How Do Real Estate Agents Get Paid?
If you’ve ever considered becoming a real estate agent, you’re probably aware that money is a major consideration. You know you can make a lot of money but knowing how much real estate agents make can help you decide whether or not to become one. So, your question might be, how are real estate brokers rewarded for their efforts?
“Luckily for you, CORE Member, in this blog we are going to talk about how real estate agents are paid, and also how other veteran agents get paid. Now there are many misconceptions about how agents get paid and that is causing a lot of confusion and frustration for first-time buyers and sellers. So, in this blog you’re going to learn the truth about being an agent and how you can help yourself as well as your clients and future clients!
Real estate agents are typically compensated in the form of real estate commissions depending on the sale price of a property. The commissions charged in a real estate transaction are negotiable and can range anywhere from one percent to ten percent of the total transaction value. For the purposes of this blog, we will assume a commission rate of 5% as an example. Consequently, the 5-percent commission paid at the time of closing on a $250,000 property will amount to $12,500. That does not imply that the agent is entitled to $12,500 in compensation. A set part of the commission will be paid to the broker of record in the transaction.
The commission split is the most prevalent type of payment arrangement between a broker and an agent in the financial services industry. A specific percentage of the commission is paid to the broker and the remaining percentage is paid to the agent, depending on the terms of the agreement reached when the broker agreed to hold the agent’s license in the first place. The standard 50/50 commission split means that each will receive a commission check for $6,250 when escrow on that particular property is closed.
As a real estate agent with a well-established clientele base, the prospect of financial success is extremely appealing. Using the example sale and assuming just one property closes per month, a real estate agent can expect to earn $75,000 per year in commissions. It is considerably more profitable for an experienced real estate agent who is committed to the market in which he or she works to earn commissions from multiple closings each month than commission from a single closing per month. When you are dealing with commissions of this magnitude, you are talking about significant improvements in earnings. Even two closings per month can increase your annual income to $150,000 if you work hard enough.
How much does a typical real estate agent charge? Here’s how a typical real estate agent fee might look like:
Referral Fees – Referral fees are a negotiated percentage paid to another company in exchange for sending a client, either as a seller or a buyer. Before the commission is split, they are deducted from it.
Real Estate Franchise Fee – Some franchisee brokerages pay their franchisor a percentage of each commission. Before the broker and the agent split the commission, this fee is paid.
What is the commission split for real estate agents?
The final commission represents weeks or months of work by the real estate agent, who must price the home, market it, negotiate with buyers, and sit down with all parties at the closing table. When people ask, “How much do real estate agents make?” They usually mean “How much do real estate agents make?” Then this is the most important factor.
Typically, commissions are split among four parties:
- The listing agent is the person who represents the seller.
- The listing broker is the company for which the listing agent works.
- A buyer’s agent is a person who represents the buyer.
- The buyer’s agent’s broker is the company for which the buyer’s agent works.
So, what’s the difference between a real estate “agent,” a “broker,” and a “REALTOR”?
We’ll get this out of the way first because it’s probably the easiest to understand. It depends on the state whether a “REALTOR” is an agent or a broker. The agent or broker must join the National Association of REALTORS(NAR) to become a REALTOR.
The distinctions between a broker and an agent are substantial, though the terms vary by state. When people use the terms interchangeably, they’re usually referring to a “salesperson” or “agent.” They’re not talking about the difference between a real estate broker and an agent. The agent is the person who is out showing homes, marketing their brand, and putting people in touch with the property they’re looking for. When that agent closes a deal, they split the commission with their broker. That is the company for which the agent works.
The most significant distinction between real estate agents and brokers is that a broker is free to work on his or her own. Real estate brokers can also hire agents to work for them. All real estate commissions must be paid to a broker, who then divides the commission with any other agents involved in the transaction.
In layman’s terms, the real estate brokerage assumes greater legal responsibility and has established a brand, which is why they receive a percentage of the commissions earned by the real estate agent. Even if the buyers and sellers do not interact directly with the brokerage, they play an important role in real estate transactions.
As previously stated, real estate agents charge an average commission of 5-6 percent per transaction. More experienced or top-producing agents are more likely to get a larger slice of the pie. In such cases, a 70/30 split may be seen, with 70% going to the real estate agent and 30% to the broker. Other common splits between agents and brokers range from 50/50 to 60/40.
Real estate agents may receive 100% of the commission in exceptional circumstances. This situation usually occurs because the real estate agent pays their broker a “desk fee,” which means the agent pays their broker for sponsorship but is less involved with the brokerage than a typical real estate agent.
