How Does a Real Estate Agent Make Money?
Real estate agents earn commissions. According to the National Association of Realtors, the median gross income of real estate agents and brokers in 2017 was $39,000. The main source of income from selling real estate is commissions.
If you’re planning on buying a home, you need to understand how real estate agents earn their commissions. If you want an overall perspective on how commissions could impact your real estate earnings and how it relates to your overall financial picture, you may want to consult a financial advisor.
Most often, commission is calculated as a percentage of the sales price. Frequently, commissions are set at 6%. On a $200,000 house, the commission would be $12,000.
Commissions are always negotiable, at least in principle. Some agents and brokers may not be inclined to negotiate. In the listing agreement, the amount of the commission is provided. This is a contract between the seller and the listing broker for the marketing and sale of the property.
Sales commissions also differ based on location. There are some regions with lower commissions than others. In some cases, a real estate agent may work for a flat fee.
Agents earn commissions by promoting a property with listing services, advertisements, showings, and open houses. Agents also handle negotiations with buyers, supervise paperwork, and arrange for inspections, appraisals, and other tasks.
The listing agent rarely gets the entire commission. Agents are not even able to receive direct commission payments. The payment is made to the broker. The broker then pays the agent based on the agreement between them.
Ordinarily, the commission is split between four real estate professionals. They are:
- Listing agent
- Listing broker
- Buyer’s agent
- Buyer’s broker
Initially, the commission is split between the broker representing the seller and the broker representing the buyer. This split can vary. Occasionally, the listing broker gets the largest cut. However, about 50-50 is typical.
The listing broker splits the commission with the listing agent. The buyer’s broker splits their commission with the buyer’s agent. Again, both broker and agent split is negotiable. About 50-50. However, newer agents can get as little as 30%.
Experienced agents could earn 100% of the commission. The agents pay their brokers desk rent instead of sharing the commission.
Sometimes one or more of the agents are also licensed and trained to act as their own broker. If an agent is also a broker, he will not be required to split his share.
A Payday for a Typical Agent
In order to put these numbers into perspective, let’s examine how an agent is compensated on a typical transaction of a $200,000 home with a 6% commission:
The total commission is $12,000. That’s $200,000 multiplied by 0.06.
The seller’s broker and the buyer’s broker usually split the commission equally. Therefore, each would get $6,000.
Once the brokers were paid, agents could earn commissions. If the agents get a 50/50 split, each agent gets $3,000.
Agents and brokers are normally only paid if the deal closes. In general, nobody gets paid when something goes wrong before closing.
On the other hand, there are exceptions. Listing agreements can usually be found to spell out a situation where the commission may still have to be paid to the listing broker even if the house is not sold.
For instance, if a capable buyer makes an offer and the seller simply declines to sell, the seller would still be liable to pay the commission. Examples of this type of case include the seller’s inability to turn over the house in a timely manner or a clear title, if available.
Where does the commission come from?
The commission is deducted before the seller gets any money.
The sale price includes the commission, the buyer is providing the money that pays the commission. If a seller is representing themselves, they might be able to negotiate for a lower price since they don’t have to pay a commission to an agent.
Even if a seller does not have a listing agent, the buyer’s agent is still entitled to commission. However, the commission will likely be less than the full commission if there were buyer and seller agents on the deal.
The commission can be negotiated like everything else in commissions. A seller may agree to pay only a part of it.
The sales commission is not paid if neither buyer nor seller are represented by an agent. Often, in this case, one or both parties would hire an agent, broker, or attorney to prepare documents for closing.
The Bottom Line
Real estate agents earn commissions. The price of the property determines the percentage. Commissions are usually split between the buyer’s agent and broker and the seller’s agent and broker. The seller usually pays the commission, which is usually included in the price paid by the buyer.