What is a typical real estate commission?
Many people believe being a Realtor is similar to being a money magnet. Not only is this a misconception, but I don’t know of any other business where a professional can put in countless hours on a transaction and possibly end up empty handed. Let me explain how a Realtor gets paid.
Most Realtors are paid on commission based on sales price of the property. THERE IS NO STANDARD COMMISSION. A real estate professional can only tell you what their company charges to list a property, not what other companies charge. It is against Federal law to “price fix,” so each company has their own policy.
For the purpose of this article, we will use 6% as the commission base and a sales/purchase price of $300,000. Wow! you’re thinking? That Realtor is getting paid a lot to sell a $300,000 house! Unfortunately, that is not the case.
Most Realtors work for a real estate brokerage. When they are hired (usually as an independent contractor), there is an agreement with the brokerage as to what “split” the company will keep and what the Realtor will be paid from the commission. Every firm is different. The Realtor is not paid directly at closing but the money is paid to the brokerage who then pays their Realtor their portion.
Commission splits can be anywhere from 50%/50%, 90% to agent/10% to brokerage, 70% to brokerage/30% to agent. It depends on so many factors, but each agent has their own agreement with their company.
Who Pays the Real Estate Agent?
In most situations, the Seller pays the company that lists the property, also known as the Listing Agent. Of the 6% paid to the Listing Agent, 3% of that amount is paid to the Company representing the Buyer. As a general rule, listing side and buying side split whatever commission was agreed upon when Listing Agent took the listing.
Also during the time a contract is entered into between lister and homeowner, it is agreed upon how much Listing Agent will make if there is no other Realtor involved (the Listing Agent working for both the Buyer and Seller). So it is silly to think you’re going to go to the Listing Agent to get a “deal” off the price of the house. That is rarely the case because it’s been agreed to before the house goes on the market. What you really get is a lack of your own representation.
So how do Realtors get paid, actually? In this scenario, each company gets 3% ($9,000). Depending on the split, let’s say the company gets $2,700 (30%) and the agent gets $6,300 (70%). Of that $6,300, the agent (again, an independent contractor) will have to pay income taxes, federal and state self employment taxes, liability insurance, dues and fees, MLS fees, all advertising costs, assistants, etc. It also takes (on average) four to six weeks after you have an accepted offer until closing, a long time to wait to get paid.
A fair amount is taken out of the agent’s check. What it looks like they’re making is not at all what they’re taking home. A Realtor can work for days/weeks/months with a Client, but if something unforeseen happens and there is no closing, then there is no payment at the end. In addition, they can go several months without a sale and have no income, or have several sales in one month. Budgeting is important.
All of this is based on generalities, but that’s a brief overview. Please ask if you would like further information. I’m here to help.