How do real estate commissions work

How Does Real Estate Commission Work?

Many people don’t understand how real estate commissions work. Real estate agents don’t get paid hourly or receive a salary. They get paid commissions from their real estate sales. Per the department of Justice and anti-trust laws, there are no set real estate commissions. 

How Real Estate Commission Works

Real estate commissions are negotiable between real estate brokerages and their clients. Many charge certain percentages of their sales prices, where some list a home for a flat fee. Real estate brokerages share and cooperate commissions with other brokerage companies. Real estate agents have an agreement with their brokerage companies about how much of their earned commissions they share with their brokerages.

Who Pays the Commission?

Typically, home sellers pay the full commission amount for the home sale transaction. The sellers pay the brokerage company who lists their home for sale. When the home is sold, the listing brokerage company shares the commission with the buyer’s brokerage company. The commission is negotiable between the sellers and their real estate agent’s brokerage company. Many times the seller’s brokerage company splits the commission equally with the buyer’s brokerage company. Sometimes it is not split equally. It all depends on the situation.

If the listing brokerage also has the buyer for the transaction, their company gets the entire commission amount. This is called “dual agency”. There can also be two different real estate agents from the same brokerage company involved in the sale. One may have the seller and one may have the buyer. On occasion, the seller’s real estate agent will also have the buyer for the home.

Do Buyers Pay Commission?

Usually, the sellers pay all of the commission. This is why discount real estate brokers have become more popular selling homes for less money. There are occasions where the buyers will have to pay their real estate agent’s brokerage company commission. Some brokerages require their agents to have a buyer’s agreement which states a certain minimum amount or minimum percentage of commission that will be due to them for the sale. 

If the amount received from the seller’s real estate company does not meet that minimum, the buyers will have to pay the difference. If buyers purchase a home that is “for sale by owner” and the owners are not paying any commission to a brokerage company who brings a buyer, the buyers will be responsible for the entire amount of commission it states on the buyer’s agreement.

How Much is the Commission to Rent Your Investment Property?

A real estate brokerage company also charges to list and rent investment or rental properties. This is typically a flat fee, for example, one month’s rent in commission. Again, this is negotiable between the investment owner and the brokerage company. People looking to rent a home usually do not pay any commission. However, in some areas it is more common.

How Much Commission Do Real Estate Agents Get Paid?

Commissions are always paid directly to the brokerage company. Real estate agents have written agreements with their companies that spell out how much they get paid out of the total commission. Some brokerage companies split the commission 50%/50% with their agents. Some agents receive 60% and their company gets 40%. Sometimes there are 70%/30% or even 80%/20% splits between real estate agents and their companies. Sometimes there is a sliding scale where they start out at a certain percentage and then their percentage increases because of sales activity. This is all negotiable between real estate agents and their brokerage companies.

How Do Real Estate Commissions Work

What Do Real Estate Commissions Cover?

Real estate commissions cover a broad range of services. Some people feel they can sell their homes “by owner” in order to save the money spent on paying commission to a brokerage company to list and sell their home. Many times the people who sell their homes by owner end up netting less money than if they hired a real estate brokerage to help them list and sell their home.  Discount real estate brokers such as 1 Percent Lists offer the same Realtor services but at a discounted listing percentage. 

Real estate agents will prepare a comprehensive market analysis to determine the best list price and potential sales price for the home. They spend time and money taking listing photos and marketing the home. Sometimes they pay a sign company to install a professional-looking post sign in the yard to help with curb appeal. They pay multiple listing system (MLS) dues to put your home’s listing in the local MLS which gets it exposure to all member brokers and agents. They install a lockbox on your home. They create flyers or brochures for your home. Sometimes they pay for ads in print magazines. 

Sometimes they have to pay website companies to highlight your home on them, as the internet is the top way people are finding homes. They negotiate one or more contracts to get you the best price for your home. They work with you and everyone else involved in the transaction all the way to closing. Buyers agents show you as many homes as it takes until you find the right one. They negotiate contracts for you, as well. They also work with you from contract to close.

How Much Do Real Estate Agents Make?

Unlike in many industries, real estate agents are NOT paid on salary, but on a commission basis. Similar to other industries, their are top producing REALTORS that make up the vast majority of the transactions and there are many that do just enough to keep their license active. With new disruptive new technology and brokerage models changing how many real estate agents look at commission splits, we are seeing many of the top producing real estate agents starting to move toward a high-volume, lower commission real estate franchises, we are seeing the larger agents take a larger market share.

Average Annual Real Estate Agent Salary

Considering the vast differences in housing prices across the country coupled with the fact that REALTORS are paid on a commission basis, we see drastic differences in how much real estate agents make.

Here is a breakdown of REALTORS salary by state.

State of Alabama$69,575
State of Alaska$75,172
State of Arizona$73,849
State of Arkansas$65,918
State of California$82,611
State of Colorado$70,210
State of Connecticut$76,717
State of Delaware$85,294
State of Florida$67,145
State of Georgia$71,241
State of Hawaii$78,893
State of Idaho$77,650
State of Illinois$65,560
State of Indiana$73,376
State of Iowa$69,498
State of Kansas$70,192
State of Kentucky$71,840
State of Louisiana$70,584
State of Maine$76,628
State of Maryland$91,113
State of Massachusetts$81,493
State of Michigan$65,889
State of Minnesota$72,782
State of Mississippi$65,757
State of Missouri$64,512
State of Montana$74,617
State of Nebraska$89,212
State of Nevada$74,581
State of New Hampshire$85,074
State of New Jersey$74,705
State of New Mexico$68,782
State of New York$87,938
State of North Carolina$60,057
State of North Dakota$74,559
State of Ohio$72,184
State of Oklahoma$82,915
State of Oregon$71,262
State of Pennsylvania$76,055
State of Rhode Island$75,619
State of South Carolina$70,477
State of South Dakota$72,381
State of Tennessee$72,712
State of Texas$75,225
State of Utah$71,254
State of Vermont$80,225
State of Virginia$88,041
State of Washington$92,287
State of West Virginia$76,425
State of Wisconsin$72,395
State of Wyoming$78,673
Data from Investopedia