Let’s Get Crystal Clear On How Real Estate Agents Are Paid

So you’re thinking about buying or selling a house? Odds are good that the first thing you did was contact a real estate agent to help you out. According to the 2013 Profile of Home Buyers and Sellers published by the National Association of Realtors, 88% of buyers purchased their home through a real estate agent or broker.

So how exactly do real estate agents get paid?

SHORT ANSWER:

Real estate agents work for real estate brokerages, and they earn money via commissions when they assist buyers and sellers buy or sell homes.

Now let’s dispel a false assumption right off the bat…

REAL ESTATE MYTH – Agents must be rolling in the cheddar. Word on the street is that some of them make 6% or even 7% commission on every house they sell! Not exactly… Most agents are not living the lavish lifestyle you may assume they are. The income is much more modest than you might expect. Real estate agents have a median income of $40,990 with the top performers making more.

Via U.S. Department of Labor

LONG ANSWER:

First, let’s go over some terminology.

When brokerages hire real estate agents they typically set them up on what is known as a commission split. This means that when a commission is paid to a real estate brokerage, it’s split between the brokerage and the real estate agent. Some common commission splits are 50/50, 60/40, 70/30 & 80/20. This will vary from brokerage to brokerage and even from agent to agent. There may be a brokerage with 5 real estate agents who all have different commission splits.

Generally speaking, in any given real estate transaction there will be between 1 and 4 real estate agents or brokerages involved in the transaction — all of whom expect to be paid.

Listing agent – This is the person who meets with a homeowner who is interested in selling their home. This person works for a real estate brokerage. This person is then hired by the sellers to sell their home. The sellers signed a contract which explained the amount of money they were going to pay this listing agent’s brokerage to sell their home. This contract is known as a listing agreement.

Listing brokerage – All real estate agents work for real estate brokerages. Every real estate brokerage has a licensed real estate broker who is in charge of the real estate agents working at that brokerage. Every real estate agent you meet will work for a brokerage like one of those mentioned. The brokerage that employs the listing agent is the listing brokerage.

Buyer’s agent – This is the real estate agent who meets a person who wants to buy a home. This agent will show a potential home buyer homes that are listed either by themselves or other listing agents.

Buyer’s brokerage – The brokerage for whom the buyer’s agent works.

It is important to note that these roles can be different in each transaction. A real estate agent can be a buyer’s agent, or a listing agent depending on the deal. A real estate agent can even be both the buyer’s and seller’s agent.

Let’s go over some different scenarios to illustrate how each of these agents and their brokerages get paid.

Scenario A

A buyer wants to buy a home. She meets a real estate agent named Brian. Brian works for The Holton Wise Property Group. Brian is on a 60/40 commission split with The Holton Wise Property Group. Brian takes his buyer to a home that is listed by Carla. Carla works for Century 21. Carla is on a 50/50 commission split with Century 21 and has been hired by the owners of a home on 123 Main Street in Cleveland, Ohio. The price this home has been listed at is $249,900.00 The sellers have agreed to pay the brokerage Carla works for 6% of whatever she can sell the house for.

Brian and his buyer put in an offer on 123 Main Street for $225,000.00 That offer is accepted by Carla’s sellers. Carla’s brokerage is going to get paid 6% of the sales price by the sellers, but why did Brian take his buyer to Carla’s home on 123 Main Street? Who is going to pay Brian and The Holton Wise Property Group?

Answer: Carla and her brokerage.

When Carla was hired by the sellers of 123 Main Street she entered their home into something called the multiple listing service (MLS). This is a website that real estate agents and brokerages use to help their clients buy and sell homes search for homes. When Carla put 123 Main Street on the MLS she offered all other real estate brokerages a share or split of the commission she gets from the sellers of 123 Main Street if they were able get their buyers to buy the house. In this situation Carla and her brokerage offered Brian and his brokerage 50% of the commission for the sale of 123 Main Street.

So let’s see how this whole thing played out.

The house sold for $225,000.00 The sellers agreed to pay a commission of 6% to Carla’s brokerage. That amount is $13,500.00.

Carla’s brokerage agreed to pay 50% of the commission to Brian and his brokerage. Carla is on a 50/50 split with her brokerage and Brian is on a 60/40 split with his.

Here is the breakdown of the commissions earned by all who were involved.

Total commission paid by the sellers $13,500.00
Total commission paid by the buyers $0.00
Carla’s commission $3,375.00
Carla’s brokerage commission $3,375.00
Brian’s commission $4,050.00
Brian’s brokerage commission $2,700.00

Scenario B

As I stated before these roles can change by the deal. There is not always that many people involved in the scenario.

Let’s assume Brian’s buyer did not like Carla’s house. Instead, Brian’s buyer liked a house that Brian had listed himself. This house was also listed for $249,000. The sellers signed a listing agreement with Brian that paid him a commission of 6% of the sales price. Brian’s buyer put in an offer of $225,000.00 that was accepted by the sellers.

Here is the breakdown of the commissions earned by all who were involved.