Real Estate Salesperson Commissions, Unveiled
It’s a common myth that real estate professionals are millionaires. Most people have no idea how much a real estate salesperson REALLY makes, and sellers have heart palpitations when hearing the realtor expects them to hand over 5 or 6% of the sale price for doing whatever it is salespeople do (that’s a topic for a future newsletter).
I don’t think compensation should be a secret, and I’d like to share with you what agents actually make. This is something to keep in mind when you’re negotiating to sell your home or when you’re wondering why agents won’t pay to make your house ready for sale.
Who gets the commission?
In most real estate transactions, there are two real estate agents: one that represents the seller and another that represents the buyer. In addition, there are two brokers, or managers who employ those agents. All four parties share in the commission.
How much do they get?
Let’s say the seller will be paying their real estate agent a 5% commission; in a simple example, if the commission is split evenly between the selling and buying agents (which is not required) that means each of the four parties in the transaction will get 1.25%.
To make that clearer, let’s say I’m selling my home, and it sells for $500,000. In the above example, the selling agent, the buying agent, and both their managers/brokers will get $6,250 each ($500K times 5% divided by 4 people).
This is a gross number. Most real estate brokers then take additional charges out of the agent’s portion. In some real estate companies, it’s a set percentage, and in some, it’s based on monthly fees, transactional activity, etc.
In this example, using the buyer agent, we will assume his broker takes a standard percentage (5%) to cover use of office copying machines, faxes, phones, etc.
In addition, the above numbers do not reflect a reduction for federal and state income taxes, so for argument’s sake, let’s use a 30% tax rate. Further, all of the business expenses for this particular transaction should be removed as well, so that a real view of profit can be determined.
In this example, the buyer agent receives, from a $500,000 house sale:
NOTE: The above is an example ONLY, and does not divulge any specific actual compensation. The 5% and broker fee are examples (but are realistic examples).
What doesn’t this take into account?
- Real estate agents do not get a paycheck or any benefits. The net proceeds from their transaction are their total compensation. If a transaction takes 100 hours to complete, that’s $36/hour. Not bad, right? Except for every successful transaction, there are many that never make it to the closing table. So there are 100s of hours that are not compensated at all, drastically reducing any calculation of hourly wage.
- Most realtors are NOT selling $500K homes, but are selling homes that are much lower in value. So the same number of hours, amount of effort, could result in a net commission of $1,800 or less.
- Realtors must also buy all their photography equipment, licenses, MLS access, etc., out of their own pocket – these are not transactional fees, but obviously reduce their annual profits.
For a real estate agent to become rich, they would have to sell a huge number of homes. The typical agent does only ~5-10 transactions a year, resulting in an estimated $15-30K annual income after taxes.
So when your real estate agent is taking the listing for your home and they tell you that their fee is 5% or 6%, they are typically not getting rich. And if they agree to a lower fee, depending on their broker’s rules, it may come out of their portion alone. So a reduction from 5% to 4% could mean the selling agent’s portion (in the above example) would go from 1.25% to .25%.
I hope this helped clarify the world of real estate commissions.
Final note: Most realtors today are in the business because they love what they are doing; it’s definitely not for the money.