Do real estate agents make a lot of money? This is a question that a lot of people ask us. The commission split and parties involved have a significant impact on how much a real estate agent earns at the end of the year. Obviously, the most important factors are the price of a home and the number of transactions a real estate agent facilitates in a year. The interplay of these factors explains the wide disparity in pay among agents. With the commission splits outlined above, successful real estate agents can easily earn well over six figures. Here’s a helpful tip: Many agents, particularly top performers, have the ability to bargain with their brokerage on commission rates. Having the courage to ask for a raise is the first step toward getting one.
The commission may be split among fewer parties in some cases. Brokers, on the other hand, have a lot more flexibility than agents. Let’s say a broker or brokerage lists a property without employing an agent and then finds a buyer. They would then keep the entire 6% commission (or another agreed-upon rate). Another option is for one person to act as both the seller and the buyer’s agent. Because only one agent is facilitating the transaction, the agent would only need to give their brokerage a percentage.
Who pays the agent in the first place?
Many agents tell their clients that the seller is responsible for paying them. But it’s a little more complicated than that in reality. The commission payment is distributed by the seller and can even be factored into the home’s initial listing price. The buyer, on the other hand, is essentially footing the bill at closing because the money they pay the seller covers it. Similarly, one could argue that the seller suffers a loss because the fee is deducted from the home’s equity. When you know who pays the agent, you’ll be able to answer another important question: how much do real estate agents make?
What about commissions for brokers? Brokers, unlike real estate agents, are free to work on their own. Brokers can also employ the services of a real estate agent. This is why well-known brokerage firms like RE/MAX and Coldwell Banker are able to generate so much revenue: they employ thousands of agents across the country. All real estate commissions must be paid directly to a broker, who then divides the commission with any other agents involved in the transaction.
The commission that a broker receives is usually spelled out in the listing agreement. A contract between a seller and the listing broker that outlines the listing’s terms and conditions is also known as a listing agreement. As previously stated, the commission is always negotiable. In fact, any attempt by members of the profession to impose uniform commission rates, however subtly, is a violation of federal antitrust laws.
What Kinds of Taxes Do Real Estate Agents Have to Pay? “Taxes” is the one word you haven’t heard mentioned yet. Taxes have a significant impact on the final income that any professional receives. This is especially true for real estate agents and brokers, who, like the rest of the workforce, are required to pay federal and state taxes.
Knowing your state tax rate is especially important when calculating the potential income from a house sale because tax rates vary by state. But the story does not end there. Then there’s the matter of listing services, dues, and marketing to think about.
To sum it up, here’s the simplest explanation of it! Everybody has seen signs about advertising or other marketing talking about an agent offering two percent commission to sell, or one percent commission to sell. But how does the listing agent get paid and how does the buyer’s agent get paid? Here in California the decision for payment of the agents involved is determined at the time of the signing of the listing. It’s negotiable between the seller and the agent, the seller hires as to what the commission will be. Typically, the commission is a percentage of the sales price of the home. So, a listing agent commission of two percent or three percent is that percentage of the sales price once it closes.
For a three percent commission on a five hundred-thousand-dollar home, the listing commission would be fifteen thousand dollars at close of escrow. Now the listing agent doesn’t get all of that money. The agent’s broker takes the first cut of that amount and depending upon the arrangement between the broker and the agent. The agent receives the remaining amount. When the listing agreement is signed the seller and the listing agent also negotiate the percentage to offer out to the buyer’s agent that brings the buyer to the transaction, the amount can be anywhere from one percent to three percent of the contract price.
The commission percentage for the buyer is identified in the multiple listing service for the particular house for sale. The higher the percentage, the more incentive there is for a buyer’s agent to bring buyers to see the home and make an offer. As with the listing agent the buyer’s agent’s broker takes the first cut and the remainder goes to the agent. Neither agent gets paid until the parties go into contract and the escrow successfully closes. If the buyer’s offer is not accepted by the seller, or the escrow falls out for any number of reasons, both agents have done a lot of work without getting paid. But, when an escrow is successfully completed between the parties, the escrow company pays each of the agents the amount that was agreed upon in the listing agreement, that money comes out of the sales proceeds of the seller!
Whether you’re an agent or a broker, the amount of money you can make is only limited by your willingness to put in the effort. One of our mentors mentioned that as a real estate agent, your experience and extensive knowledge of the market will allow you to earn money you never imagined possible. Surrounding yourself with experienced and knowledgeable agents can help you make a fortune as a broker. If you have any questions or want to leave a comment, please do so in the comment section below. If you’ve been thinking about buying or selling real estate in this market, we’d love to sit down with you and have a strategic planning session so we can help you navigate the challenges and opportunities that we see in the market every day.
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