How Do Real Estate Agents Get Paid?
If you're in the market to buy or sell a home, odds are you'll work with a real estate agent to help you through the process. According to the National Association of Realtors, 87% of buyers purchased their home through a real estate agent or broker in 2017, a share that has been increasing steadily from 69% in 2001. The vast majority of sellers also relied on real estate agents; only 8% of sellers sold their homes on their own.
As of March 2018, the average annual earnings for real estate sales agents was $40,587, according to salary.com. How much money agents make each year depends on a number of factors, including the number of transactions they complete, the commission paid to the brokerage and the agent's spilt with the sponsoring broker. Here, we take a look at how real estate agents are paid.
Real Estate Commissions
Most real estate agents make money through commissions – payments made directly to real estate brokers for services rendered in the sale or purchase of real property. A commission is usually a percentage of the property's selling price, although it can be a flat fee. To understand how real estate agents are paid, it helps to know about the relationship between an agent and a broker. Both agents and brokers are licensed by the state in which they work.
Agents are licensed salespersons who work under the umbrella of a designated broker. Agents cannot work independently, and they are prohibited from being paid a commission directly by consumers. Brokers, on the other hand, are able to work independently and/or hire real estate agents (salespersons). All real estate commissions must be paid directly to a broker, then the broker splits the commission with any other agents involved in the transaction. (For related reading, see: How Real Estate Agent and Broker Fees Work.)
The broker's compensation is specified in the listing agreement, a contract between a seller and the listing broker detailing the conditions of the listing. The rate of the broker's commission is negotiable in every case; in fact, it is a violation of federal antitrust laws for members of the profession to attempt, however subtly, to impose uniform commission rates. Commissions are taken out of the sale proceeds, and it's usually the seller who pays the commission, unless the buyer and seller negotiate a split. Most sellers factor the commission into the asking price, so it can be argued that the buyer pays at least some of the commission in either case (due to the higher asking price).
Real estate commissions are often shared among many people. In a typical real estate transaction, the commission might be split four ways, among the:
- Listing agent – the agent who took the listing from a seller
- Listing broker – the broker for whom the listing agent works
- Buyer's agent – the agent who represents the buyer
- Buyer's agent's broker – the broker for whom the buyer's agent works (For more, see: How to Choose the Right Real Estate Broker.)
To illustrate, let's assume an agent takes a listing on a $200,000 house at a 6% commission rate. The house sells for the asking price, and the listing broker and the buyer's agent's broker each get half of the commission, or $6,000 each ($200,000 sales price x 0.06 commission ÷ 2). The brokers then split the commissions with the agents. A common commission split gives 60% to the agent and 40% to the broker, but the split could be 50/50, 60/40, 70/30, or whatever ratio the agent and broker have agreed upon. In a 60/40 split, each agent in our example would receive $3,600 ($6,000 X 0.6), and each broker would keep $2,400 ($6,000 X 0.4). The final commission breakdown would be:
- Listing agent - $3,600
- Listing broker - $2,400
- Buyer's agent - $3,600
- Buyer's agent's broker - $2,400
Sometimes commissions are split among fewer parties. If a broker lists a property and then finds a buyer, for instance, he or she would keep the full 6% (or other agreed-upon rate) commission. Or, if a listing agent also sells the property (acting as both listing agent and buyer's agent), he or she would split the commission only with his or her sponsoring broker. If the commission were $12,000 as in the previous example, the broker would keep $4,800 and the agent would receive $7,200, assuming the same 60/40 split.
Of course, as in other professions, earnings are often eroded by taxes and business expenses. Federal, state and self-employment taxes, along with the costs of doing business (insurance, dues and fees, MLS fees, advertising, etc.), can end up taking sizable chunks out of otherwise substantial commissions.
No Settlement Can Equal No Pay
In general, commissions are paid only when a transaction settles. There are instances, however, when a seller is technically liable for the broker's commission even if the transaction is not closed. If the broker has an offer from a ready, willing and able buyer, the broker may still be entitled to a commission if the seller:
- Has changed his/her mind and refuses to sell,
- Has a spouse who has refused to sign the deed (if that spouse had signed the listing agreement),
- Has a title that contains uncorrected defects,
- Commits fraud in regard to the transaction,
- Cannot deliver possession to the buyer within a reasonable time,
- Insists on terms that were not in the listing agreement, or
- Has mutually agreed with the buyer to cancel their transaction.
In some cases, real estate agents are employed by their broker and paid a salary. Redfin.com, for example, is an online property search site that employs a staff of full-service real estate agents who are paid a salary plus a commission dependent upon customer satisfaction ratings collected by the company. It is far more common, however, for agents to be paid a percentage of the commission.
The Bottom Line
Most real estate agents make money through commissions paid directly to brokers when transactions are settled. A single commission is often split multiple ways among the listing agent and broker, and the buyer's agent and broker. The commission split a particular agent receives depends on the agreement the agent has with his or her sponsoring broker. It is common for more experienced and top-producing agents to receive a larger percentage of the commission.