Whether you have ever bought a home, sold a home, or simply seen an advertisement for a real estate agent, you may have wondered, exactly, how a real estate agent gets paid and who pays them.
There are actually a number of ways real estate professionals can use their training and license to earn a living. According to carealtytraining.com, six common ways to earn an income include becoming a referring agent (refer clients to other agents and receive a fee), creating a downline (recruiting other agents to join your team and earning a portion of their commission or a flat fee on their sales), invest in your own real estate (by being on the front line of hearing about good deals and acting quickly with their own funding), representing themselves in real estate transactions (when they invest in their own properties, agents essentially pocket their own commissions), becoming a broker (working independently or employing other agents under you), and finally, using your credentials (educate, train, or consult for extra income).
While there are many ways a real estate agent can put their training and credentials to good use and elevate their income potential, many wonder, in a given purchase or sale of a home, how does a real estate agent get paid. Let’s break that down:
In its simplest terms, real estate agents enter into a listing agreement when they represent a buyer or a seller in a real estate transaction. In most states, the sellers typically pay anywhere from 5-6% of the home sales price in real estate commission. The listing agent typically gets half of that and the buyer’s agent retains the other half, typically called a commission split. However, in some cases, agents may instead charge a flat rate when the sale is complete. It should be noted that sellers do not pay this commission directly to a real estate agent. Agents are paid after the commission is run through their brokerage minus any fees.
While it may seem like a commission split of generally 3% of a home’s sale price is a steep amount, most agents don’t see all of that in their paycheck. It can vary widely, but in many instances of that commission, the real estate agent may only see about 60% of the amount, with as much as 40% going to the broker. Many brokerages take this substantial portion of that in fees for marketing, office space, and other necessary risks they take on to cover the agent.
As an example, if a home sells for $300,000 the total commission for 6% of that amount is $18,000. If half goes to each agent, that $18,000 is split evenly and each agent’s portion is $9,000. If the buyer’s agent is working under a broker, of that $9,000 commission, $3,600 is deducted by the broker, leaving the buyer’s agent’s earned amount at $5,400, before taxes. If a 30% tax rate is used, the agent, after all splits, broker cuts, and taxes, earns about $3780 on the sale of a $300,000 home.
While that may still seem like a great return on their investment of time in a real estate transaction, there is actually much more to consider that goes into that payment amount. Not only did the agent pay to study for and take a state real estate license, many also have to factor in the costs of continuing education as well. Beyond showing homes or showing up for the final sale or procuring documents to pass between buyer, seller, and other agents, real estate professionals have a lot of day-to-day responsibilities to keep their business moving along.
In order to be a successful real estate agent, most devote many, many long work hours to building and maintaining professional relationships, intensive marketing efforts, and ensuring their customers’ utmost satisfaction.