How Does Real Estate Commission Work?

Real Estate Commission

Ever wonder how real estate commission works?

I always crack a smile when a client whispers to me, “so how do you get paid anyway?”

There is little to no public service announcements on how this whole real estate thing works.

Every year a ton of new startups *cough enter the arena and put a wrench into the way you thought things went.

This article will break down 3 simple scenarios on how agents get paid and how real estate commissions work in Canada.

Real Estate Commission Fee for Buyers

In Canada, the buyer does not pay a commission to the agent.

This may not be true in all instances, but I have never heard of a situation where a buyer was willing to pay a commission to their buyer agent.

Something I will never understand, is why buyers contact the listing agent for showings, and are willing to work with the sellers agent to purchase a property. Sometimes not acting in full agency capacity.

For any real estate transaction it is more beneficial to have an agent working for you, in your corner.

Also, you do not need to pay your agent.

As discussed previously, the seller typically pays the agent fee for both the buyer agent and the listing agent.

Real Estate Commission Fee for Sellers

Before the property is active on the MLS ® and when the listing agent is competing for the listing, they will negotiate the listing commission with the seller.

This includes the full commission, to both the buyer agent and the seller agent.

The way this full commission is split depends on the type of transaction.

I will break down 3 different scenarios below.

Or, you can check out this video I made:

Real Estate Commission Fee for Sellers: 3 Scenarios

Real estate commission is entirely negotiable and up to the seller and their listing agent. It can be a percentage of the purchase price or a flat fee for the service.

For the purpose of this demonstration, and for simplicity, I am going to use 6% of the purchase price.

Scenario 1
Buyer with Agent
Seller with Agent

The seller has agreed to pay the listing agent 6% and has agreed to pay 3% of that to a cooperating buyer brokerage.

A buyer agent submits an offer for their buyer client. It is accepted.

The seller agent and buyer agent split the commission at 3% each.

Scenario 2
Seller with Agent
Buyer NO Agent

The seller has agreed to pay the listing agent 6% and has agreed to pay 3% of that to a cooperating buyer brokerage.

A Buyer contacts the listing agent to view the property, falls in love, and wants to submits an offer.

The listing agent, whose client is the seller, agrees to treat the buyer as a customer, and submit the offer with them.

A customer relationship means the agent can not give any advice to the buyer, does not have any fiduciary duties to the buyer, and is basically leaving the buyer on their own.

Because there is no buyer agent, the selling agent keeps the entire 6% in this scenario.

Scenario 3
Seller NO Agent
Buyer with Agent

Seller has listed their property on the MLS ® independently, without an agent.

At the time of the listing, the seller has put on the listing cut they are willing to pay a buyer agent 3% of the purchase price if they bring their buyer and purchase the property.

A buyer comes along who has a buyer agent, and submits an offer, which the seller accepts.

The seller then pays the buyer agent the negotiated commission directly.

Final Thoughts

The following article highlighted 3 basic examples of how real estate commission works.

While there are a lot of different models out there, and brokerages, offering all sorts of services, it is important to understand the basics of how agents get paid.

If you have questions regarding real estate commission, let us know by commenting below.