For those new to the world of real estate, the market can present all sorts of confusing dynamics. From learning the jargon to figuring out what all the players involved actually do, it can get a little stressful when you’re trying to ask the right questions and get the best value for your hard-earned cash. One of the things that leaves many people mystified is understanding exactly how real estate agents get paid and where the hefty commission fees actually end up.
To help you make sense of everything that is involved in buying and selling a home, let’s break down the various steps and the difference structures that govern how real estate agents ultimately end up with money in their pocket.
Below are eight different ways on how realtors get paid:
1. How real estate commissions work
To understand how realtors get paid, it is important to know a bit about how the commission process works. The simplest way to put is to break it down as a three-step matter of business. First off, you need to know that all real estate agents work for a real estate broker. Therefore, all fees paid to a real estate agent must first pass through the broker and then, only a real estate broker can pay a real estate commission and sign a listing agreement with a seller.
2. Commissions for real estate brokers
As you may have suspected, the broker whose hands the money passes through inevitably take a cut of the commission—although commission divisions vary quite a bit. In some cases, especially when dealing with new agents, they might receive as little as 30 percent to 40 percent of the total commission received by the brokerage.
From that amount, other fees may be deducted such as advertising, sign rentals or office expenses. Top-producing agents, on the other hand, might receive up to 100% and simply pay the broker a set desk fee. Most real estate agents fall somewhere in the middle though.
3. Listing agent fees
What you’ll see most often as a form of agreement between a seller and agent, involves giving the agent’s broker the right to exclusively market the home. This means no one else is allowed to market to home and that once a buyer has been brought to the table, the seller agrees to pay a commission to the broker. Typically, this fee is represented as a percentage of the sales price and is shared between the listing broker and the broker who brings the buyer.
4. Co-brokerage splits
Of course, how the fees get divided up between brokers can vary. In some cases, a seller might sign a listing agreement that splits the commission 70/30, it doesn’t necessarily have to be an equal division. In a buyer’s market, for example, sellers are likely to want to consider asking the broker to give a larger percentage to the buyer’s broker.
In a seller’s market, on the other hand, it is more likely that the buyer’s broker will receive less. As you can see, there is no set formula that applies in all cases. In general, though, commission divisions are fairly stable throughout a specific area, so it’s wise to do some research into what your local custom appears to be.
5. Real estate commission advances
As a real estate agent, one of the biggest worries is not being able to close a sale within a certain time frame. This is troublesome when you’re relying on a consistent monthly income to take care of your regular expenses. Fortunately, you’re able to offset this inconsistency with commission advances. These real estate commission advances are ideal for individuals seeking a steady income, particularly on months when you need more time to close a sale. The advances give you more flexibility in your schedule, while ensuring that you have an income month-to-month.
6. Seller pays the buyer’s commission
If working under a buyer’s broker arrangement, then the named brokerage and agent representing the buyer collect payment from the seller. Note though that some buyer broker agreements contain clauses that will compensate the brokerage for the fee it is due less the amount paid by the seller.
This means that a cooperating listing might offer to pay a broker a smaller portion of the sales price, whereas the brokerage operates at fees that are a higher percentage. The difference could then be paid by the buyer if the broker chooses not to waive that amount.
7. Buyer pays the commission directly
Under most listing agreements, the seller is not obligated to compensate the listing broker for more than the listing side’s portion of the commission. Note that sales prices will often be reduced to reflect the amount the buyer is paying. Sellers then can also credit the buyer the commission and the buyer, in turn, credits the brokerage.
8. Remember that everything is open to negotiation
In real estate, it is true that commissions are always negotiable, and you should not be led to believe otherwise. That being said, it is of course up to every agent whether or not they are willing to engage in the negotiation process. You should also keep in mind that as far as determining an agent’s worth, you should not judge solely on commissions. Newer agents will almost always have to start out with a lower commission and build their business up over time.