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. Most make money through commissions based on a percentage of a home's selling price. 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 split with the sponsoring broker. Here, we take a look at how real estate agents are paid.
How Real Estate Agents Get Paid
- Most real estate agents make money through commissions.
- A single commission is often split multiple ways among the seller's agent and broker, and the buyer's agent and their broker.
- The commission split agents receive depends on the agreement they have with their sponsoring broker.
How Real Estate Commissions Work
Most real estate agents make money through commissions. These are payments made directly to real estate brokers for services rendered in the sale or purchase of a property. A commission is a percentage of the property's selling price, although it can also 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.
Agents are salespeople who are licensed to work in their states under the umbrella of a designated broker. Agents cannot work independently and are prohibited from being paid a commission directly by their clients. Brokers, on the other hand, are able to work independently and/or hire real estate agents as their employees. All real estate commissions must be paid directly to a broker. The broker then splits the commission with any other agents involved in the transaction.
The broker's compensation is specified in the listing agreement, which is a contract between a seller and the listing broker that details the conditions of the listing. The rate of the broker's commission is negotiable. 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 generally range between 5% to 6% across the country, though they may be higher or lower based on where the sale takes place. They are taken out of the sale proceeds. The seller is the one who pays it 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.
Both agents and brokers are licensed by the state in which they work.
How Commissions Are Shared
Real estate commissions are often divided between many people. In a typical real estate transaction, the commission may be split four ways:
- Listing agent: This is the agent who took the listing from a seller
- Listing broker: This is the broker for whom the listing agent works
- Buyer's agent: This agent represents the buyer
- Buyer's agent's broker: The broker for whom the buyer's agent works
Example of Commissions
To illustrate, let's assume an agent takes a listing on a $200,000 house at a commission rate of 6%. This equals a total commission of $12,000. If the house sells for the asking price, both 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 their 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 upon which the agent and broker agree. It is common for more experienced and top-producing agents to receive a larger percentage of the commission.
In a 60/40 split, each agent in our example receives $3,600 ($6,000 X 0.6) and each broker keeps $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
There are cases, though, where commissions are split among fewer parties. For instance, if a broker lists a property and finds a buyer, they keep the full 6% commission or another agreed-upon rate. Or, if a listing agent sells the property by acting as both the seller and buyer's agent, they split the commission with their sponsoring broker. If the commission were $12,000 as in the previous example, the broker keeps $4,800 and the agent receives $7,200, assuming the same 60/40 split.
Of course, as in other professions, an agent's earnings are eroded by taxes and business expenses. Federal, state, and self-employment taxes, along with the costs of doing business, including insurance, dues, fees, MLS fees, and advertising, end up taking sizable chunks out of what would normally be considered substantial commissions.
The median annual earnings for real estate agents in May 2019, according to the U.S Bureau of Labor Statistics.
Commissions are generally 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 complete. If the broker has an offer from a buyer who is ready and able to make the purchase, the broker may still be entitled to a commission if the seller:
- changes their mind and refuses to sell
- has a spouse who refuses to sign the deed (if that spouse signed the listing agreement)
- has a title with uncorrected defects
- commits fraud related to the transaction
- cannot deliver possession to the buyer within a reasonable time
- insists on terms not listed in the listing agreement
- mutually agrees to cancel the transaction with the buyer
Listing agreements vary among jurisdictions and each is individually negotiated so sellers need to make sure to understand the terms. A contract may include contingencies that require sellers to pay a commission even if the home doesn’t sell.
Other Pay Models
Although it is common for agents to be paid a percentage of the commission, there are cases where real estate agents who are employed by a broker may be paid a salary. Redfin.com is one example. It's an online property search site that employs a staff of full-service real estate agents who are paid a salary plus bonus dependent upon customer satisfaction ratings collected by the company.
How Realtors Are Paid FAQs
How Are Realtor Fees Paid?
Realtor fees are deducted directly from the sale proceeds. This amount is then paid directly to real estate brokerage firms, which provide services for the sale or purchase of properties.
Do Realtors Get Paid a Base Salary?
Most realtors are paid on a commission-only basis. But certain realtors, including those who are employed by companies like Redfin.com, get a base salary plus bonuses.
Are You Supposed to Pay Your Realtor?
Consumers don't pay realtors directly. Brokers receive the commission, which is taken from the total sale proceeds. This amount is then split between the agency and the agent.
Do Real Estate Agents Get Paid Weekly?
Real estate agents do not get paid weekly. Instead, they work for commissions on the sales they make. These commissions are split between the agency and the agent.
What Percentage Do Most Realtors Charge?
Real estate commissions typically range anywhere between 5% to 6% of a property's sale price. This amount is further divided between the agency and the agent who worked on the sale.
The Bottom Line
Most real estate agents make money through commissions that are paid directly to brokers when transactions are settled. A single commission is often split multiple ways among the listing agent, the listing broker, the buyer's agent, and their broker. The commission split a particular agent receives depends on the agreement the agent has with their sponsoring broker.