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Explaining Real Estate Commissions
Like we mentioned, commissions are the main source of income for most realtors. A commission is a payment that is made to a real estate broker in exchange for the role that they played in the purchase or sale of a property. Although commissions are usually determined as a percentage of the property’s final selling price, they can also be flat payments.
The Relationship between Brokers, Real Estate Agents, and Realtors
A broker is an independent worker who often hires a real estate agent as an employee. Every real estate commission is paid directly to brokers. Once the broker receives the commission, they then split the fee with their real estate agents, usually on the basis of a pre-determined ratio.
Agents, on the other hand, are licensed salespeople who work under designated brokers. According to laws, and cannot operate independently, nor can they obtain a real estate commission directly from a client.
Both brokers and real estate agents can be described as realtors. In other words, any broker or agent who is a member of the NAR (National Association of Realtors) and adheres to its Ethical Code, is a realtor.
How Does a Real Estate Commission Work?
The listing agreement, which is essentially a contract through which a property seller or buyer hires a broker, outlines the compensation for the broker. The brokers can negotiate their commission rates. In fact, imposing uniform rates, no matter how subtly is a clear violation of antitrust federal laws.
Generally, the rate of real estate commission hovers between 4% and 6%, although, depending on the market conditions, they could be above or below this typical range. Unless the seller and buyer have agreed to split the cost of the commission, the onus is on the seller to make the full payment. Many sellers factor the commission in while coming up with an asking price for their property, which means that, more often than not, the buyer does end up paying at least a certain percentage of the total commission cost.
Every agent has a predetermined contract with the broker that they are working for, according to which the commission is split. The money could be split in a 50:50 ratio, or on the basis of any other ratio which has been agreed upon.
How Does Commission Sharing Work?
A real estate commission will normally be apportioned between several people. Usually, this commission is divided between the following people:
- The listing agent, who is responsible for obtaining the listing from the property seller
- The listing broker, who is responsible for employing the listing agent
- The buyer’s agent, who is responsible for representing the buyer
- The broker of the buyer’s agent, who is responsible for employing the buyer agent
How Does a Realtor Get Paid?
A real estate agent is usually paid a proportion of the sales commission generated by the broker that they work for.
Let us suppose that an agent obtains a listing for a $100,000 property, with a 6% commission rate. This means that the commission, in actual terms, would be $6,000.
Assuming that the property is sold at the asking price of $100,000, both the buyer’s agent and the listing broker will receive half of the $6,000 commission ($100,000 x 0.06 x 2), that is, $3,000. The brokers will then share this commission with their respective agents.
A typical commission split ratio is 60:40, which means that 60% of the earned commission goes to the broker, while the remaining 40% is taken by the employed agent. However, like we mentioned, other ratios, such as 50:50, 40:60, 70:30, or 20:80, can also be agreed upon. The more experienced and prolific an agent is, the likelier he is to get a bigger piece of the pie.
Let us assume that, in our example, the agreed-upon ratio is 60:40 (60% for the broker; 40% for the agent). Hence, the broker will keep $1,800 ($3,000x0.60), while the agent will get $1,200 ($3,000x0.40).
Hence, the final breakdown of the commission would look like this:
Listing agent: $1,800
Listing broker: $1,200
Buyer’s agent: $1,800
The broker for the buyer’s agent: $1,200
There are some cases in which the commission is divided between fewer parties or people. For example, in case a listing broker puts up a property and manages to find a buyer, the broker will keep the full 6% (or whatever the agreed-upon commission rate is) for himself. Or, should a listing agent act as both the agent for the buyer and the seller, they will split the commission amount with the broker that they work for. So, if the commission is $6,000, the broker will keep $2,400, while the remaining $3,600 will go to the agent (assuming that the agreed-upon commission split rate is 60-40).
Indeed, much like in pretty much any other profession, the agent’s income is impacted by taxes as well as other business-related expenses. Self-employment taxes, as well state and federal taxation, along with the various expenses associated with conducting the business (such as fees, dues, advertising, and insurance), take up a considerable portion of an agent’s commission.
How Much Does a Real Estate Agent Make?
According to the US’s Bureau of Labor Statistics, the median average income for a real estate agent in 2019 was $48,930. Brokers, meanwhile, made $59,270 on average.
Of course, both brokers and real estate agents can earn a lot more than the median amount. In fact, the average income of the 10% highest-earning agents in 2019 was $111,800. The highest-earning brokers, meanwhile, generated an average annual income of $178,720 during the same period.
There are several factors that determine how much income a real estate agent will generate, including how many real-estate transactions are successfully executed in a year, as well as the amount of commission fee.
How Much Does A Real Estate Agent Make in Each US State?
In which States do Real Estate Agents Earn the Most Money?
Geographically, the highest paying states are situated in the South (two states), West (five states), and Northeast (3 states).
In which states do Real Estate Agents Earn the Least Money?
This list primarily consists of states belonging to the Midwest and Southern regions, with just a single state from the Northeast.
Can Agents Get a Commission for Sales that Do Not Close?
Generally, a commission is only given after a sale has been completed and closed. However, there are some instances in which sellers are liable to pay the commission, even when the transaction process is broken off midway. If a broker finds a buyer who is able and ready to buy the property, the broker could be entitled to commission in case the seller:
- Ends up changing their mind and decide to not sell the property at all.
- Has a partner or spouse who is unwilling to put their signature on the deed (assuming that the partner or spouse did put their signature on the listing agreement).
- Possesses a title in the presence of unaddressed defects.
- Commits fraud or misrepresentation pertinent to the property transaction.
- Fails to hand the possession over to the purchaser within a reasonable period.
- Stresses on terms which were not a part of the original listing agreement.
- Comes to a mutual agreement with the purchaser regarding the cancellation of the transaction.
Property Selling Price – With and Without Real Estate Agents:
Let us assume that you are selling your property for $100,000
Statistically, in the absence of a real estate agent, you can expect to retain 84.3% of that $100,000, which means:
($100,000x0.843) = $84,300.
Meanwhile, if you are working with a real estate agent, and have agreed to pay a commission of 6%, you can expect to retain the full remaining 94% of the price, which means:
($100,000 x 0.94) = $94,000.
In other words, involving a capable real estate agent can, on average, save you ($94,000-$84,300) = $9,700.
So, a lot of potential property sellers feel that they will be able to save money by going solo, but that is not the case. If you decide to sell your property by yourself, you will have to deal with the various costs, such as listing and advertising, by yourself, which will cost you about 15% of your property’s selling price. On the other hand, a real estate agent can undertake all these responsibilities against a commission of just 6%. In addition, when you work with an experienced real estate agency, you can expect your property to be sold off quicker than if you tried to sell by yourself.
Will Gaskins is one of the leading real estate agents throughout North Virginia, and has sold over 10-times more homes than the average real estate agent in Arlington. He believes that being an agent is about protecting their clients’ interests, especially since those interests are generally not well-protected.
Gaskins thinks that part of his success has to do with the fact that he finds it easy to explain his self-worth to his clients. According to Gaskins, real estate agents should not feel that their roles are merely result-driven, but should also consider the empathetic aspect. Gaskins feels that real estate agents are problem-solvers; they help their clients solve the problems that clients do not know how to solve. At times, real estate agents can even help solve client problems that the clients were not even aware of.
Other Models of Payment:
While, typically, an agent generates an income through transaction commissions, there are instances where agents hired by brokers are compensated through fixed salaries. One example is an online website for conducting property searches, called Redfin. The company hires real estate agents who work fulltime, and are paid a monthly salary, along with bonuses pertinent to the customer-approval ratings generated.