What is a real estate commission and how is it calculated?

A commission is the fee a brokerage charges for the work of selling or buying a home. It is usually expressed as a percentage of the sale price, though flat fees and other arrangements also exist. The commission is paid at closing, out of the transaction proceeds, and it is itemized on the settlement statement. It is not a tax or a government fee, and no law, MLS, or trade association sets the rate. Compensation is a negotiated business term between you and the brokerage, so there is no standard rate, and no one should quote you a typical rate as fact. Your actual figure comes from a conversation and lives in a written agreement.

Two practice changes took effect on August 17, 2024, following the National Association of REALTORS settlement. First, offers of buyer-broker compensation are no longer published on the MLS. That information used to sit in a field every agent could see, and now it is negotiated off the MLS and written into the agreements and the contract. Second, if you are working with an agent who participates in an MLS, that agent needs a signed written agreement with you before touring a home with you, in person or by live virtual tour. The agreement must state what the agent will be paid, or exactly how that amount will be calculated. It cannot be open-ended. It also has to say, conspicuously, that broker fees are not set by law and are fully negotiable. New Jersey adds its own requirement: the state's Real Estate Consumer Protection Enhancement Act requires a written brokerage services agreement between the firm and a residential buyer before services begin, or as soon as reasonably practical after. In practice, in New Jersey, expect to sign before you tour.

What the commission covers varies by brokerage, so get it itemized. In a full-service listing, it typically covers pricing strategy, marketing, showings, negotiation, and coordination of the inspection, appraisal, and closing timeline. For a buyer, it covers the search, the property research, the offer and negotiation, and the same inspection and closing coordination. What it does not cover: transfer taxes, attorney fees, title insurance, recording fees, and mortgage costs are separate line items, and so are any repairs, credits, or concessions you negotiate. The agreement should spell out exactly what is included.