How real estate commission works, and why it matters in buy vs rent

What commission is

Real estate commission is the fee paid to brokerages for the services they provide in a sale. It is commonly a percentage of the sale price and negotiable, set out in a written agreement between the seller and the listing brokerage before the home is marketed.

The percentage is not fixed by law. Different brokerages and agents propose different structures, and a seller can discuss the rate, any flat-fee components, the services included and how the fee is divided. Compare the whole package, not only the headline figure.

Who pays, and how it is divided

Traditionally, the seller pays commission from the sale proceeds at closing, and the amount is shared between the brokerage that represents the seller and the brokerage that represents the buyer. The details of that sharing, and how buyers’ representation is compensated, have been changing across the industry, so ask for the current structure in writing.

For a buyer, the practical questions are simple. Is any part of the buyer’s representation fee payable by you directly? When is it due? Is it covered by the seller’s offer? What happens if the seller does not offer to cover it? See working with a buyer’s agent for questions to ask before you sign.

GST on commission

Commission is a professional service fee, and GST generally applies to it. When you review a fee proposal, check whether the quoted amount includes or excludes GST, and add it in before comparing options.

The calculators here model GST on commission as a separate line, which is why a 4% commission input produces an effective cost that is higher than 4% of the sale price. These are illustrative planning inputs, not a statement of what is typical.

What the fee covers

A seller’s commission usually pays for pricing advice, marketing, showings, negotiation and paperwork through to closing. Some brokerages itemize extras such as professional photography, staging advice or virtual tours; others bundle them. Ask what is included.

A buyer’s representation covers search, showings, offer strategy, negotiation, coordination of conditions and support through closing. Legal fees, inspections, appraisals and moving costs are separate.

• Services included in the fee, and those billed separately
• How long the agreement runs and how it can be ended
• Whether the fee changes if you find the buyer or seller yourself
• How GST is shown on the invoice or statement of adjustments
• How the fee is paid at closing and by whom

Commission in the buy vs rent numbers

A renter pays no sale commission when they leave. An owner does, so commission pushes the buy vs rent break-even later. In the default illustrative scenario ($600,000 home, 3.5% annual growth, ten-year stay), total selling costs are about $38,047 on a home worth about $846,359, and about $35,547 of that comes from commission and the GST on it. With a 0% commission the same scenario falls to $2,500 of selling costs and buying finishes ahead by about $77,233 instead of about $41,686.

Each percentage point on a $600,000 sale price is $6,000 before GST. That is why small changes to the commission input can move the result visibly. Test your own number in the selling costs tool and see how the break-even moves in the break-even tool.

Remember that price, time to sell and negotiated terms matter as much as the percentage. A lower fee is not automatically better if the service or outcome is weaker, and a higher fee is not automatically worse.

Questions to ask before agreeing to a fee

Ask for a written breakdown and take the time to compare it. A good agent will explain the structure without pressure. Check any cancellation terms and any holdover or protection periods after the agreement ends.

If you are a future seller planning for the buy vs rent decision, selling costs and buy vs rent explains how to build commission into your own plan.