Whether you want to become a real estate agent or need to hire one, it is common to wonder how they earn an income. This is a particularly popular question because they don't get paid like traditional jobs. Discover how real estate agents earn an income.
Most real estate agents do not earn a salary or hourly wage. Instead, they receive a commission. This means that real estate agents will only get paid if they sell a home. For real estate agents dealing with rentals, the payment structure is slightly different but still commission-based.
Take a closer look at how real estate agents earn income. This can help you decide if it is the right career for you. Or you can use it to better plan your budget for buying, selling, or renting real estate with the help of an agent.
How Does the Real Estate Agent Get Paid?
Real estate is one of the fields with an unusual payment structure. People either earn an hourly wage or an annual salary broken up into pay periods in most jobs. Real estate agents don't typically have a set wage or salary. Instead, their income is entirely dependent on commissions.
The exact commission structure depends on whether they focus on buying and selling properties or rentals. It also varies greatly.
Real Estate Broker Salary
Because real estate brokers' salaries are on a commission basis, they can vary greatly. The amount that an agent makes will depend largely on how many sales they make and the price of the properties they sell. Since property price varies greatly, what state you are in will affect the average income.
According to data from Indeed, the average real estate agent in the U.S. makes $104,592. This ranges from about $94,295 in the first year or two to about $123,721 after 10 years. But other sources have very different figures. A U.S. News report found a median salary of just $49,040 in 2020. This ranged from $33,370 for the lowest-paid quarter to $76,720 for the top-paid quarter.
How Real Estate Agents Get Paid For Buying And Selling Homes
Real estate agents receive a commission for helping someone buy or sell a home. The commission is typically a set percentage of the property's sale price. So, the more that the property sells for, the higher the amount that an agent gets.
Commissions Can Vary Greatly
On average, real estate commissions total 6% of the home sale price. Importantly, the buyer's agent and the seller's agent share the commission. But this is also just an average. Working with a discounted brokerage may lead to commissions of just 1%. On the other side of the spectrum, highly specialized real estate agents may charge up to 10%.
Most of the time, you can negotiate the commission to some extent. This is good news for both real estate agents and property buyers.
Agents And Brokers Usually Split Commissions
We already mentioned that the commission is usually divided between the seller's and buyer's real estate agents. But the brokers for the seller and buyer also have to be paid. The structure typically means that the commission gets split between the buyer's broker and the seller's broker. Then each broker splits the commission further with their agent. So, each agent involved in the transaction could earn just 25% of the commission.
Agents May Have To Pay Out Other Fees As Well
In addition to splitting the commission, agents may need to pay additional fees out of their commission. This will depend on the situation.
One common example is a referral fee. This would be the case if a company sent a client to the agent with the agreement that they would receive a percentage of the commission. You usually deduct this type of referral fee before splitting the commission.
Another common example is a real estate franchise fee. The franchise fee will apply if the broker or agent is part of a franchise. The broker or agent pays out the fee before splitting the commission.
But Some Agents Will Receive 100% Of The Commission
With experience comes the ability to increase the amount of commission that you get. For example, if the same person serves as both the buyer's and seller's agent, they won't have to split the commission between them. Similarly, an agent may have the licensing and training to be a broker and an agent. In this case, they won't have an agent or broker to split their commission with, as they serve both roles.
Experienced agents sometimes pay brokers "desk rent" instead of a commission. In this case, they pay the brokers a flat fee regardless of sales. So, the agent paying "desk rent" gets to keep 100% of the commission.
Who Pays The Commission?
In most cases, the person buying the property is responsible for paying the commission. The buyer will pay the commission for their agent and the seller's agent.
Some Agents Have Salaries Regardless Of Sales
Although it is rare, some real estate agents receive a salary regardless of whether they make a sale. These will typically receive bonuses based on customer satisfaction or even based on commissions.
For this to be the case, the agent will have to be the employee of a broker. Redfin, for example, has full-service real estate agents on its team. These agents receive a salary and then get potential bonuses.
Getting Paid Typically Requires A Sale – But Not Always
A real estate agent typically doesn't get any money unless the property sells. But there are a handful of exceptions. It will depend largely on the listing agreement. Most real estate agents will include language in the listing agreement to protect themselves.
For example, they may write the agreement, so they will get a commission as long as a capable buyer makes an offer. This would mean that the seller has to pay the commission if they don't accept the buyer's capable offer.
There also may be fine print ensuring real estate agents get a commission if something else gets in the way of the sale. For example, the buyer may be responsible for the commission if they can't produce a clean title. Or that may be the case if they don't turn the house over to their buyer in a reasonable time.
In summary, the following are some situations when the real estate agent may receive payment even if a sale doesn't go through. The seller would typically be responsible for paying the commission in these situations.
- The title has defects that go uncorrected
- The seller changes their mind and decides not to sell
- The seller and buyer mutually agree to cancel the transaction
- A spouse who signed the listing agreement refuses to sign the property deed
- The buyer did not receive the property from the seller in a reasonable amount of time
- The seller commits fraud that is relevant to the transaction
- The seller insists on terms that weren't originally included in the listing agreement
All of these possibilities should be the listing agreement. That is why the listing agreement is important for both the buyer and the seller.
How Do Real Estate Agents Get Paid For Rentals?
There is no buying or selling with rentals, so the commission structure for real estate agents has to be slightly different. There are typically a few potential payment structures that the agent may follow.
- Percentage of Annual Lease – This type of commission is calculated based on the amount that the renter pays annually in rent. An example would be charging 10% of the annual lease.
- A Month's Rent – An even simpler method is when the real estate agent charges the landlord the equivalent of one month's rent.
- A Percentage of the Monthly Rent – Sometimes, the commission will be a percentage of the first month's rent. The tenant commonly pays for this.
Who Pays Commissions for Rentals?
We mentioned that in the case of property sales, the buyer usually pays the commission. There is no hard and fast rule for rentals. It depends largely on the city itself.
In cities where there are more renters than landlords, the renters are usually the ones to pay the fee. If more landlords are looking for tenants than renters, then the landlords usually pay the fee. In cities with a fairly even supply and demand, the landlord and tenant may split the fee.
Most real estate agents do not receive a set salary. Instead, the agents get a commission when they sell or rent out a property. This means that all of the other work, from screening buyers to showing the house, goes unpaid. Real estate agents typically have to split their commission with others involved. For example, the seller's and buyer's agents and brokers divide the commission among themselves. Whether you are an aspiring real estate agent or looking to buy, sell, or rent a property, pay close attention to the fees and commissions.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.