How Real Estate Agents Get Paid and Why It Matters to You

Real estate agents will typically make most of their income from commissions on home sales. When an agent helps a person sell a home or helps a buyer purchase a home, the agent is paid a percentage of the home’s sale price. For example, if an agent sells your home for $200,000, the commissions on that home would typically be $12,000, which is 6% of the sale price. Six-percent is the de-facto standard for total Realtor commissions on a house, though the cut may be different and its determined when the listing contract is drawn up.  If two agents are involved—one for the seller and one for the buyer—the commissions are split. Each agent would receive 3%, or $6,000 in our example.

In the background it’s a little more complicated! Real estate agents must work for real estate brokers.  It’s the brokers who actually take the commissions. The brokers in turn, pay the agents. How much the brokers pay the agents depends on a few things. Typically, it’s a 50/50 split, but not always. New agents working for a powerful broker may take a smaller split in order to leverage the broker’s capabilities and industry presence. High performing agents may negotiate for a larger split, as they provide more value to the broker. Sometimes brokers act as agents and keep all the money!

No matter how the commissions are split and no matter how many agents and brokers are involved, you as a home seller need to understand one thing: you’re the person who pays for all of this to happen!

Understanding how agents get paid is critical in understanding how you must manage them. Your interests and your agent’s interested may very well not be totally in line. You both want to sell the house, but how hard you’re willing to fight for the best price is probably something you and your agent disagree with, even if the agent isn’t upfront about this.

To illustrate this point, let’s take the example of a house priced at $200,000. The market is tough right now and it’s not very likely that the house will sell for $200,000 right away. Let’s imagine the agent has a crystal ball that shows the future. There will be two offers for the house: after one month, an offer for $200,000, and after four months, an offer for $185,000.

Taking each of these dollar amounts, let’s look at what the agent stands to make. For this example, we’ll make the following assumptions:

  • The home sellers owe $150,000 on the mortgage for the house they’re selling
  • The agent will show the house six times every month

 

Sale Price Time on Market Seller Agent’s Commission (1.5%) Seller’s Profit Agent Showings
$180,000 One Month $2,700 $30,000 6
$200,000 Four Months $3,000 $50,000 24

You can clearly see from this comparison why the agent’s incentives are not lined up with the owner’s! By holding out another three months for a better offer, the agent has to do A LOT more work and only gets $300 extra dollars for the effort! The homeowners, however, make an extra $20,000, a very sizable amount.

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