How Real Estate Agents are Paid
As part of my first meeting with a prospective client (buyer or seller) I ask if they know how real estate agents get paid …. and they usually answer “YES, you get commission.” Ok, then I ask if they know any more about that. …. I also hear “Real estate agents make a lot of money.”
So let’s get real and talk about money where it comes from and who receives it.
The funds paid to real estate brokerages and their agents starts with the terms in either the real estate Listing Agreement (for sellers) or Buyer’s Agreement (for buyers).
These Agreements are legal contracts between the client (seller or buyer) and the real estate brokerage which spells out the terms.
A Listing Agreement is required when someone hires a real estate brokerage to sell their property. The Agreement usually includes list price, length of the contract, the duties and responsibilities of the of the seller and their listing brokerage. The Agreement also specifies how and when the professional services fee (often called commission or compensation) will be paid by the seller to the listing brokerage. The amount to be paid to the listing brokerage is usually a percentage of the sales price but it doesn’t have to be. Also please note that the fees are negotiable. The Listing Agreement usually will also specify if the seller is open to compensating the buyer’s brokerage or not. Or the seller may authorize the Listing Brokerage to offer Buyer Broker compensation.
A Buyer Agreement is a contract between a prospective buyer and a real estate brokerage where the buyer requests a real estate professional’s assistance in finding and purchasing a property. This Agreement also spells out the duties and responsibilities of the buyer and real estate brokerage. It also spells out the length of the contract, type of property or locations the buyer is seeking, and just like the Listing Agreement, it specifies how the Brokerage will be compensated. In many cases the buyer will instruct their real estate brokerage to seek compensation from the Listing Broker or Seller (by specifying the compensation in the Contract to Purchase) to help them fulfill the buyer’s financial obligations in the Buyer Agreement.
In most cases the agreed upon Professional Services Fees are paid when the real estate transaction closes (property transfers from seller to buyer).
The Listing Brokerage receives the agreed upon compensation out of the proceeds of the sale.
Depending on the terms of the Listing Agreement, Buyer’s Agreement and subsequent Contract to Purchase (and/or Purchase and Sale Agreements) between the buyer and seller, the buyer’s brokerage may be paid out of the proceeds of the sale or may be paid by the buyer at closing.
Once the property has closed and funds issued to the respective brokerages, the real estate agents would receive payment from their brokerages. The amount the agent receives is based upon their contract or agreement with their Brokerage. Most real estate agents are self-employed independent contractors for the broker. Once compensated by their brokerage the real estate agent will need to pay their taxes including the self-employment tax, insurance, reimburse any marketing expenses, their own team, and licensing costs, education and more.
All of this is often invisible to the seller and buyer because their primary point of contact with the real estate brokerage is their agent - and someone they usually get to know very well. The agent may be the face of the transaction, however the agent isn’t paid that amount. The professional services fees goes to their brokerage.
So while the seller or buyer may look at the Compensation in the Agreement and think “Wow! Real Estate agents make a lot of money,” please remember this doesn’t go to the agents, but to their brokerages. And the real estate agent you see every day is working mightily to receive their compensation at the end of the day to grow their business and feed themselves and their families.
