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How Do Real Estate Agent Commissions Work?

360training.com April 16, 2019 0
How Do Real Estate Agent Commissions Work?

If you’re looking at a career in real estate, you’ve probably realized that most real estate agents live entirely on commission.  But you might be a little fuzzy on the details.

You’ll often hear that real estate agents get a 6% commission on the property’s selling price, but that’s from the client’s perspective.  In reality, the individual real estate agent only gets a portion of the total commission paid.

The exact proportion varies by how many agents are involved, the total negotiated commission, and the fee arrangement you have with your broker.  We’ll break it down, below.

The Parties

First, we have to understand everyone who’s involved in a sale.  In addition to the buyer and seller, we have:

The Listing Agent: The agent who works on the seller’s behalf to list and sell their property is called the listing agent. Sometimes also referred to as a seller’s agent, for obvious reasons.

The Listing Broker:  If you only have a real estate license, you can’t legally accept commissions directly.  That’s why real estate agents have to work under brokers.  Brokers are agents who have upgraded to a broker’s license. They can handle commissions, establish a real estate firm, and hire real estate agents to work under them.  Since brokers bear the brunt of the liability and overhead for your business, they either keep some portion of your commission or a flat monthly fee.

The Buyer’s Agent: Some buyers contract with an agent of their own who will represent their interests. Not every deal has a buyer’s agent. Some sales are handled by the listing agent only.  But when a buyer’s agent is involved, they get part of the commission.

The Buyer’s Broker:   Buyer’s agents also work under a broker.

Now that you know the players, let’s talk about how money changes hands.

Step 1: The Seller and Listing Agent Negotiate the Commission

Real estate commissions are negotiated on a case-by-case basis when the seller signs a listing contract with their agent.  Negotiating the commission is a legal requirement—you’ll violate federal anti-trust laws if you try to impose a standard, non-negotiable fee.

Commissions are typically negotiated as a percentage of the final selling price. They vary, of course (they’re negotiable!), but the figure is usually 5-6%.

Step 2: The Listing and Buyer’s Agents Negotiate a Split

Once an offer has been made on the property, the listing agent negotiates how to split the commission with the buyer’s agent (if one exists).  Usually, the agents split it down the middle, but this varies based on local traditions, the condition of your market, and the individual circumstances of the sale.

If no buyer’s agent is involved, the listing agent and their broker take the entire commission.

Step 3: The Commission is Paid to the Broker

Commission fees come out of the final selling price at settlement, so if a sale falls through, the commission does as well. Under rare circumstances, fees are still collected—if one party is in breach of contract, for example.

As we mentioned above, the commission is paid out to the broker(s) first, rather than the agent(s).

Step 4: The Brokers Pay their Agents

The question of how the commission is divvied up from there is a little complicated, and the real answer is “according to your employment contract.”  There are several business models used across the industry, so your arrangement will vary with experience, preference, and how much support you want from your broker.

A Commission Split: Just as it sounds, a commission split is a further division of the pie between broker and agent.  The split varies.  New agents who want training and mentorship from their brokerage can start as low as 30%; in return, though, they get support to begin their careers.

Agents often “graduate” into higher commission splits as their experience and skill level grow.  A typical split for an experienced agent would be 70/30 or 80/20 in the agent’s favor.

A Desk Fee:  Another model is for agents to receive 100% of their commissions but pay a flat fee, or “desk fee,” to the broker on a monthly basis. This is riskier than a commission split for new agents or slow markets—you may not have the cash flow for the desk fee if nothing is selling. But when cash flow isn’t a concern, desk fees are the way to go (think hot markets and top-producing agents).

A Commission Split/Desk Fee Combination: You can hedge your bets between the two strategies by using a combination: pay both a desk fee and a commission split.  The benefit, of course, is that the desk fee will be lower than it would be at 100% commission, and your commission split will be higher than it would be with no desk fee.  You get some of the benefits of both, which serves as a buffer during market fluctuations.

Salary plus Commission: This option used to be very rare, but the rise of large national brokerages like Redfin have made it (slightly) more common. In the “traditional” models above, agents are independent contractors for the broker. They earn entirely on commission, then taxes, health care costs, and time off all come out of their own pocket.

Under the salary model, agents are company employees.  They receive a regular paycheck, paid time off, and other common benefits.  They also receive commissions and bonuses based on selling prices and customer reviews. These commissions are a fraction of what they would be in other models, but cash flow is constant, and the risk is much lower.

So, How Does It All Shake Out?

According to Salary.com, as of March 2019, the average base compensation for real estate agents nation-wide is $41,481.  It’s heavily influenced by location, of course—the average agent in San Francisco takes home $52,266 a year, while in Mississippi, they would take home $36,616.  It also varies based on the value of the properties you focus on and your skill at closing deals—top performers can earn millions.

If you’re interested in becoming an agent, you can complete all your pre-licensing course requirements online, where you’ll pay affordable fees and work at your own pace.  And if you decide to become a broker later on, we can help with that too!  Start training for your new career around your current job, from the comfort of your home or, since we’re mobile-friendly, whenever you happen to have the time.

 

 

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