How is a real estate commission typically calculated?

A real estate commission is most commonly calculated as a percentage of the sale price of the property. This method aligns the interests of both the agent and the client, as it directly ties the agent’s compensation to the final sale price achieved. It incentivizes agents to negotiate the best possible price for their clients, as their earnings will increase with a higher sale price. This percentage can vary depending on the agreement between the seller and the agent, but it typically ranges from 5% to 7% of the sale price.

In contrast, a flat fee for services rendered, while it does exist, is less common in real estate transactions since it does not account for the variability in sale prices or the associated work involved in each unique transaction. Similarly, calculating commissions based on the time invested does not reflect the actual value added by the agent and can lead to disputes over what constitutes 'time invested.' Finally, using a predetermined amount regardless of the sale price overlooks market conditions and the potential variation in home values, which can be detrimental to both the agent’s and the seller’s interests.