Marcio Vasconcelos
Understanding how realtors get paid is crucial for both aspiring agents and clients navigating the real estate market, yet many people don't give much consideration to how real estate agents earn their income—neither in terms of commission percentages nor which party covers these costs.
It's clear that these earnings must come from somewhere, since the functionality of a company costs money. Here we will break down the commission structure and explore scenarios like when a sale doesn't close. Typically, it's not until someone begins to think about buying or selling a home that they start to really question how real estate agents are compensated.
How Do Realtors Get Paid?
Most real estate agents earn their income primarily through commissions, which are calculated as a percentage of the property’s selling price, typically ranging from 5% to 6%. Although it is possible for commissions to be flat fees, this practice is relatively rare.
The commissions are usually split between the listing agent, who represents the seller, and the buyer's agent. Agents work under real estate brokers, who are the ones that directly receive the commission payments from these transactions. The standard rate can vary by region and brokerage, highlighting the importance of understanding local market conditions.
Splitting the Commission
Real estate agents have the opportunity to negotiate commission percentages with brokers either when they are initially hired by a brokerage or realtor firm or just before the purchase or sale of a property. This negotiated percentage usually becomes the standard for how the broker and the agent divide commissions between them.
Typical arrangements include a 50/50 split, where both the broker and agent equally share the commission. However, splits such as 60/40 or 70/30 are also common, where the real estate agent receives a larger portion of the commission than the broker. The choice of split can depend on factors like the size of the brokerage and the number of agents the broker manages.
How Much Money Do Most Realtors Make?
In 2024, real estate agents could expect to earn between $87,810 and $115,212 annually, with variations based on experience. Meanwhile, the U.S. Bureau of Labor Statistics' most recent 2022 data reported a median annual salary of $52,030 for agents, and an average annual salary of $90,930 for brokers.
However, earnings can significantly exceed these figures; the top 10% of real estate agents earned over $113,320, while the highest-earning 10% of brokers made upwards of $173,000.
How Is the Broker’s Commission Usually Paid Out?
The broker's commission is typically paid directly by the seller at the closing of the transaction. The total amount is deducted from the proceeds of the sale, and then distributed between the listing and buyer’s brokerages as previously agreed. Let’s break it down like this:
Source of Payment
The broker's commission is typically funded by the seller. This means that the agreed-upon commission is considered an expense of selling the home and is paid at the time of the transaction closing.
Deduction from Sale Proceeds
At closing, the commission is deducted directly from the proceeds of the sale. Essentially, the amount the seller receives is the gross sale price minus the commission and any other closing costs or fees associated with the sale.
Distribution Between Brokerages
Before listing a property or representing a buyer, brokerages often agree on how the commission will be shared between the listing (seller's) and the buyer’s brokerages. This split is typically documented in the listing agreement and the buyer’s brokerage agreement.
Commissions When the Sale Doesn’t Close
Commissions are typically paid only when a transaction is completed, but there are certain conditions under which a seller might still owe a broker's commission even if the sale falls through. These conditions are usually outlined in the listing agreement.
For example, if a broker secures a ready and willing buyer, but the sale does not close for some reason – because the seller changes their mind, a spouse co-listed refuses to sign the deed, there are unresolved title issues, the seller commits fraud, insists on terms not included in the agreement, or if there is a mutual cancellation with the buyer – the seller may still be liable for the commission. This scenario is uncommon but possible.
People also ask
Is a commission model beneficial for home sellers?
Proponents of the percentage-based commission system contend that it motivates agents to expedite the sales process and obtain the highest possible price for the property. The logic is simple: Agents only earn their commission after the sale is finalized.
If they are unable to secure a good offer, they lose out on payment and the effort and resources spent on marketing the property go unrewarded. Additionally, because their commission increases with the sale price, agents have a strong incentive to aim for higher offers.
Can commission rates be negotiated?
Yes, commission rates are entirely negotiable and can vary based on many factors, including market conditions and the value of the property. Before entering any negotiation, it's essential to be well-prepared by researching and understanding your value. Discover the typical commission rate for your specific industry, role, and geographical area.
Assess how this compares with your current or anticipated base salary, benefits, and other incentives. Utilizing online resources, industry publications, or networking with fellow professionals can provide you with this vital information. This preparation enables you to establish realistic and competitive expectations, ensuring you neither undersell yourself nor request excessively.
What happens to the commission if the buyer is unrepresented?
If the buyer does not have an agent, the full commission may still be paid to the listing agent, although the seller might negotiate a lower total commission.
In these scenarios, the seller's agent typically receives the full commission and often ends up performing a significant amount of work on behalf of the unrepresented buyer. This arrangement compensates the seller's agent for the additional responsibilities they undertake.
