Before you start trying to make money as an agent, you need to understand how you get paid so you can be strategic about how you’re using your time. So, how exactly do real estate agents get paid? And how much do they get paid? Let’s take a look at how real estate agent commissions work.
How real estate agent commission works
The United States Department of Housing and Urban Development (HUD) recommends a 6% commission on the sale of a home that is to be split between the buyer’s agent and the seller’s agent. While that may seem like each agent would walk away with 3%, things are a bit more complex than that.
For starters, that recommended 6% commission rate isn’t a guarantee. Commissions are negotiable and the agent will work with a buyer or seller before the transaction occurs to determine what their commission rate will be. That rate is then written into the listing agreement contract and the commission ends up being based on how much the final selling price of the property is.
You have to be mindful of the market you’re in. Ask your broker and other agents what their fees are. You need to make sure you’re compensated fairly for your time, especially when you’re a listing agent. Listings are expensive and you invest your hard earned dollars into marketing these listings with the hope of selling them. You are not guaranteed a commission when you list a property, so that’s why it’s so important to work hard to get the home sold for top dollar for your client within your listing contract time period.
Once a deal is closed, the commission fee is paid to the brokerage, not the agent. The brokerage is the one who pays the agent and they’ll split the commission with the agent. How much of a percentage the brokerage gets depends on the agent’s unique contract with them. In the end, commissions are typically split among four parties:
- The listing agent (the agent representing the seller)
- The listing agent’s broker (the broker representing the seller)
- The buyer’s agent (the agent representing the buyer)
- And the buyer’s agent’s broker (the broker representing the buyer)
The reason the broker gets a percentage of your commission is because of the value they bring to the table. The broker not only has their own business to run that requires revenue to function, but they’re responsible for ensuring their agents are acting fairly and ethically. The brokerage takes on the liability of you working as an agent within their organization. Therefore, they need to be compensated and make sure they are protected as well.
To work at a brokerage, you have to have a commission structure in place. Keep in mind that once you start doing more volume and consistent business, you’ll want to go back to your broker and renegotiate your commission structure. Most brokerages have a scale depending on your volume and other factors.
There are three types of listing agreements you’ll come across most often that can affect what your commission looks like. That being said, these aren’t the only types of listing agreements, so if a seller comes to you with a request for a different type of agreement, make sure you do your research and understand what you’re agreeing to.
With open listings, a seller is allowed to employ numerous agents to help sell their home. Only the agent who actually manages to sell the home will receive the commission.
Exclusive agency listings
This type of listing agreement occurs when a seller makes an agreement with a sole broker that either the seller or the broker can sell the home. If the seller manages to sell the property on their own, the agent does not get a commission.
Exclusive right to sell listings
Similar to exclusive agency listings, exclusive right to sell listings, the seller is allowed to find a buyer. The difference being, that the broker gets the commission, no matter which party actually sells the property.
With dual agency, the real estate agency acts as both the agent for the seller and the buyer. Dual agency is illegal in seven states: Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas, and Vermont. If it’s legal in your state, arranging a dual agency sale can be a really big win. If you represent both the seller and buyer in a transaction, your commission fee will be paid directly to you and your brokerage. There will not be another agent to split the commission with.
If you are going to pursue a dual agency sale, ethically, you have to inform both parties that you’re acting as a dual agent and you can’t impart personal information to the buyer or seller that can influence the sale either way.
Some real estate brokerages cap how much money they can take from their agents’ commission in a year, this is called a commission cap. If you earn your brokerage more than the commission cap, you won’t need to pay them any more commission for the rest of the year and will keep your full share of commission from each sale (aside from what you share with the other agent involved in the transaction). This only applies if you have the commission cap outlined in writing, so make sure it is included in your contract.
If you truly want to succeed as a real estate agent, you need to get all of your business ducks in a row. Enroll in Real Estate Essentials 101: Getting Started as an Agent to learn the exact steps you need to take to thrive as an agent!