How much does your RealtorĀ® earn in commission?

Real Estate

By David Anderson, California Licensed Realtor® CalBRE #02011749 

Most buyers and sellers of real estate do not realize how much (or little) their agents earn in commission.  How much do you think your real estate agent (Realtor®) would make on the sale of a $1,000,000 home? If you think it’s 3% or $30,000, you’d be wrong! Many people think that their agent earns a ton of money for the sale of a home; however, you may be surprised to learn that it’s not as much as you first might think…

Who pays the commission to your agent?

All commissions paid out for the sale of a home are the responsibility of the seller. The buyer does not pay for the services of their agent unless the buyer and agent agree otherwise in writing. The buyer agent will be paid through the proceeds of the sale.

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Why wouldn’t you hire a professional agent to represent you?

Although negotiable, the industry standard for the sale of a home is 6%. This 6% is then typically split between the listing and selling (buyer) broker (3% each). Unfortunately for agents, it’s very common to see total commission set to 5% or even lower. As you will soon read, lower commissions, even by 1% make a significant impact to your agent’s paycheck.

Example case


The median sale price of a single-family home in Anaheim Hills from September 2017 to February 2018 is $775,000. Using this number, let’s see how much your agent is likely to take on commissions.  Let’s use the most optimistic number of 6% total commission: 

·    Sale Price: $775,000

·     6% Commission: $46,500

·     Each side receives: $23,250 (split 50%)

Now, you may think that $23,250 goes directly to your real estate agent, but you’d be wrong – the $23,250 commission is paid to your agent’s broker (e.g. Coldwell Banker). This is where further commission splits apply (and vary from broker to broker).

Splits, splits, and more splits


Real estate agents (Realtors®) work for a real estate broker, which means that all real estate transactions are between brokers and not real estate agents.  When a real estate agent decides to join a brokerage, the broker and agent negotiate how commissions are to be paid out; i.e. what will be the broker/agent split. New agents typically receive a low split of 50% or lower. Experienced “top-producing” agents can command higher splits of up to 85%-90%.  Brokerages also tend to charge an additional admin fee to cover marketing and office expenses. Let’s use a 6% administration fee for our example below:

Split for new agent (50% split)

·      Commission of sale ($775,000 @ 3%): $23,250

·      Admin fee (6%): $1,395

·      Broker split with new agent (50%): $10,230

·      Total overall split: 44%

Split for experienced agent (85% split) 

·      Commission of sale ($775,000 @ 3%): $23,250

·      Admin fee (6%): $1,395

·      Broker split with experienced agent (85%): $18,367.50

·      Total overall split: 79%

Seems like a decent paycheck, right? Unfortunately, it doesn’t end here; as there are other fees and expenses that may also apply that affect how much your agent would have as their take-home pay. 

Real Estate Teams


If your agent is part of real estate team and they decide to split their sales 50/50, the commission is now split in half for each partner: 

·      Commission of sale ($775,000 @ 3%): $23,250

·      Admin fee (6%): $1,395

·      Broker split with experienced agents (85%): $18,367.50

·      Team split (50%): $9,183.75

Lead-Providing Service (Referral Fees)


If your agent found you through a lead-providing service, a further split would apply. Many lead providers charge a whopping 30% for a lead referral. If we assume the $775,000 sale was a lead given to the agent by a lead-providing service, then their commission would now be calculated as follows: 

·      Commission of sale ($775,000 @ 3%): $23,250

·      Referral fee (30%): $6,975

·      Total available for Broker/Agent splits: $16,275

·      Admin fee (6%): $976.50

·      Broker split with experienced agent (85%): $12,857.25

·      Team split (50%): $6,428.63

The team split of $6,428.63 now represents less than 1% of the total sale (0.83%)

As you can see, the original $23,250 has now been reduced to $6,428.63, a reduction of 72%!

But it doesn’t end there… (sigh)

Your (listing) agent will have marketing costs to market your property for sale (±1% of a sale). This includes costs for advertising on MLS, real estate websites, print advertising, photography and staging, and more. Since Realtors® are independent contractors with their broker, they will have other business costs involved, such as travel costs, office, and other business expenses, and let’s not forget agent association fees in order to access MLS and other required tools of a professional Realtor®, and the value of time that your agent spends working with you through the entire process of a sale, such as: showing homes, staffing open houses, and coordination with the other agent, escrow officers, lenders, inspector, etc.

Summary


Depending on the experience of your agent and the splits and fees that apply, your agent could be receiving as little as 1% (or less) on a property sale.  Even for a top producer, the total take home pay is not that much considering they are running a business and usually a team with administration and business expenses.

Full-time agents make a living by selling a lot of homes every year and by growing their real estate team to increase total production. It is for this reason why only 20% of agents work full-time. 

Tips:

Buyers: It’s important to understand that your Realtor® only gets paid when escrow closes. If you decide after many weeks of searching for a home, not to purchase a home in the end, you need to be sensitive to the fact that your agent will not be receiving any compensation for the time your agent has spent with you.

Sellers: Don’t forget to incentivize the buyer agents. What do you think would happen if a buyer agent came across your listing and saw that you were only offering 2% or less in commission? Ignoring professional ethics (for a moment), how motivated do you think the agent would be to show your home to their potential buyer(s) if you are offering low commission rates? Both the listing and buyer agents are integral players in the successful selling of your home. Although not the only reason, it could one reason why home listings expire and do not sell.