Do you understand Real Estate Commission? How much do agents make?

Takeaway:  On the sale of a $361,000 home with 6% commission a seller will pay $21,660 in commission.  Buyers work with agents for free since the sellers pay for both commissions.  A new agent would most likely earn $3249 after taxes but before business expenses.  National Association of Realtors research shows the median gross (before taxes) income for realtors is $39,200.  62% are female.  26% have another job.

Who pays real estate commission?

The seller pays the entire commission at closing or settlement (4-8 weeks after the home is under contract typically).  The commission is negotiated between the listing agent and the seller when the listing agreement/contract is signed to put the house on the market.  In our area 5-6% commission is typical but it is negotiable.  The average price of a home in Chester county is $361,000 so for the seller that is a cost of $18,050-$21,660.

How is the commission divided?

commission-pic

Generally, the commission is divided four ways: to the listing broker, the listing agent, the selling (buyer’s) broker and the selling (buyer’s) agent. Once the listing agreement is signed the listing agent uploads the home into our MLS system.  The MLS is a system agents use and pay for to share listings.  The commission offered to the selling agent is shown in the listing of the seller’s home in the MLS.  So if it is a total of 5% commission then it will show 2.5% commission ($9,025 for $361,000 sale) to the selling broker.  6% commission will show 3% ($10,830 for $361,000 sale) to the selling broker.

How is it split with the brokers?

That depends on the agent’s agreement with their real estate broker and company.  Many companies start new agents at a 50-50 split and as you sell more your percentage increases.  Using the $361,000 sale the brokers and agents would each earn $5415 with 6% commission.

What other expenses are there for agents?

  • We are independent contractors/1099 employees so we pay self employment tax of 15.3% of our income.  Many experts recommend agents set aside 40% of our income for federal income tax, self employment tax and state income tax.  So in our example a new agent would net $2707-$3249 on the $361,000 sale.
  • We basically are our own business so we have to pay for office supplies, computers, smart phones, cars, gas and any other expenses that are needed to be a successful real estate agent.
  • We often have to buy leads (Zillow, Trulia or Realtor.com) or pay a referral fee of 25-35% of our commission if the lead is referred to us by a website.  (Here’s a fun fact:  realtors pay a lot of money to use the MLS system to market and research homes.  Zillow pulls listings from our MLS system that we pay for.  Then Zillow charges hundreds of dollars a month per zipcode to agents for leads that are captured using our listing information in our MLS.)
  • We have marketing costs.  If you are a listing agent you pay for professional photographs, marketing material, advertising and blasting out a lot of information to every real estate website.  For finding buyers we have to market to them.
  • We pay dues and membership fees to belong to the MLS and realtor associations.  Also, we have to pay a monthly fee to access the electronic lockbox on listings.
  • We pay money to the Real Estate Commission of Pa for our license.  We have continuing education classes that are required to keep our license active and we have to pay for them.
  • Health Insurance for self employed or business owners is very high.  It’s a big consideration when thinking of being a real estate agent.
  • Here’s the other expense to take into account.  Often homes don’t sell or fall through due to inspection issues, the appraisal is too low or (happened to me many times) the loan falls through.  So as realtors we spend a lot of time selling a house and we spend money (listing agent is more) and it did not pay off and actually costs us money because we don’t get paid unless we go to closing and transfer of the home happens.
  • For new agents it can take 6 months to a year before you make your first sale and make your first commission.

Any other fees?

NOT FROM ARTISAN REALTY!  Most real estate companies charge an administrative fee to both sellers and buyers.  It should be explained beforehand and they put it on the settlement sheet.  It can be $200-$600 depending on the company.  Artisan Realty does not charge this fee to buyers or sellers because we are a local, boutique real estate company that focuses on utilizing technology for our clients.

Note:  There are other options to sell your house:  For Sale By Owner, Discount Brokers etc…  I based the above on how it typically works.

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