Understanding Real Estate Agent Commissions
If you’ve ever pondered becoming a real estate agent, money is probably a key determining factor. You know you can make a lot of money, but exactly how much real estate agents make could determine whether you take the plunge to become an agent or not. That’s why we’ve compiled this easy-to-follow guide to ensure you get the answers to common questions surrounding how you get paid as a real estate agent and how much do real estate agents make.
How Real Estate Commission Works & Who Is Involved?
Most real estate agents charge a percentage of the sale price of the home when a deal goes through. What is a typical real estate agent fee? That usually ranges between 5 - 6%. That commission is usually paid by the home seller and split between the agents and brokers involved.
What a Typical Real Estate Agent Fee Looks Like
Here are some examples of what a typical real estate agent fee looks like:
- Referral Fees - These fees represent a negotiated percentage paid to another company for sending a client, either as a seller or buyer. They are deducted from the commission before it is split.
- Real Estate Franchise Fee - Some franchisee brokerages pay a percentage fee of each commission to their franchise. This fee is paid before the broker splits the commission with the agent.
How Real Estate Agent Commission Is Split
The final commission paid often represents weeks' or months’ worth of work in which the real estate agent must price the home, market it, negotiate with home buyers, and sit down with all parties at the closing table. When you ask How much do real estate agents make? then this is the biggest determining factor.
The commissions are typically split among four parties:
- Listing agent - Represents the seller
- Listing broker - Whom the listing agent works for
- Buyer's agent - Represents the buyer
- Buyer's agent's broker - Whom the buyer’s agent works for
What Is the Difference Between an “Agent” and a “Broker”?
So what are the differences between a real estate “agent,” a real estate “broker,” and a “REALTOR®?”
This is probably the easiest to understand, so we’ll get it out of the way right now. A “REALTOR®” can be either an agent or a broker, it just depends on the state. To become a REALTOR®, the agent or broker must join the National Association of REALTORS® (NAR).
As for the differences between a broker and an agent, they are significant although the terms do vary by state. Typically, when people use the terms interchangeably, they’re referring to an “agent” or a “salesperson.” They’re not referring to a real estate broker vs. an agent. The agent is the person who is actually out showing homes, marketing their brand, and connecting people with the property they’re seeking. When that agent makes a sale, their commission is split with their broker. That’s who the agent works for.
The biggest difference between real estate agents and brokers is that a broker is free to work independently. Brokers can also hire real estate agents to work for them. All real estate commissions must be paid directly to a broker, then the broker splits that commission with any other agents involved in the transaction.
In simpler terms: The real estate brokerage takes on more legal responsibility and has built a brand, which is why they get a percentage of everything the real estate agent makes. They play an important role in real estate transactions, even if the buyers/sellers don’t directly interact with the brokerage.
What Percentage Do Real Estate Agents Charge?
As noted above, real estate agents charge an average of 5-6% commission per transaction. It is common for more experienced or top-producing agents to receive a larger percentage of the pie. In such cases, you might see a 70/30 split where 70% goes to the real estate agent and 30% to the broker. Other common agent/broker splits range from 50/50 to 60/40.
In rare instances, real estate agents can receive 100% of the commission. Typically this scenario unfolds because the real estate agent is paying a “desk fee” to their broker, meaning the agent pays their broker for sponsorship but is less involved with the brokerage than a typical real estate agent.
Do Real Estate Agents Make a lot of Money?
Commission splits and parties involved greatly influence how much a real estate agent will make by the end of the year. Obviously, the price of a home and the number of transactions a real estate agent facilitates in a year are the most important factors. The balance between these factors explains the wide range of pay between agents. Successful real estate agents can easily earn a salary of well over six figures with the commission splits outlined above.
Many agents, especially top performers, can negotiate commission rates with their brokerage. The first step to getting a raise is having the courage to ask.
More Examples of Real Estate Agent Commissions
In some instances, the commission is split among fewer parties. You’ll remember that brokers typically have much more flexibility than agents. Let’s say a broker or brokerage lists a property without the use of an employed agent and then finds a buyer. They would then keep the full 6% (or another agreed-upon rate) commission.
Another possibility is that one person serves as both the selling and buying agent. In that scenario, the agent would only need to give a percentage to their brokerage, as only one agent is facilitating the transaction.
Who Actually Pays The Agent?
The simplest answer that many agents tell their clients is that the seller pays them. But in reality, it’s a little more complicated than that. The commission payment is technically distributed by the seller and can even be factored into the initial listing price of the home. But it’s the buyer who is essentially footing the bill at closing because they are providing it through the money they pay the seller. Likewise, one could also argue that the seller takes a hit because the fee is coming out of the home’s equity. When you understand who actually pays the agent, that also helps you to answer the other key question: How much do real estate agents make?
What About Broker Compensation?
Unlike real estate agents, brokers are free to work independently. Brokers can also hire a real estate agent to work for them. This is why popular brokerage groups like RE/MAX and Coldwell Banker are able to generate so much money because thousands of agents are earning for them across the country. All real estate commissions must be paid directly to a broker, then the broker splits that commission with any other real estate agent involved in the transaction.
The compensation a broker makes is typically specified in the listing agreement. That is also known as a contract between a seller and the listing broker which details the conditions of the listing. As noted earlier, the commission is negotiable in every case. In fact, it is a violation of federal antitrust laws for members of the profession to attempt, however subtly, to impose uniform commission rates.
What Taxes Do Real Estate Agents Pay?
The one word you have yet to see mentioned is “taxes.” Taxes have a major impact on the final income any professional takes home. That is especially true for real estate agents and brokers who, just like most workers, must pay federal and state taxes.
Because tax rates vary by state, knowing your state tax rate is particularly important when calculating the potential income from a house sale. But it doesn’t end there. You then have to take into account the listing services, dues, and marketing that is involved.