If you’re selling your home for the first time—and working with a top-notch real estate agent to get the deal done—you might wonder how exactly your agent will get paid.
…And how much.
…And why that much.
…And by whom.
Heck, even if you’re a homeowner several times over, you still may be scratching your head. Who could blame you? While it’s no big secret, it is confusing.
Here’s the lowdown on how real estate agents make their living.
How Do Real Estate Agents Get Paid the Money?
Simply put, real estate agents get paid in commission—but it’s not so cut-and-dried. Commission for agents has been 6% since the 1950s, when the National Association of Realtors came up with a suggested rate. However, in 2017 The Washington Post reported that the national average was closer to 5% and could dip below that in the years to come.
This downward trend is the result of stiff competition and shortages of homes for sale in certain markets. Other factors that might influence a listing agent’s offer include:
- Anticipated sales price:
If your house is worth more than a million dollars, you may be offered a rate lower than 6% as the agent’s take-home slice gets bigger.
- Time it takes to sell:
If the agent feels confident the house will sell quickly, they may be more willing to lower the commission.
- Strength of local market:
A strong local market bodes well for a quick sale, also making it a potentially influential factor.
- Buyer’s agent:
Typically, the commission is split between both listing and buying agents if both take part in the sale. However, you could make the case for a reduced rate if a buying agent does not take part.
- Lighten the agent’s load:
You could agree to take on some of the responsibilities generally handled by the listing agent, such as putting together an open house.
Once presented with a listing agreement to sign, you’re welcome to negotiate with the agent, but don’t be surprised if their rebuttal is a swift “no.” If the agent is willing to discuss it, you should be prepared with good reasons for why they should earn less.
Who Receives What When it Comes to Real Estate Agent Commissions?
Aside from the important work they do, here’s another reason a listing agent might be unwilling to negotiate commission: They don’t get to keep all of it.
This is because a real estate agent cannot fly solo. State requirements for earning a real estate license vary, but all states prohibit selling property independently unless you have a broker’s license.
Listing agents must therefore work under a real estate broker and give a percentage of their commission—that’s right, a percentage of a percentage—to the brokerage. It’s not uncommon for the broker to take half and give the other half to the agent. However, this balance can tip in either direction, mostly depending on the experience and success rate of the agent.
Oh, and we can slice this piece of the pie thinner yet.
If a buyer’s agent takes part in the sale, they get a cut, too. A listing agent’s percentage becomes even smaller to pay the buyer’s brokerage. The buyer’s brokerage then pays their agent. When all is said and done, very seldom are the spoils split evenly between the two agents.
In fact, the listing agent often takes the majority, especially in a seller’s market. How much commission is split between brokerages is predetermined by seller in the listing agreement and then published on the MLS.
You’re thinking “Huh? Give it to me in real numbers!”
Though the splits are not necessarily 50/50, for example’s sake, we’ll keep it that way. Say you sell your home for $200,000 and have agreed on a 6% commission. Your real estate agent would be paid $12,000. He would then give up some to both his and the buyer’s brokerage, each getting $6,000.
After both brokerages take their cut, each agent pockets around $3,000.
Check out our in-depth piece about Realtor fees to see where that $3,000 real estate agent commission really goes.
There Must Be Benefits to Working Under a Real Estate Broker, Right?
Sure. This deal may make brokers sound like the Sheriff of Nottingham, pocketing money from earnest, hardworking real estate agents limited by their real estate license, but there are reasons why the commission gets divvied up.
Perhaps the most important reason is that agents simply can’t work without brokers, much in the same way that nurse practitioners must practice under an MD. Other benefits to working under a broker include:
- Recognizable brand:
Working for a recognizable brand, especially if the broker is reputable, helps keep business consistent in addition to giving agents access to well-connected networks, handy industry tools and a physical office location.
- Access to the MLS:
The MLS is a massive database of property listings comprised of many smaller, regional MLSs (around 800). These databases offer tax data, demographic information and market statistics, which is why brokers pay annual membership dues for access.
Another advantage of “hanging a license” in a broker’s office, especially for an inexperienced agent, is working in close proximity to seasoned agents. This way you can learn while you work.
Is This the Only Payment Option for Real Estate Agents?
Nope. There is an alternative to the split commission model that is typically available to top selling real estate agents. Agents can negotiate with their broker and pay what’s called a desk fee—a monthly charge by the broker to cover, among other things, the cost of the office space, office supplies, advertising and insurance.
If a broker allows it, and an agent doesn’t want to split that commish, they can agree to pay the desk fee. A combo of a desk fee and commission may also be an option.
What Is The Money Going Toward?
The thought of 6% commission may strike hubris in the heart of a home seller and send them down the For Sale by Owner path. But that percentage allows an agent to work their magic. Real estate agents are so much more than house tour guides.
A good real estate agent will do all of the following:
A good agent will use their knowledge of the market to assign a fair and accurate price to your home. You might think that overestimating the price is a good idea, but in truth it’s more likely to leave your house on the market, dancing alone by the punchbowl.
They’ll know how to effectively market a listing using all the tricks: a professional photographer, social media, the mighty MLS and print marketing (yes, a nice, shiny brochure still gets things done).
Staging is more than a thorough vacuuming and some well-placed flowers. It’s about allowing prospective buyers to see themselves in your space. Many agents, or their agencies, will spearhead this as well.
By being present during the home inspection and appraisal, an agent can relay important information to their client and make sure all is fair in love and war. They also help clients bushwhack through a thick jungle of legalese before signing papers.
Agents don’t have to do all of these things, but they do have a fiduciary responsibility to negotiate terms and conditions on behalf of their client, not to mention a reputation to uphold and bacon to bring home.
Ok, Then Who is Actually Paying the Real Estate Agent and When?
Because it is up to the seller to negotiate how much of the final sale price goes to their agent, they are the ones paying. Some say that technically the buyer is putting up the money, so they in fact pay the agent, but the commission rate really has no effect on the buyer’s wallet.
Agents get paid when a sale is final, but the amount of time spent working on a sale is not factored in. Whether your house sells in five minutes or five months, an agent’s earnings are based on how much the house sells for. This can be both a blessing and a curse, but it also further illuminates why it’s worth it for the agent to do the best they can to price it right and sell it quickly.
No need to whip out your wallet or dust off your checkbook or figure out what the heck Bitcoin is. You negotiate terms upfront and your agent will get paid if and when the house sells. Whether this happens as a result of the agent’s hard work or just good fortune is not always clear.
One thing is for certain: A real estate agent’s skills and expertise should not be underestimated.