At some point in their lives, most people will have enlisted the help of a real estate agent to buy or sell their home. While hiring a real estate agent isn’t required, many people turn to an agent for help navigating the process of buying or selling their home. Due to the many steps to complete a real estate transaction, licensed agents are a valuable asset. With all that said, how do they make their money?
Most real estate agents are paid on commission after completing the sale of a home, which is typically 5 to 6 percent of a home’s sale price. The seller usually pays both the listing agent and the buyer’s agent’s commission fees once the home has been sold. The listing agent and buyer’s agent split the commission equally, usually. Buyers might unknowingly pay a portion of the commission because most sellers factor it into the asking price.
A portion of the commissions are also paid to brokers, which varies based on the experience of the agent. Experienced agents may keep as much as 90% of the commission, whereas new agents may pay as much as 70%.
Despite the fact that real estate commissions can take a significant portion of a seller’s profits, these fees are negotiable and variable, so there is hope for sellers. In order to prevent clients from finding lower commission rates, brokerages cannot agree to fixed commissions together, in violation of antitrust laws. According to the value brought to clients, commissions must be determined independently by each broker or brokerage.
How much they can actually make really depends on a few factors, such as sale price, real estate brokerage policies, the housing market, and more including:
- Expertise: Agents who have more experience earn higher incomes than those who have less experience. Long-term agents tend to have greater market insight, a deeper understanding of successful techniques, and stronger ties to the industry in general.
- Overhead Expenses: A real estate agent is generally responsible for the costs associated with running their business. These include transportation, office supplies, renewals of licenses, training, and advertising.
- Location: Real estate commissions are influenced by the market where an agent works, because listing prices vary accordingly. In large urban areas, real estate prices are typically higher and there are more opportunities, leading to higher commissions for agents in these areas.
Agents typically only make money if a sale is completed. However, real estate agents can protect themselves through contingencies in listing agreements, guaranteeing their pay if a sale falls through due to something out of their control. Some agents may also add a fee in the listing agreement for marketing services, such as professional photography, in the event a home doesn’t sell.
While rare, some real estate agents are paid an annual salary and earn bonuses rather than a commission. Some agents might prefer the predictability of a salary and choose to work with a brokerage that pays an annual salary and bonus instead of working on commission.