How Do Real Estate Agents Get Paid?- "So, Vickie, what do I owe You?"

"So, Vickie, what do I owe you?"

That's the question I heard recently from a Tenant after completing the final Walk-through where she received the Keys for her Home that she's now Leasing.   Though she understands Commission structure, she was grateful for my assistance with her Home search and facilitating her Lease and wanted to give me a Gift to express her appreciation (by the way, my answer was "You don't owe me anything at all, but I appreciate the gesture.")

I thought about her question again and was reminded of a post that I've been intending to write for quite a while.

In the course of my daily interactions, I've found that many Buyers, Tenants, and others do not understand how Agents are paid and there are many inaccurate beliefs regarding not only how Agents are paid, but what an Agent's Job Description includes. If you're a Buyer, Seller, Tenant, or anyone else who's reading this, understand that I am not assuming that you should automatically know this information.  I wasn't always aware of how the process worked.

NEWS FLASH TO BUYERS AND TENANTS:  In Real Estate Transactions with Brokers and Agents, the Homeowner/Landlord, NOT YOU, is responsible for paying Commission. If an Agent is assisting you with searching for Property to Purchase or Lease, they will only get paid if you actually Lease or Purchase Property.

1. The Homeowner signs a Listing Agreement with a Broker (i.e. ABC Realty Group) who's represented by a Real Estate Agent.  In the Listing Agreement, the Homeowner agrees to pay a certain amount of Commission for the marketing and facilitation of their Property's Sale or Lease.  That Commission is paid only if the Home is actually sold or Leased (paid on the day of Closing).
   
   Yes, the scenario is the same even if the Homeowner is a Bank/Lender who signed a Listing Agreement (meaning that even if a Home is listed as a Foreclosure and the Bank has listed the Home for Sale through a Broker, the Commission structure is the same--even Auction properties listed in the MLS offer the same Commission structure as outlined below).
   
   
2. Commission amounts vary. Homeowners and Brokers agree to various Commission amounts (meaning that one Listing Agreement might specify 10%, another 8%, another 6%, and so on).  Despite what you might have heard, there IS NOT a specific Commission amount that's paid in every Real Estate transaction (if that were the case, it would be illegal and is forbidden by the Sherman Antitrust Act).  
   
   
3. The Listing Agreement indicates that Commission will be shared equally with the Broker & Agent who Lists their Property for Sale or Lease AND with the Broker & Agent who introduces a Buyer or Tenant who purchases or Leases the Property (see Example 1).  IF the Listing Agent also introduces the Buyer or Tenant, then the Listing Agent's Broker receives the full Commission amount since there isn't a 2nd Agent and Broker involved in the transaction (see Example 2).
   
   
4. Example 1:
   Agent Sally Jones lists 123 Main Street for Sale through her Broker, ABC Realty Group.  The Homeowner requests to list the Home for $300,000 and agrees to 8% Commission.
   Agent Bob Smith with XYZ Realty Group finds 123 Main Street in the MLS (Multiple Listing Service) and shows it to his Buyer, who purchases the Property for $300,000.
   
   In this example, the Homeowner would pay total $24,000 Commission at the time of closing, which is shared equally by ABC Realty Group and XYZ Realty Group (this $24,000 is subtracted from the Homeowner's proceeds from the sale of their Property). See Chart below.
   
   
   
   
5. Example 2:
   Agent Sally Jones lists 123 Main Street for Sale through her Broker, ABC Realty Group.  The Homeowner requests to list the Home for $300,000 and agrees to 8% Commission.
   Agent Sally Jones is working with a Buyer who's searching for Property.  She shows them many Homes for Sale, including 123 Main Street, which the Buyer decides to purchase for $300,000.
   
   In this example, the Homeowner would pay total $24,000 Commission at the time of closing to ABC Realty Group (this $24,000 is subtracted from the Homeowner's proceeds from the sale of their Property). See Chart below.
   
   
   
   
6. AGENTS ARE NOT PAID THE ENTIRE COMMISSION AMOUNT!!!  
   The full Commission Amount is paid to the Agent's Broker and that amount is shared by the Broker and the Agent.  After receiving a Real Estate License through the Licensing Authority for their State, Real Estate Agents then choose and "sign up with" a Broker (i.e. EWM Realtors, Coldwell Banker, Prudential, Keller Williams, etc.).  The vast majority of Real Estate Agents have agreed to receive a certain percentage/split of the Commission amount from their Broker (Commission split amounts vary).
   
   Using Example #1 above, let's say that Sally Jones receives 70% of the Commission from her transactions and her Broker, ABC Realty Group, receives 30% of the Commission (this would be what's considered a 70/30 split).  Let's say that Bob Smith has also agreed to a 70/30 split with his Broker, XYZ Realty Group.
   In this example, Sally Jones and Bob Smith would each receive 70% of $12,000, which equals $8,400 each.  See Chart below.
   
   
   
   Using Example #2 above, if Sally Jones has agreed to a 70/30 split with her Broker, she would receive 70% of $24,000, which equals $16,800. See Chart below.
   
   
   
   
7. The majority of Real Estate Agents are considered Independent Contractors and are paid by Commission only (no paycheck unless they Sell or Lease Property).  
   
