How is a real estate agent paid???

From time to time I will have a buyer or a seller who is unsure of how I am paid. This is more prevalent with my first time home buyers. So I thought this would be a good forum to give a brief overview.

Real estate agents almost always work on commission only and are not salaried employees nor are they paid hourly. The commission on a home sale is paid to the listing agent (representing the sellers) and selling agent (representing the buyers) at the closing of a real estate sales transaction and is almost always paid entirely by the seller of the home.

Commissions are shared between the listing and selling agents. A standard real estate commission on a home in our area is 6% (Commercial and land are sometimes more).

So let’s say that a home sells for $100,000.
Sales price: $100,000
Commission: 6%
Total commission: $6,000 (6% of $100,000)
Listing agent: receives 3% (of $100,000) = $3,000
Selling agent: receives 3% (of $100,000) = $3,000

Many people know this much but are unaware of what happens next...

Each of the agents usually will not take home $3,000. The real estate brokerage or agency that the real estate agent works for will still receive a percentage of the commission. The agency takes a cut of all agent commissions in order to pay overhead costs such as rent or mortgage for physical location, front office employees, liability insurance, association dues, state employee costs and taxes, small business taxes, etc.

Depending on the agency commission structure which varies from company to company the commission split between agency and agent could be 50/50, 60/40, 70/30, 80/20, 90/10. So, instead of the agent receiving the full $3,000 in the above example, his or her commission may actually be anywhere from $1,500 (50/50 split, agency gets $1,500) to $2,700 (90/10 split, agency gets $300). The agent may also be required to pay a “desk fee” or rent for their office space at the company and/or other expenses.

Real estate agents are also considered self employed so they are usually responsible for every expense required to list and sell their client’s homes. This includes everything from photo copies to computers and everything in between as well as TV advertising, homes guide advertising, newspaper advertising, website advertising, mailings, business cards, postage, FedEx fees, plat maps, membership dues, licensing fees, Errors & Omissions Insurance, real estate signs, etc. These expenses can be astronomical. Most are tax deductible but many new real estate agents will not make it past their first year unless they have a considerable nest egg to start off with.

Every agent is different, every company is different but in general this is a good synopsis of how the commission structure works. Some agents or companies will offer their services for less, but it usually comes at the expense of full service and advertising. Most discount agencies will put the listing on the local MLS and limit their advertising to free resources. It’s one more instance of the classic “You get what you pay for.”