How Do Real Estate Agents Get Paid
Updated: March 23, 2021|
Updated: March 23, 2021|
After learning all about your local real estate market through pre-licensing education, passing your real estate license exam, and joining a professional network, you’ve finally gotten to the fun part of real estate: helping people to buy and sell homes. As you begin to work directly with clients, representing the buyer, seller, or even both, it’s time to understand how you earn money for your hard work.
Everything in real estate, from the amount a real estate agent gets paid to the actual home price, is negotiable. As the real estate agent, you need to have a strong understanding of what to include in the contract between you and the client, as well as the contracts you write on behalf of your client for the actual home purchase or sale.
Below you will find a couple of ways that real estate agents get paid when they are paid, and additional income streams in the real estate industry.
Most real estate agents are paid on commission. This means that they earn a percentage of the overall sales price for each home that they represent. The exact percentage can vary by location, brokerage, the agent’s role, and the terms specified in their contract. Understanding all of these factors is an important part of the real estate license exam and a real estate agent’s job.
Real estate agents are paid from their brokerage, not the client that they work with during a real estate transaction. While many industry professionals will refer to their commissions coming from the home sale, it is important to note that the commission is actually paid to the brokerage, which then pays the real estate agent.
The brokerage will keep a percentage of the commission. This amount can vary depending on their agreement with the agent. Like most things in real estate, the contract between the real estate agent and the brokerage is negotiable and can change as the agent gains more experience and sales.
Note: The exact amount that real estate agents charge is between them, their broker, and their client. It is illegal to discuss what you charge with other agents or engage in price-fixing. These laws protect consumers and ensure that the real estate industry is able to maintain economic competition. The information below is one example of a real estate agents’ pay structure.
Many real estate transactions include a 6% commission to be split between the seller’s agent and the buyer’s agent. This nets each agent a 3% commission, or 3% of the overall purchase price. This structure is common but not required. You should discuss your specific contracts and setup with your broker. As your sponsoring broker, part of their job is to ensure that you meet the guidelines and regulations in your state.
There is no set amount that real estate agents charge. Like many aspects of real estate, the amount that a real estate agent charges varies by market and local area. Many laws prohibit brokers and real estate agents from setting a standard commission rate. The exact commission percentage is negotiable up until the listing contract (the agreement between the seller and their agent) is signed.
In most real estate transactions, the seller pays all of the commission, which goes to the brokerages and on to the real estate agents. The commission is generally split 50/50 between the buyer and seller’s agents, with each earning 3%.
The home buyer usually does not pay for any of the real estate agent’s commission. That’s right, the buyers do not pay for the services and expertise that their agent provides during the home buying process.
So why would any agent represent a home buyer? Because the home seller is responsible for paying the overall commission, which will then be split between the two agents that worked to get the sale through the seller’s agent and the buyer’s agent.
Savvy home sellers and seller’s agents know that they will pay the commission. To account for this, they may increase the overall asking price of the home, knowing that they are covering the agent’s paychecks during the sale. You could argue that part of the agents’ commission is passed on to the buyer, who has to agree to the home’s purchase price.
In some cases, the home buyer may offer to help pay for some of the commission during the negotiation process. If a lot of buyers are interested in the home, this extra financial incentive can cause the seller to choose one offer over another.
Some buyer’s agents do charge their clients to represent them during the home search and negotiation process. The majority of real estate agents will make most of their income from their portion of the commission, paid by the seller at closing.
What happens when the same real estate agent represents the home buyer and seller? In these cases, the agent must disclose to both the buyer and seller that they are a dual agent. The seller will still pay the commission that they agree to in their listing contract with their agent.
It is common for the commission amount to remain 6% in the contract since the seller’s agent does not know at the time of signing the contract that they will be representing the buyer as well. Some may amend the listing contract later once they know that they will be acting as a dual agent.
Real estate sales agents must work under a broker. Some brokers even operate as part of a larger company, or brokerage, while others start their own business. While the real estate agent does a lot of the one-on-one work with the client during the home buying and selling process, the broker still earns a part of the commission.
Keep in mind that SR Brokerage has other real estate sales agents that work for them as well. Less experienced agents may keep a smaller percentage of their commission, with more going to SR Brokerage. Sally likely has other clients as well and brings in additional business.
While not as common as commission-based real estate agents, some agents work for a flat fee. This can be less than the 6% commission, resulting in savings for the client. A fee-based agent often needs to work under a fee-based brokerage.
Agents who work for a flat-fee sometimes take on less of the responsibility for the real estate process. Clients may need to do additional marketing, host open houses, or show their home to potential buyers on their own. Like most things in real estate, the fee and the agent responsibilities are often negotiable and outlined in the listing contract.
Many fee-based real estate agents offer monthly or even daily fees. This provides additional flexibility and the option for either the client or the agent to discontinue the process if it is not working. Traditional commission-based agents often require a longer exclusivity period, where the client must work with them on their home sale or purchase.
The exclusivity period will be specified in a contract signed by the agent and the client before the agent works on their behalf during the home buying or selling process. The amount of time of the exclusivity period varies by market, brokerage, and even agent. An exclusivity agreement of six months or one year is not unusual.
The client will still be required to sign a contract with your real estate agent, agreeing to the terms of payment. These terms can include the amount of the fee, when the agent gets paid, and what the agent is responsible for in the home buying or selling process.
A real estate agent’s income varies by state and even city or region. Higher cost-of-living areas have higher home prices, which results in higher commissions or fees for real estate agents and brokers. According to the Bureau of Labor Statistics, real estate sales agents average $48,930 annually.
The real estate agent is paid by the brokerage where they work. The client that they work for does not pay the agent directly. This most often happens at closing, when all the purchase paperwork is signed and completed, but can occasionally be done at other times in the process.
Most real estate agents get paid by their brokerage after the home sale is completed at the Closing meeting. The funds are sent from the closing office (often a law office or title company) to the brokerage for the buyer’s agent and the brokerage for the seller’s agent. Some brokerages pay their agents each commission once it clears, while others have a monthly or biweekly payment that includes all cleared transactions for that period.
The real estate agent’s commission is detailed in the financial statements provided to both the home buyer and seller at closing. This document, called a HUD-1, shows the final agreed upon purchase price, commissions, legal fees, and any other costs that were incurred during the purchase, such as required repairs or home inspections.
When a real estate transaction is not completed, the agents involved do not usually earn their commission. This is part of the risk of being a real estate agent. Circumstances that can result in the purchase, not closing can include:
In these cases, the initial purchase offer must include these provisions, called contingencies, that allow the buyer to cancel the purchase.
When these things do happen, the buyer and seller can continue to negotiate and still get to closing. The process may take additional time, but it does not automatically mean that the sale will fall through.
If the sale does not close because either the buyer or seller simply changes their mind, they may need to pay a penalty or part of the commission to the real estate agents. These specifics are outlined in the listing contract between the client and the agent.
Many real estate agents apply their professional knowledge to other income streams as well. Many are real estate related and can even develop as part of their home buying and selling business.
Earning income as a real estate agent takes hard work, professional expertise, and a thorough knowledge of how real estate contracts are structured. After all, almost everything in real estate is negotiable, including how a real estate agent gets paid. While there are some common models and amounts, you can increase your earnings by developing a long, professional relationship with your brokerage and supplementing your real estate paycheck with additional income streams.
Information on this page has been gathered by a multitude of sources and was most recently updated on January 2021.
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