How to Calculate Real Estate Commission — Step by Step

The formula, in one paragraph

Real estate commission is the fee the seller pays for the sale, and it is one number split three ways. The total is the sale price times the rate. The total is split between the listing side and the buyer side. The listing broker takes a cut of the listing side, and the listing agent keeps the rest. The seller keeps the price minus the total. That is the whole calculation, and every step below is arithmetic you can do on a phone.

Step 1: Work out the total commission

Start with the sale price and the rate. At the example numbers the price is $500,000 and the rate is 5.5 percent, so the total is $500,000 times 5.5 percent, which is $27,500.00. The rate is whatever the seller and the listing agent agree in the listing agreement. It is not set by law, and it is not the same everywhere. A common figure is 5.5 percent, but 4 percent and 6 percent are both seen. On a $500,000 sale the difference between 4 percent and 6 percent is $10,000.00, so the rate is the number that matters most.

Step 2: Split the total between the two sides

Next split the total. The listing share is the part of the total that goes to the listing side, and the rest goes to the buyer side. At the example numbers the share is 50 percent, so each side gets $13,750.00. The split does not change the total or the net. It only moves money between the two sides. At 60/40 the listing side gets $16,500.00 and the buyer side gets $11,000.00. At 70/30 the listing side gets $19,250.00 and the buyer side gets $8,250.00. The split is set in the listing agreement, so check it there before you trust any number.

Step 3: Take the broker cut off the listing side

Next take the broker cut. The broker cut is a cut of the listing side, not of the whole sale. That is the step people get wrong. At the example numbers the broker takes 30 percent of the listing side, so 30 percent of $13,750.00 is $4,125.00. The listing agent keeps the rest, which is $13,750.00 minus $4,125.00, or $9,625.00. At a 20 percent broker cut the broker takes $2,750.00 and the agent keeps $11,000.00.

Step 4: Work out what the seller keeps

Last, work out what the seller keeps. The net to seller is the sale price minus the total commission, so $500,000 minus $27,500.00 is $472,500.00. That is 94.50 percent of the price. The commission is $55.00 per $1,000 of price. At 4 percent the seller nets $480,000.00. At 6 percent the seller nets $470,000.00. At 3 percent the seller nets $485,000.00.

The same arithmetic at other prices

The same steps scale to any price. On a $300,000 sale at 5.5 percent the total is $16,500.00, each side gets $8,250.00, the broker takes $2,475.00, the agent keeps $5,775.00, and the seller nets $283,500.00. On a $1,000,000 sale the total is $55,000.00, each side gets $27,500.00, the broker takes $8,250.00, the agent keeps $19,250.00, and the seller nets $945,000.00. The rate is a percentage, so the fee grows with the price.

Working backwards from a target

The calculation also runs backwards. If you want a $20,000.00 commission at 5.5 percent, divide the commission by the rate: $20,000 divided by 5.5 percent is a $363,636.36 sale. A $25,000.00 commission needs a $454,545.45 sale. If you want $15,000.00 on a $500,000 sale, divide the commission by the price: $15,000 divided by $500,000 is 3.00 percent. If you want to net $450,000.00 at 5.5 percent, divide the target by one minus the rate: $450,000 divided by 94.5 percent is a $476,190.48 sale. The most the rate can be while the total stays at or under $22,000.00 is 4.40 percent.

What NOT to do

Do not treat the net here as the cash at closing. The net to seller in this calculation is the price minus the commission only. Closing costs, transfer taxes, the mortgage payoff and repairs all come out of it, so the cash at closing is lower. Do not apply the broker cut to the whole sale. The cut is a cut of the listing side only, and applying it to the total would overstate the broker by $4,125.00. And do not assume the rate is fixed. The rate is negotiated, and a one point change is worth $5,000.00 on a $500,000 sale.

That box is the whole formula.