Matthew L. Tuck, J.D., M.B.A.
Hi Khloe. Great question.
Real estate agents are essentially sales people and are usually paid on commission. That means they get a percentage of the sale price of the home or property for which they have found a buyer. Real estate rules differ a bit from state to state but the basics are pretty similar.
Real estate agents generally work for what is called a "broker." A broker has a special type of real estate license that allows real estate agents to work for him or her selling real estate. When a buyer has a house to sell they will generally list that house with a broker who, in turn, usually puts the house into some type of on-line database. Real estate agents with access to these databases can search for houses based on all kinds of variables, including price range, location, square feet, number of bedrooms, style, lot size, year built, and other criteria. That's how realtors are able to match buyers with homes that pretty closely match their wish list.
Real state agents are generally "independent contractors" which means they are not an employee of the broker work pretty much for the commissions they earn. Independent contractors, sometimes called a "1099" worker are usually responsible for their own taxes and withholdings. About 86% of real estate agents are independent contractors.
When a buyer purchases a home, part of the sale price of the home is paid over to the broker who has listed the home as a commission. The broker pays part of that commission to the real estate agent who actually handled the sale of the house.
Your question about commission splits a good one. Splitting the commission complicates things even further. Sometimes a realtor will locate and sell a house that is not one listed by the broker they work for, but is instead listed by another real estate broker. In this situation it is normal for the real estate agent and her broker to split the commission with the broker who listed the house for sale.
So how much does the real estate agent actually get? Typically, the real estate commission is 5%–6% of the home’s sale price. In most areas the buyer’s agent receives 2.5%–3% in commission and the seller’s agent receives 2.5%-3% in commission. In a "dual agency" situation (where the realtor is representing both the buyer and the seller) the agent gets it all. Sometimes dual agents will reduce the commission rate to make sure they get the sale.
To see how this works out, let's say we have a brand new real estate agent named Kiki. Kiki has a client who is looking for a house. She finds the perfect house for $200,000 that is listed with another brokerage. She sells the house. So on the sale of that $200,000 house, the total commission (6%) would be about $12,000. Since the house was listed by a different broker than the one Kiki works for, the two brokers would split the commission. Kiki's broker would get $6,000 and the other broker would get $6,000. Since Kiki is new, her broker would keep a lot of the commission, probably about 40%, and Kiki would get 60% of the $6,000, or about $3,600.
In terms of salary, it varies a lot because of the variables noted above. According to the website salary.com, a typical income for a full time real estate agent is about $41,000 per year. Of course this can vary a lot depending on what type of houses you sell and how many. The average realtor sells about 4-5 homes per year. There is a saying in the real estate business that 10% of the agents sell 90% of the homes. As you can see, if Kiki sells 5 houses per year, she would make about $18,000. But as she gets better and sells more and bigger houses, she would earn more. There are a lot of people selling real estate part-time for this reason.
These numbers are just averages. How much a real estate agent actually earns depends on a number of different variables. These include:
- How much the house sold for (more expensive house = higher commission)
- How long the realtor has been working for the broker (new realtors, like Kiki, usually get paid lower commissions while they are learning, often just 30%-40% of the fee the broker receives. Though some more senior, high-performing agents may get 100% of the commission the broker gets. They then pay the broker what is called a "desk fee" that covers the brokers costs and profit). Most other agents fall somewhere in between these extremes.
- How many houses they sell every year
- How hard the agent works
- How big the broker is that they work for (a broker with lots of listings means lots of inventory to sell and not having to split commissions)
- Whether they wind up splitting commissions with other agents
- Other deductions and fees charged to the agent by the broker (some brokers charge their agents certain fees, like advertising, sign rentals, office fees, and document fees)
- Interest rates
- The market (a good economy means lots of buyers, a bad economy means few buyers)
The commissions earned by realtors are ultimately paid by the seller out of the proceeds of the sale since they are the party selling the house. Of course the price of the house is usually set with sales commissions in mind. Buyers may have to pay what are called "closing costs." Closing costs paid by the buyer include things like loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Sometimes these closing costs become part of the negotiation and can be partially or completely paid by the seller if they really want the house sold.
Hope this helps.
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