How do Realtors Get Paid? What Every Buyer and Seller Should Know
Realtors get paid on a commission basis, usually 5 to 6 percent of a home’s sales price, which is split between the listing broker and buyer's agent. Fees typically come out of the sellers’ proceeds while buyers generally pay nothing to the agent who represents them.
Honestly, most folks don't put much thought into how real estate agents make money – neither the commission percentages nor from which side of the deal the fees come. Obviously, one must assume that compensation comes from somewhere, or no one would be in business. Office furniture, copy machines, and yard signs don’t pay for themselves. Usually, about the time people start thinking about buying or selling a home, they then start to wonder how real estate agents get paid.
Most buyers are surprised to learn that real estate commissions come from the “listing side” of a deal. Meaning, the fees get worked out between a seller and their listing agent when a house is put up for sale. Then when the home is sold, the seller’s agent splits the listing fee with the buyer’s agent. Thus, buyers aren’t on the hook for any costs, just the sellers. While there are some agents who will represent buyers for a flat fee or work on an hourly basis, brokerages with that kind of business model are few and far between. The most common practice is to follow the age-old commission split between the listing broker and the buyer's representative.
Splits between agents are normally 50/50, so if a listing agent procures a 6% listing fee, the buyer and seller agents will each receive 3% when the deal is done.
Real Estate Commission Example
Here’s an example of how real estate commissions work.
The person selling the home and their listing agent agree to a 6% commission. They sign a listing agreement that spells out the precise fee (as a percentage) along with the duties the listing agent should perform (marketing the property, etc.) on behalf of the seller.
Pictures of the home are taken, a property description is written, and the details of the home are uploaded to the local Multiple Listing Service (MLS). MLSs are essentially a marketplace of home inventory within a specified region. The listing is then syndicated to several portals like REALTOR.com and individual office or agent websites.
Within the local MLS, listings contain extra information that only accessible to member agents. For example, only members of an MLS can see the commission split offered by the listing agent to buyer representative for bringing customers to the table.
In the normal course of the home buying process, local buyers' agents show the listed home to their clients, one of whom decides they want to buy it. An offer is made, via a standard form called a residential purchase agreement, along with an earnest money deposit. Assuming the negotiation process, inspections, and contingencies of the deal are handled expediently, the deal proceeds to the closing stage.
During the closing, the escrow company - a neutral third party - handles all the money. The listing fee is subtracted from the proceeds of the sale, and then the remaining monies are disbursed to the companies for whom the agents work. Wait. The companies? I thought you said the listing fee splits between the listing and buyer agents? Let me explain...
So far, here are the people involved in this example deal:
- Listing broker – represents seller and lists the home on the market
- Buyer’s agent – represents the buyer, gets paid from the listing broker’s commission split
In fact, there are two more entities involved. While agents are technically self-employed, they work under the licenses of their respective brokers – two additional people that get paid (one broker on each side of the deal).
Brokers and agents split the commission, based on a standing agreement between the two, typically between 25% and 50%.
Note: There's another scenario where the buy-side commission is split even further. When a real estate agent refers their client to another real estate agent (typically in another market), the referring agent is paid a referral fee, typically 25% of the buy-side commission.
Real Estate Agent Responsibilities
Listing Agents / Brokers
Legally speaking, only brokers can list homes. So, while you may work with a listing agent and agree to the terms of the deal, their broker legally holds the listing. What's more, all commissions flow through brokers, on both the buy side and sell side of the transaction. This isn’t super important to know, as a consumer, but it’s something most people don’t know and it’s somewhat interesting.
Listing agents represent their customers (sellers). Their typical fee is 5% to 6% to list and market a home. Prices are negotiable and vary by market, based on local custom. For example, homes for sale in Los Angeles are generally listed at a 5% fee. It's illegal for real estate agents and brokers to collude and fix listing fees; a practice that violates of antitrust laws.
Some discount brokers and for sale by owner (FSBO) companies agree to be paid less than the local norm for listing a home. However, low listing fees can be problematic as there is very little commission left over to split with buyers’ agents. What’s more, with less money on the table, discount brokers are less likely to spend what is required for professional photography, advertising and the myriad of other expenses needed for properly marketing and selling a home.
So just how are homes marketed? Marketing and advertising budgets are deployed the following ways.
- Print publications like newspapers and specialty publications
- Personal website
- Office website
- International syndication (especially for luxury properties)
- Internet advertising
- Direct mail
- Yard signs
- Premium placement on real estate portals
- Social media
- Yard signs
- Local MLS (annual membership fees)
- Property photographs
- Open houses
- Home staging
As explained above, agents who represent buyers get paid a portion of the proceeds of the listing fee. Buyer’s agents incur marketing and advertising expenses, too; all agents need to spend money on advertising to gain market share, attract customers and increase awareness of their brands.
Agents on both sides of a deal have a fiduciary responsibility to their clients. This means agents must disclose known issues about a property and negotiate in good faith. As such, a buyer's agent must act in the best interests of their customers just as a seller's agent must represent the best interests of their clients. There may be a time when a listing agent also represents a buyer (for the same property), and this is known as dual agency.
Because dual agency makes it difficult to negotiate and represent both parties of a real estate deal, several states prohibit the practice. The State of California allows dual agency, but only if the agent or broker fully discloses it to the buyer and seller. To say the least, this becomes a precarious situation.
Final Thoughts on REALTOR® Pay
If you’re read this far, you now know how agents get paid and how commission splits work. You also know that there are more parties to the transaction than just the two agents representing the buyer and seller. Realtors incur many expenses that eat into those seemingly wonderful profits. To be sure, it's fun and rewarding profession with many responsibilities. Marketing is just the cost of doing business. Lastly, be wary of dual agency situations.