For my real estate friends who don’t quite know how to explain commission to their clients, here is my take on it. I have a bit of a background, having been a real estate agent for 25 years. Although people understood that I worked on commission, some still thought I got a paycheck or could get advances in tough times. Some thought that I got paid for every hour in the car or on the phone and got a bonus if something sold in my office.
Real estate agents do not typically make a salary. They receive a commission if one of these three things occur:
1. A buyer buys a house through the agent and it closes escrow.
2. A seller sells a house through the agent and it closes escrow.
3. A buyer or a seller uses an agent whom their agent referred. If this happens, their agent receives a referral fee (commonly 20-25% of the commission) from the agent who actually did the deal.
An agent does not receive monetary compensation for doing a market analysis, for showing property, for listing a property that does not sell (even if it is over-priced by the seller), for giving advice, for helping clients find a needed professional such as a contractor, for holding an open house, for taking “floor time”, or for any other service, except the three instances mentioned above.
Commissions are paid upon sale, from the proceeds of the sale. The seller agrees to the amount of the commission when they put the house on the market. The rate can vary, usually a percentage of the sales price. The most common commission rates are between 5% and 7% although they can be as high as 10% and as low as 1%. The seller’s agent offers a split of the commission to an agent who procures a buyer. Sometimes the split is equal, and sometimes one agent or the other receives a higher percentage. Agents also split commissions with their broker, the manager/owner of the office they work in.
Here is an example of a typical commission and how much ends up in the agent’s pocket:
Sales price $250,000. Commission 6%, split equally.
In this scenario $7500 would be given to the buyer’s representative and $7500 would be given to the seller’s representative. This starts with funds going to the broker’s office.
If the office is a franchise, a fee is taken from the top of the commission, a common amount is 8%. This would be $600.00, leaving a balance of $6900.00.
After the franchise, the broker/agent split occurs. A common split is 60/40 although top producing agents may receive 80% or more. Let’s use 70/30 for our example. The agent receives $4,830.
We are not done yet. From this amount, the agent is responsible for self-employment tax as well as income tax. Assuming a rate of 30% for both taxes combined, this amount would be $1449. The net to the agent, after taxes is $3381.
From this amount the agent pays all the costs of doing business (which may lower their taxes to some degree) and their living expenses. They fund their retirement account and pay their own medical insurance. Agents have numerous expenses. They write checks for licenses, dues and fees, for education and continuing education, for photographs, promotional materials, mailers, postage, advertising, desk fees, copies, forms (like contracts), insurances including errors and omissions as well as an upgrade on car insurance, gas (for showing property), a decent car (if possible), professional clothing, internet placement, glossy magazines, newspaper ads, flyers, signs and posts, gifts, client appreciation parties, snacks for open houses, keys and lockboxes, assistants and/or transaction coordinators, seminars, and more. Many agents end up paying for a host of other things to satisfy their clients such as staging, cleaning, snow removal, landscaping, and minor repairs.
Yes, a real estate agent can make good money. One big sale can change their life. Yet, they have a different salary from the executive with what appears to be the same salary. Real estate agents write checks before they get checks. They build relationships with everyone they meet, not just their “higher-ups” and their “subordinates”. They take calls at 4 am from a seller who can’t sleep because they are worried about their urgent need to move or a buyer who is scared because they have never spent this much money on anything in their life. They get to know people on such a personal level, helping them find a home, that they develop lifetime friendships. They get happy, slobbery kisses from the kids of their clients. They become a part of the families of each and every client they help. Real estate agents don’t do this job for the money and they sure don’t do it for the free time. Real estate agents do this job because they love helping people live the American Dream. Real estate agents do this job because they love you.
Thank you – Shahri Masters of Incline Living – inclineliving.com