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How Do Real Estate Agents Get Paid?

Where Does That Real Estate Commission Really Go? 

Many people outside the real estate industry have a perception that real estate agents take home large commission checks each time they sell a property.  Often times when I've spoken to someone who thinks that real estate agents get paid more than they should to sell a house, I've found out that they believe the agent is receiving a check for 6% of the purchase price.  However, this isn't how real estate agents get paid.

First, let's clear up one common misconception--The assumption that real estate agents are employed by the real estate brokerage they're affiliated with.  This generally is not the case.  Most real estate agents are independent contractors and pay all of their own business expenses, including phone, transportation, advertising and marketing, continuing education, insurance, association dues, office equipment, technology, accounting and tax preparation, administrative staff, etc.  As independent contractors, real estate agents affiliate themselves with a particular brand and work under the general supervision of the brokerage firm.

To illustrate where the real estate commission goes, we'll use an example of a listing agent charging a 6% fee to sell a $250,000 house.

$250,000 x 6% = $15,000 total commission paid by the seller

Out of that total commission, the listing agent will typically split their commission with the buyer's agent, offering the buyer's agent a 3% commission.
$250,000 x 3% = $7,500 paid to buyer's agent

This leaves $7,500 on the listing side.  A typical real estate brokerage will keep approximately a third of the commission (some keep significantly more and some keep less, but we'll use a third since it's fairly common).
$7,500 x 33% = $2,500 paid to the real estate brokerage (approx.)

This leaves $5,000 for the listing agent.  Out of this remaining amount, approximately half is typically spent on marketing and servicing the listing, as well contributing to other behind-the-scenes costs like administrative support staff, office expenses, dues (MLS dues, Realtor dues, etc.), continuing education, insurance, business travel, technology tools, etc.
$5,000 x 50% = $2,500 for marketing, servicing, and operational costs

This leaves approximately $2,500 pre-tax that the listing agent retains on a $250,000 sale.

To bring it all together, here's the summary of where the money goes:

$15,000 Total commission paid by seller ($250,000 x 6%)
- $7,500 Amount paid to buyer's agent
- $2,500 Amount retained by brokerage firm
- $2,500 Marketing, servicing, administrative, insurance, office, etc.
  $2,500 Amount retained by listing agent
- $1,075 Taxes (assumes 28% tax bracket, plus 15% self employment tax)
  $1,425 Listing agent's take-home pay on a $250,000 sale

So you may be asking, "How much does the buyer's agent keep in the same transaction?"  For the buyer's agent, the numbers are fairly similar except for the marketing and servicing costs.  Since the buyer's agent doesn't incur costs like signs, flyers, additional marketing, key box, etc., the buyer's agent may retain a bit more of the commission.  However, the buyer's agent will typically spend more money on transportation, and since many of the services performed by a buyer's agent cannot be delegated to other support staff, the buyer's agent will be more limited in the number of homes that can be sold each month.

So now that we have established how much a real estate agent actually makes on the sale of a home, I'll be posting a follow up blog post soon that shows the duties and activities that a real estate agent actually performs.  You may be surprised by the amount of work that goes into selling a house.

Authored by David Monroe, Realtor®, Master Certified Negotiation Expert®
Phone:  (206) 905-8590

Copyright (c) 2013 by The David Monroe Team at Keller Williams Western Realty.

Published Tuesday, November 26, 2013 11:53 AM by David Monroe

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