Unlike most jobs and careers, real estate agents are not always salaried positions. They don’t always get monthly or bi-monthly paychecks. So, if you’re planning to enter the industry and become a real estate agent, you might wonder how real estate agents make money. Read on to find out!
How Do Real Estate Agents Make Money?
Most real estate agents make money through commissions. These are payments made to real estate brokers. Buyer agents may also get a monetary bonus, but it still depends on closing the deal.
Commissions are a percentage of the property’s sale price, commonly set at a 4% to 6% fee. For example, if the home is priced at $1,000,000, the commission can run from $40,000 to $60,000.
However, not all deals pay this specific percentage. Commercial properties may include up to 10% in commission. Some may also offer standard commissions at just 1%. Still, others may agree on a flat-rate fee. Also, commissions may vary depending on the location or region of the property.
The commissions that agents earn are for the services they provide. This includes listing, marketing, advertising, and holding open houses and showings. It also covers fees for arranging inspections, handling paperwork, managing negotiations, and doing other administrative tasks.
In principle, sales commissions can be negotiable, depending on the willingness of the parties involved. When the seller and the listing agent agree, the amount will be indicated in the listing agreement.
Essentially, real estate agents make money as one big commission paycheck at the end, rather than the hours that they work with a seller or buyer. As soon as the closing and funding are completed, the commission can be released to the brokers.
How are Commissions Shared?
Typically, four real estate professionals split the commission. They are the:
- Buyer’s agent
- Buyer’s broker
- Listing agent
- Listing broker
The commission is first split between the buyer’s broker and the listing broker. The broker then pays the agent according to their agreement. Often, the split is about 50-50. However, some splits can vary wherein the listing broker gets a larger portion.
The brokers then split their share with their agents, often at around 50-50. Again, the split is negotiable. Newer agents may get as little as 20% to 30%. Experienced agents may get 100% if they pay agreed fees to the brokers instead of splitting the commissions.
For example, in a $1,000,000 home sale with a 6% commission, the brokers receive $60,000. If they agree to split 50-50, they get $30,000 each. If the listing broker splits 50-50 with their agent, they each get $15,000. On the other hand, if the buyer’s broker splits 60-40 with the buyer’s agent, the broker gets $18,000 and the agent gets $12,000.
Who Pays the Commission?
The party who pays the commission can get a little complicated. In theory, the seller pays the commission. Since it’s usually incorporated into the home sale price, the buyer ends up paying the fee indirectly.
If sellers are not represented by an agent, buyers may be able to negotiate for a lower price, considering they don’t have to pay a seller’s agent. They will still be called to pay commission to the buyer’s agent. However, this will most likely be lower than the full commission for both agents.
In cases wherein buyers or sellers are not represented by an agent, no sales commission will be paid. One or both parties, however, may hire an agent, broker, or lawyer to guide them in handling the documents towards the closing step.
How Does the Payment Process Work?
Generally, commissions are paid only when a transaction settles. Before real estate agents make money, here’s a quick view of the payment process:
- Closing: Documents must be signed by the parties. From here, funding from the buyer must be completed.
- Once the funds are confirmed by the bank and the sale closes, the escrow company can send the commission fee to the brokers.
- When the brokers receive the commission, they will deposit the appropriate share so real estate agents can make money.
Commissions are paid when the sale closes. However, a seller is liable for the commission for certain instances wherein the transaction doesn’t follow through. If a buyer puts in an offer and is ready to purchase, the broker is entitled to a commission if the seller:
- Cannot deliver to the buyer within the agreed or reasonable time.
- Changes their mind and backs out of the sale.
- Claims some terms not listed in the agreement.
- Commits fraudulent activities related to the transaction
- Has a mutual agreement with the buyer to cancel the transaction.
- Has a spouse or legal partner who refuses to sign the deed.
- Has uncorrected defects in the title.
Note that contingencies that require sellers to pay a commission even if the property doesn’t sell should be included in the listing agreement.
While some agents may receive base salaries and bonuses, most real estate agents make money through commissions. Generally, commissions are split and agreed upon by the listing agent and broker, along with the buyer’s agent and broker.
The sellers pay the commission, but it’s reflected in the price paid by buyers. This is paid directly to brokers when transactions are settled.
If you liked this article, you might be interested in learning what happens in a day in the life of a real estate agent.