   
8. So, as a Buyer or Tenant, you do not control the Commission structure since the Homeowner has already signed a Listing Agreement with their Broker specifying the amount of Commission that they will pay if the Property is sold or leased. If you're a Buyer or Tenant who's currently being assisted by a Real Estate Agent, it is of no benefit or financial savings to you to contact a Home's Listing Agent directly (if you choose to do so, it only means that the Listing Agent will now be facilitating your portion of the transaction as well and will receive both sides of the Commission from the Transaction, while your former Agent who has worked hard on your behalf will now receive no pay at all).

FACTS:    Real Estate is a Business.  Real Estate Agents incur MANY Business Expenses. We receive a 1099 stating our earnings at the end of the year, NOT a W2, which means that Taxes ARE NOT deducted from my Checks throughout the year, SO I must set aside a sufficient portion of my earnings in order to pay good ole' Uncle Sam.  What all of this means is that Commission paid to Agents gets taken away in many pieces to pay Business Expenses and Taxes. Oh, and let's not forget those pesky little living expenses like Food, Mortgage, Home Insurance, Property Tax, Automobile Expenses and Maintenance, Home Maintenance, Household Utilities, Travel, Incidentals, and the list goes on...


Let's review a few examples of Real Estate Agent Business Expenses (I'm using mine as an example):

1. Taxes.  Self Employment Tax is payable to the IRS at a rate of 15.30% of Income earned
2. Annual Business Tax from Broward County (formerly known as an Occupational License)
3. Annual Dues payable to the National Association of Realtors and my local Association of Realtors, The Realtor Association of Greater Ft. Lauderdale
4. Annual Dues payable to The Institute for Luxury Home Marketing (optional, but one whose membership I maintain as it enhances the set of services that I offer to Luxury Home Buyers and Sellers)
5. Monthly Administrative Fees payable to my Broker
6. Fees payable for State required Continuing Education Classes
7. Fees payable for OPTIONAL Classes that I take to enhance my Real Estate knowledge and Business
8. Annual Fees payable for Electronic Access for Lockboxes
9. Lockboxes for Homes that I list for Sale
10. Copies of Keys for Homes that I list for Sale
    
11. Signs for Homes that I list for Sale
12. Internet Advertising for Homes that I list for Sale
13. Printed advertising material for Homes that I list for Sale ("Just Listed" Cards, Newspaper Ads, Magazine Ads, Printed Brochures and Flyers)
14. Monthly payment for my website hosting
15. Payment for my website Domain Names
    
16. Monthly payment for the Property Search feature that I provide for Buyers and Renters through my Website 
17. Monthly payment for Listing Enhancement Services (VisualTour.com and Enhanced Realtor.com)
18. Home Photography and Videography
19. Payment for Single Property websites for my listings (Website example:  Las Olas River House Condo)
20. Postage for Marketing material mailed for Homes that I list for Sale
21. Open House Expenses (Printed Invitations mailed to the Neighborhood and others, Printed Flyers, Refreshments, Open House Signs, etc.)
22. Print and Internet Advertising to promote my business 
23. Membership dues to local Chamber of Commerce and other Organizations to provide Business opportunities and visibility
24. Office Equipment (Laptop, Camera, Air Card, GPS, Cell Phone, etc.)
25. Necessary Computer Software
    
26. Office Supplies
27. Cell Phone Bill (Numerous phone calls are placed to conduct Real Estate business)
28. Air Card Bill (I have an Air Card so that I'm able to access the Internet in areas without Internet Access such as Open Houses or when meeting with Buyers or Sellers in Homes without WIFI).
    
29. Greeting Cards for various Client events (Birthdays, Holidays, etc.)
30. Dinners and Lunches for Buyers and Sellers
    
31. Closing Gifts (when I sell a Homeowner's Property or sell a Home to a Buyer, I purchase and present a Gift to the Seller or Buyer)
    
32. Gas Expenses for showing property to Buyers and for other Real Estate related appointments
33. Time spent conducting Real Estate related activities (time is valuable and it is an expense).  View a partial list of these activities below:

NOTE:  In the majority of Real Estate transactions, Real Estate Agents do not require Buyers or Sellers to pay a Retainer for their services.  What this means is that the services and activities rendered on the behalf of Buyers and Sellers are performed for free UNLESS a Home is purchased or sold.  As an Agent, I can spend countless hours and money marketing a Home for Sale, but if a Buyer doesn't purchase the Home, I don't receive a paycheck or reimbursement for the resources expended.  I can also spend numerous hours facilitating Home Searches and showing property to Buyers and Tenants, but if a Buyer or Tenant doesn't Lease or Purchase a Home, I don't receive a Paycheck or reimbursement for the resources expended.   Whether a Home is sold or not, I continue to operate my Business, along with all of its' necessary activities and Business expenses.  

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Vickie Arcuri, Realtor®
EWM Realtors
1700 E. Las Olas Blvd., Suite 103
Ft. Lauderdale, FL  33301
Cell:  (954) 708-9309
vickie@vickierealestate.com  
Fort Lauderdale Waterfront Homes

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Listings of Interest:

Palm Beach Waterfront Condo for Sale with a Dock
San Juan del Sur Oceanfront Home for Sale
Las Olas River House Condo for Sale
Rio Vista Home for Sale
Ft. Lauderdale Waterfront Coop for Sale with a Dock
Palm Beach Waterfront Condo for Rent (Seasonal/Vacation Rental)
Tamarac Townhouse for Sale