The world of property sales can be a minefield to negotiate, especially as a home buyer or seller who does not know much about the industry. This is where the services of a realtor can be invaluable to either the buyer or the seller of a property. But how much do realtors get paid for this service? What commission do they make on a sale?
As a rule of thumb, a realtor or real estate agent can typically expect to make 1.25% to 1.5% on the total sale price of a property as commission. Even though the industry standard is between 5 to 6% commission on a transaction, this commission amount must be shared by all the agents involved.
There are a number of entities and people involved in the sale of a property, both on the side of the buyer and of the seller of the property. All of the people and agencies that have rendered a service to the buyer and the seller in the transaction need to get paid for their services. The payment for all of these participants in the process comes out of the commission on the total sale price of the property. Let’s investigate the transaction participants and what realtors get out of the deal.
What Commission Is Charged For A Property Sale?
If you are thinking about getting into the real estate business because of the up to 6% commission on property sales, you may be surprised to learn that what realtors earn is significantly less than this amount.
There is no formal regulation on what percentage of the sale price will become the commission on the deal, but it is typically between 5 and 6% of the sale price. This is, however, not a fixed percentage, and a savvy property seller could negotiate the commission to be lower than this percentage.
In any property sale or rental transaction, there are many people involved who offer services at various levels of the process. Each of these participants gets paid for their services from the overall sale commission.
There are always two main parties to a property sale; the buyer and the seller. Each party has its own realtor who guides them through the process of either buying or selling the property. This means that the 6% commission on the sale of the property is split immediately in half, with 50% going to the selling or listing realtor and 50% going to the buyer realtor.
The carving up of the commission pie does not stop at this 50%, however. There are various levels of realtor, which will determine the final percentage of the 50% commission that the agent will receive.
To discover what each party will get from their half of the sale commission, we need to take a look at all the participants involved and what they potentially earn from the commission.
Who Is Involved In A Property Sale?
A property sale can be a complicated process, with many people involved in various stages of the marketing, sale, contracts, and financial transactions. For property buyers and sellers, the scope of this process is beyond their expertise and skill level.
People who specialize in these markets and processes offer their services and knowledge to help the sellers and prospective buyers through the process so that all the boxes are ticked and the transaction goes smoothly.
Each of the agencies and people involved in the process needs to be paid for the services that they rendered to both parties of the transaction, and these people are paid from the total commission on the sale.
So, who exactly is involved in the process of selling a property, and who gets what portion of the commission?
Before we get into the numbers, we need to clarify some of the terminologies regarding the people involved in the process.
The Real Estate Agent
A real estate agent is a person who has a professional certification to assist property sellers, buyers, and renters. Real estate agents must work under the sponsorship or supervision of a broker or brokerage company. The real estate agent is the liaison between the buyer and the seller or the other party’s agent or property broker.
The requirements to earn a real estate agent license vary from state to state since there are no over-arching federal licensing requirements. Essentially, each state has its own regulations regarding the certification of real estate agents, and you may need to apply for a different license should you move to a different state.
There are some minimum requirements that are standardized and apply to all the states if you want to become a real estate agent.
- You must be at least 18-years old or older.
- Legal residency in the United States is a requirement.
- Complete the pre-licensing class required by your state.
- Pass the real estate licensing exam as prescribed by your state.
- Undergo a background check.
- Obtain sponsorship from a licensed real estate broker.
- Continue with professional development classes to maintain the license.
Real estate agents can work for buyers as well as sellers but cannot represent both parties in a single transaction as this creates a conflict of interest. Agents working on behalf of a property seller are often referred to as the listing agent.
What Do Real Estate Agents Get Paid?
The payment the real estate agent receives comes out of the overall percentage of the commission on the total sale price for the property.
Typically, the commission on the sale will be split between the buying brokerage and selling real estate brokerage, and the portion that the real estate agent receives will be what was negotiated between the real estate brokerage company and the real estate agent when the relationship was established.
Thus, what the real estate agent gets paid will depend on the payment policy of the broker. Typically, it is 50% of the portion that the brokerage receives, but there is no regulation governing the portion that the real estate agent receives.
The estate agent could get paid between 1.25 and 1.55 of the total sale commission, depending on the overall commission percentage. The portion the real estate agent actually receives is negotiated between the agent and the brokerage and may increase over time as the real estate agent gets more experience in the field.
A property or real estate broker in the industry is a real estate agent who has completed advanced studies and licensing requirements which allows them to work independently and also allows them to hire other real estate agents to work under them.
