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.
Real Estate Commissions
Mostreal estate agentsare paid on commission. This means thatthey earn a percentage of the overall sales pricefor 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.
Tolearn more about becoming a real estate agent, StateRequirement recommends:How to Become a Real Estate Agent
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.
How Much Do Most Real Estate Agents Charge?
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 isto 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.
Ask your broker about how they get paid and how you should structure your contracts as a real estate agent. Many are willing to share the pay structure and sample contracts, even if they keep their exact earnings private.
How Does a Seller’s Agent Get Paid?
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%.
Jim lists his home for sale with the SR Brokerage, with Sally representing him as his real estate agent. Jim and Sally sign a listing contract that outlines Sally’s responsibilities and how she will get paid. After analyzing the current homes for sale in their area, marketing the home to buyers, and conducting an open house, Sally gets word that someone wants to buy Jim’s house. For a full price! The buyer signs a purchase agreement, stipulating that Sally must split the commission with their real estate agent. Jim and Sally both like this arrangement and the house is officially under contract. After around a month of inspections and providing financial information to his lender, the buyer purchases Jim’s home for a sales price of $200,000. 6% ($12,000) of the sales price goes to the two brokerages: 3% to SR Brokerage and 3% to the brokerage representing the buyer. SR Brokerage now has $6,000 (50% of the full commission). Sally’s contract with SR Brokerage states that she gets 90% of all transactions that she represents, with the other 10% going to her sponsoring brokerage. Sally gets paid $5,400 and SR Brokerage keeps $600.
Let’s do the math:$200,000 x 0.06 = $12,000
$12,000 / 2 = $6,000
$6,000 x 0.90 = $5,400
How Does a Buyer’s Agent Get Paid?
Thehome 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? Becausethe home seller is responsible for paying the overall commission, which will then be split between the two agents that worked to get the sale throughthe 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.
Jim liked working with Sally and SR Brokerage to sell his previous home, so he asks for her help to look for a home to purchase. They sign a contract, outlining the pay structure for Sally. As the buyer, Jim will not pay Sally’s commission, but it will be included in any purchase offers Jim submits. Jim tells Sally what he is looking for and they tour a few homes before he finds just the right one. It is listed for sale for $250,000. Jim wants to make a lower offer, so Sally prepares paperwork offering $240,000. The seller negotiates by saying that they would like Jim to help pay the real estate agent’s commissions, with an additional 1% going to the costs of closing (completing the purchase). Jim loves the house and knows he is getting a good deal so he agrees. Jim and Sally again have a signed purchase agreement! After a period of inspections and working with Jim’s loan officer to get his mortgage loan approved, Jim arrives at closing (the meeting where the final purchase documents are signed) with a check in hand for his portion of the closing costs and his down payment amount. $2,400 will go to cover Jim’s contribution to the real estate agents’ commissions and closing costs. The 6% commission is split between SR Brokerage and the brokerage representing the seller: $7,200 each. SR Brokerage keeps 10% of their amount, or $720, paying Sally her 90%, or $6,480. Sally loves working with Jim and may consider taking a lower commission in the future to keep his business. Commissions and contracts are always negotiable in real estate, she remembers. Finding a great client who will bring repeat business can be worth taking a lower commission overall.
Let’s do the math:
$240,000 x 0.06 = $14,400
$14,400 / 2 = $7,200
$7,200 x 0.90 = $6,480
Dual Agent Earnings
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.
Jim’s new neighbor, Bob, wants to sell his home. He asks Jim for a recommendation and, of course, Jim connects him with Sally and SR Brokerage. Sally and Bob sign a contract that outlines Sally’s responsibilities and commission of 6%. After a few months on the market, Sally finds a buyer for Bob’s house–one of her other clients, Sue! She discloses to both Bob and Sue that is a dual agent, representing them both during the transaction. Bob and Sue are okay with this arrangement and agree on a purchase price of $180,000. During the inspection period, Bob, Sue, and Sally find that the house needs a new roof. This is a costly expense and Sue is not sure that she will be able to afford it. Bob isn’t able to replace the roof and everyone is worried that the purchase will not go through. Sally agrees to lower the overall commission to 4%, leaving more room in Bob’s budget for him to get the roof fixed and still make money when selling his home. Once the roof is replaced and all other paperwork is completed, Bob and Sue complete the transaction at closing. 4% of the sales price, or $7,200, is transferred to SR Brokerage. Sally earns 90% of the commission, or $6,480, with the other 10%, or $720, going to the brokerage. This amount is the same as she earned from representing Jim when he purchased his home. But the home sales price was significantly less. Because Sally represented both the buyer and seller and earned a higher overall commission percentage, her earnings were still $6,480.
Let’s do the math:
$180,000 x 0.04 = $7,200
$7,200 x 0.90 = $6,480
How Does a Real Estate Brokerage Get Paid?
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.
Let’s do the math:
$600 + $720 + $720
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.
Real Estate Flat Fee
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.
Across town, FB Realty works on a fee-based model. Wilbur is a fee-based agent at FB Realty. He agrees to represent a new client, Martin, who is trying to sell his home. Martin knows a bit about real estate and feels confident that he has priced his home well and can show off its best qualities to potential buyers. As his agent, Wilbur will handle marketing the home on the Multiple Listing Service (MLS), directing all interested buyers to Martin to set up a tour. Martin pays Wilbur a $600 fee for this work. When Martin sells his home, he pays a 3% commission to the buyer’s agent, as agreed on in their purchase offer. Martin keeps more of the profit from the sale and Wilbur earns his fee upfront. The brokerage and Wilbur have their own contract, with 10% of the fee going back to the brokerage. Wilbur earns $540 for his work and FB Realty keeps $60.
Let’s do the math:
$600 x 0.90 = $540
How Much Does a Real Estate Agent Make?
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 theBureau of Labor Statistics, real estate sales agents average $48,930 annually.
Tolearn about what real estate agents make in your state, StateRequirement recommends:How Much Does a Real Estate Agent Make
When Does a Real Estate Agent Get Paid?
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.
Payment at Closing
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.
Understanding Real Estate Closing Documents
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.
Payment without Closing
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:
- Repairs or damage are found during the home inspection
- The seller is not approved for their loan
- The property does not appraise for at least the value of the loan
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.
Additional Income Streams for Real Estate Agents
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.
- Property Management:This is one of the most popular ways for real estate agents to earn additional income. They can manage rental properties for investors or homeowners who rent out a second home. For successful property managers, this can account for even more of their earnings than home sales.
- Home Inspections:Real estate agents are familiar with the ins and outs of homes and know what to look for when walking through a house. With some additional training, they can become licensed to inspect homes for damage and needed repairs during the homebuying process. They usually need to separate these two roles and not inspect properties that they represent as an agent.
- Appraisals:Real estate agents know a lot about the value of homes in their areas. It is part of their role as a real estate agent! They can use these skills to act as a home appraiser. Like home inspectors, appraisers must keep their role as appraiser separate from their work as a real estate agent.
- Notary Signing Agent:Real estate transactions often require notarized signatures, especially if not completed at a law office or title company. This is often the case for refinances of homes. A real estate agent is familiar with all of the paperwork and can become a notary with just a basic level of training. Notary signing agents cannot notarize signatures on a home purchase that they were involved in as an agent, representing either the buyer or seller.
- Real Estate Education:Savvy real estate agents know that their knowledge and experience is worth a lot, especially to new agents. They can teach real estate licensing courses through an established program or develop and market their own training modules.
Getting Paid as a Real Estate Agent
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.