How do Realtors get paid? There is often a great deal of confusion regarding how Realtors® are paid. Yes, we are paid a commission, but there are some aspects you probably don't realize.
Realtors are state licensed Real Estate Agents, Broker/Associates or Brokers. Although business models may vary, Real Estate Companies or Real Estate Agencies are a group of Real Estate Agents and Broker/Associates with a single controlling Broker. These companies come in various sizes and may have one or more individual offices. They can be independent Real Estate companies or franchised Real Estate companies.
The companies that are advertised on television, radio and magazines such as Century 21, Coldwell Banker, Help-U-Sell, Realty World, RE/MAX, etc., and others are not Real Estate Companies. They are franchise companies (Sales agents that belong pay a fee that is 6-8% of their commission for that privilege.) that have copyrighted and registered their name and then franchise and control the use of their name to individual, privately owned Real Estate companies. The clue to whether it is a franchised company is the small print on the ads, "Each office individually owned and operated" or "Franchised."
In general Brokers are either owners of, or managers of, each office. Each physical office has one Broker of Record who is, by license, responsible for the actions of the sales agents that work in the office and all the Real Estate transactions that are involved with that office. All home or commercial listings, home or commercial sales and money transactions are done through and with the approval of the Broker of Record. Real Estate Agents and Broker/Associates who list and sell Real Estate (the persons that have personal contact with the sellers and buyers) are contract employees. They are responsible to the Broker of Record of the office in which they work. These contract employees are not paid directly for their work. They must be paid through the Real Estate Company and the Broker of Record.
In all Real Estate transactions there is a listing Real Estate Company and a selling Real Estate Company. All commission money at closing of a Real Estate transaction is paid to the Real Estate Company and disbursed by the Company Broker. The amount or percentage of commission for the sale of the property is set by the listing broker (with the approval of the home owner or seller) and published in the MLS along with the listing. The commission split between the selling broker and listing broker is also determined by the listing broker but generally the listing broker keeps 50% of the commission and pays the selling broker 50% of the commission.
After the commission money is received by the Listing and Selling Brokers, they in turn pay the sales agents involved in the transaction. The amount that the sales agent receives is determined by the employment contract the sales agent has with the Real Estate Company. Real Estate Agents are independent contractors and receive no other financial benefit other than the sales commission.
The agents payment may vary from 40% share of what the broker received (20% of the total commission) to 100% of what the broker received (50% of the total commission). When the broker/company shares the commission generally the company pays for advertising, telephone, and other office business expenses.
When the agent receives 50% of the total commission the agent pays for all the expenses, including advertising, telephone, and office expense. In this case a realtor typically pays an office/monthly fee to broker.
REMEMBER Agents are generally independent contractors, not employees. There's no salary involved and no regular pay-day. As independent contractors, each agent must pay self-employment taxes, their own medical insurance, errors and omissions insurance, licensure fees, access fees for the MLS (multiple listing service) as well as their own business expenses - mobile telephone, mileage, etc.
This is a broad brush explanation of real estate commissions. The Real Estate industry is changing rapidly. For example, with the introduction of the internet there has risen a whole other tier of people and companies that want to grab a portion of the Realtor's commission dollar, this is in the form of referrals and referral companies. But, that is for another discussion.
We work on a contingency basis - we are only paid if and when a deal closes. So if a buyer's financing falls through or there's a problem with the title and the sale doesn't close, the agent isn't paid... period. Because of that, we are very committed to working with you and making your transaction a successful one.
We have a fiduciary duty to you. That means if it's not in your best interest to buy or sell, we'll advise you to walk away - that means we don't get paid. Now that's commitment! Accordingly, we ask you to be willing to commit to us. Sometimes it's not a 'good fit' and we'll both move on in those rare instances because we need to be able to work as a team.
Here is the important thing to remember:
In almost every case, the entire real estate commission is being paid by the seller. That is true even if the agent you are working with has signed a buyer brokerage agreement with you. However, a real estate transaction can be negotiated any number of ways, and that includes the possibility that the buyer could end up paying some or all of the sales commission.
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