To become a broker, you must be a fully qualified and licensed real estate agent. You then undergo further training as specified by your local state, and once you have completed this training successfully, you will be granted a state real estate broker license.
The additional training will be more in-depth about the state laws regarding real estate transactions. Real estate brokers can work independently and do not need to work under any other agency in the industry. A broker can also start their own agency and employ real estate agents to work under them.
Real estate brokers essentially do much the same work that real estate agents do, but they are more highly qualified and capable of conducting negotiations with the sellers and buyers to try and achieve a better price for their clients.
A real estate broker for a seller can assist with establishing market pricing for the property, will be responsible for advertising the listing, and negotiating with prospective buyer’s brokers.
There are different types of real brokers, especially within an agency, and even though a broker can work independently, they may choose to work for an agency or another brokerage in a particular role.
- Associate brokers. These are fully qualified brokers that choose to work under another broker for convenience. Typically, associate brokers do not have other real estate agents reporting to them but focus on their own sales. These brokers would share their commissions with the brokerage but with a better ratio than a real estate agent.
- Managing brokers. These brokers are involved in everyday agency operations in the office and are generally in charge of a number of real estate agents. Managing brokers receive payment from the broker portion of the commission when real estate agents under their management close sales.
- Principal broker. This is the designated main broker in the agency who is responsible for ensuring all business conducted through the brokerage is done so in accordance with the relevant real estate laws, both nationally and for the state. The principle broker receives income from the brokerage portion of the commission that is generated by the sales from all the real estate agents that are affiliated with the brokerage.
What Do Real Estate Brokers Get Paid?
Real estate brokers are also allowed to operate independently of an agency and take on buying and selling property clients. When a property sale is made, the broker will get the full 50% of the agreed sales commission on the property.
If the broker has real estate agents working for them, then a portion of the commission generated from the sales made by the real estate agents will go to the broker and the balance to the real estate agent. This ratio of the split will be determined by agreement between the broker and the real estate agent.
A realtor is a licensed broker or real estate agent who has successfully applied and become a member of the NAR, or National Association of Realtors. The NAR has a strict code of conduct and ethics that all members must comply with.
The term “realtor” is often used to refer to anyone involved in the real estate market, whether brokers or real estate agents. The term, however, can also encompass people who are property managers and property assessors or appraisers.
To officially be called a realtor, you need to belong to the National Association of Realtors and be up to date with your dues and all your qualifications.
To become a member of the NAR, you need to be a fully certified, practicing estate agent, have no official industry sanctions against you for malpractice in the industry, and not have filed for recent bankruptcy.
Being a member of the NAR means that you will adhere to their strict code of conduct in the real estate industry and always work in the best interests of your clients. The guidelines around this open and transparent business model are detailed in the NAR code of ethics. This code must be strictly adhered to by all its members.
Since realtors can be brokers or estate agents, or part of other sectors of the industry, the way they get paid will be according to the role they fulfill in the industry.
Many property sellers and buyers will look to deal with real estate agents and brokers who are members of the NAR because this will give them peace of mind that their business ethics will be above board and compliant with the NAR prescribed code of ethics.
It also means that if the client is unhappy with the way a property sales transaction was conducted, they have a place of recourse to have their concerns addressed.
How Much Do Real Estate Agents Make?
For those wanting to get into the property business, we all have to start somewhere, and in the property business, that will be as a real estate agent.
If you are thinking that getting into real estate is a quick way to make money because of the 6% commission or something close to it, you need to re-evaluate your perception. The full 6% commission does not belong to the agent. Each person or entity in the process must get its share.
As we have already mentioned, the commission on the sale of a property is generally somewhere between 5% and 6% of the total sale price. A 6% commission on a $200 000 property is $12 000, which may seem like a nice sum of money.
However, this commission must be split between the seller’s agent and the buyer’s agent, which only leaves 3% of the commission from which the estate agent can be paid.
Real estate agents are not permitted to work on their own; they have to work under a broker or a broker agency until they qualify as a real estate broker themselves.
This means that the 3% commission must now be split between the real estate agent and their associated broker. When I started my first job in real estate as an agent, the split between the broker and myself was a 54% portion to the broker and 46% to myself.
The brokerage that the real estate agent is affiliated to incurs costs related in support of the sale of the property. If the agent is the listing agent, there is the cost to photograph the property, advertise the property on various platforms.
The broker also provides office services to the real estate agent, such as office space, printing services, administration services, and association subscriptions and licenses.
For this reason, the broker may charge a transaction fee on each transaction before paying the real estate agent, or they may simply take a larger portion of the commission to cover these costs.
Broker companies are all different and will have different operation methods and payment structures for their agents. Some companies will charge transaction fees, as mentioned, while others will take a greater portion of the commission. Other companies still will pay the agent a higher share than the norm.
Some brokerages will work on a ceiling for the fees that they charge the agent and will cap their fees to a certain annual amount. Once this annual cap has been reached, they will no longer charge the fee on each transaction, and the agent will earn a larger share.
Some broker companies will also cap their fee on an annual basis. This encourages estate agents to sell more properties to reach these target numbers. On the cap has been reached on the broker portion of the commission, the agent will also receive this portion of the commission as well.
Other real estate broker companies will work on a graduated commission scale, where you will be paid an increasingly higher amount of the commission the longer you work for the company. This is known as graduated commissions. We have an article that details the various ways brokers split the commissions with their agents, “Which Company Has the Best Commission Split in Real Estate?” where we give more details on payment structures.
The capped fee and commission structure are more lucrative for the real estate agent than the graduated commission model. The capped model allows the agent to reach a point in each year when they will get a greater portion, sometimes up to 100% of the commission from each sale, until the next annual cycle kicks in.
This model is good for the broker and the agent because it is performance-based; the more the agent sells, the greater the reward for both parties.
Because the share of a broker is so much more than that of a real estate agent, most agents strive to complete their training to qualify as a broker so that they can increase their earning potential.
The easiest way to summarize the distribution of the commission is to summarize the transaction in a table.
|Commission Splits In A Real Estate Sale|
|Listing Agent||Buyers Agent|
|Original Sale Price – $200 000|
|Agreed Commission – 5%||2.5% To Listing Broker||2.5% To Buying Broker|
|Commission Amount – $10 000||$5000||$5000|
|Agent Receives 1.25% = $2500||Agent Receives 1.25% = $2500|
Who Pays The Commission In A Property Sale?
The payment of the commission in a real estate transaction is generally made by the seller of the property.
The seller will engage with a real estate agent and sign a mandate with the agent to sell the house and agree to the terms of the commission once the sale has taken place. The agreed commission percentage at this point will determine the total commission for the transaction, which must then be divided between the listing agent and the buyer’s agent.
The commission is normally only paid out once the deed for the property has been transferred over into the new owner’s name. This property transfer process can take up to three months which results in some delay before the commissions due are paid out to the respective parties.
Many people do not fully understand how the commissions work in a realty transaction, and as a result, they are often reluctant to use the services of a real estate agent because of the commissions. Some prospective buyers opt to go without an estate agent because they believe they will have to pay commissions to the agent.
If you are the buyer of the property, you will not pay any commissions to your real estate agent who found the property for you. All your agent’s commissions will be paid by the seller of the property, not out of your pocket as the buyer.
However, if you are buying a property from someone who has not used a listing agent and the property is “for sale by owner,” or you are buying it from another entity such as a bank after a foreclosure, then you may be responsible for the fees for your agent.
Therefore, it is crucial to read the buyer agreement carefully and thoroughly before agreeing to purchase a property in these circumstances.
Are Commissions Always Charged in A Real Estate Transaction?
Even though real estate agent commissions are negotiable, no real estate agent is going to go down too low on the commission because they will lose money on the deal. The average commission rates vary across the country, with the rate being slightly below 5% in some locations.
Generally, you will be hard-pressed to find a rate lower than 5%. So what can you do if you don’t want to pay a commission percentage?
Some realtors will agree to a flat fee for a transaction rather than a percentage. When a realtor takes on a deal like this, the services they will provide will be vastly reduced, and much of the legwork will need to be done by the client. This is because they cannot offer the same level of service for such a reduction in commission.
This is often a cumbersome way to perform real estate transactions, and as a result, many realtors or brokers will refuse to take on deals that are structured in this way.
Real estate agents typically only receive between 1.25 and 1.5% commission on a property sale. Even though the total commission percentage is between 5 and 6%, half of this total commission goes to the listing broker and the other half to the buyer broker.
The real estate agent will receive about half of the 2.5 or 3% that is distributed to their leg of the transaction. If the broker charges the estate agent transaction fees, this amount can be reduced even further.
A real estate broker has the advantage of being able to work independently and does not need to be associated with another broker or agency, and thus can keep the full 2.5 or 3% of the purchase price as commission.