Real Estate Agents Get Paid
Wondering about how much real estate agents get paid when signing a listing agreement with a 6 or 7% commission attached?
I have. Looking at paying $20,000, an amount it seems I have to pay to sell me house, yeah I wondered. What is the deal with real estate commissions?
If I hire a real estate agent with multiple properties for sale and mine is the least expensive, are they going to ghost me when I need help but the other client – worth a $35,000 commission – needs them too?
This blog is about real estate commissions, both the structure and the incentives that that typical commission structure drives.
I caution you. Rather than getting wrapped up in what’s right or wrong with this system, see as neutral. How a current system works. Neither good nor bad. That way you can negotiate more effectively and create expectations for you and your family that can be met.
Incentives driven by the structure
Money and incentives. If you really think about it, the people lean toward that which provide the best opportunity, especially when it comes to money. Why do some sales people switch which of their company’s products they are selling? It has to do with the products that pay the most commission. It is the same in the real estate commission structure and becomes larger issue in relocation.
Following the money is how personal interests and incentives are seen. That old quote “For wherever your treasure is, there your heart will also be”. And when it comes to relocation, more times than you would like to believe, …
the agent’s service to the relocation client wains because of the money.
Really,the lack there of.
Real estate agents establish a fiduciary relationship with their clients through contracts(buyers representation agreement or listing contract). This is a contractual obligation to put their client’s interests before their own. When it comes to money though are we humans able to do this?
Money pays our bills – housing, fuel, food, clothing and for our fun. And it is no different for real estate agents.
In 2019, the average gross income for real estate agent was $42,501 a year according to Salary.com. AND if the agent is lucky enough to be in the 90th percentile of all agents they earn $64,585. This is not the lifestyle of the rich and famous for almost every real estate agent you will hire. This means that your real estate agent is going to have to hustle to find as many clients as possible…at all times
Chances are you and your family is not the only client.
Money Drives Attention
If a real estate agent can’t make a car payment or the kids needs braces this month, they will focus their attention on the clients and transactions that have the highest commission and have the highest chance of closing.
“Well I am not going to hire those struggling real estate agents.” However, knowing an agent’s finances is not part of the interview process. You will not know, no matter how shiny their Mercedes Benz is.
This is why I spend so much time last week on using the interview process to evaluate what the agent is going to do for you and putting it in writing. That formal agreement will help the focus to stay on your home as much as possible. Finding the Right Real Estate Agent
Understanding how the money moves help you understand when and how your real estate agent may be distracted even in the middle of managing your contract to buy or sell.
Commissions: Where does the money come from?
Most real estate agents are paid, on both sides of a deal, according to the listing agreement at the time of closing. The listing agreements is a contract between sellers and a real estate brokerage they have chosen.
Note The listing agreement is not a contract between the real estate agent and the sellers. It is a contract between the sellers and the agent’s supervising broker/brokerage. The real estate agent is just that, only an agent of the brokerage they are associated with.
Also, though many of us assume the “standard commission is X%” for our area, know that all commission are negotiable, per federal law. The excuse that “all brokerages in Santa Fe charge 6%” is potentially price fixing and therefore illegal. If you want to negotiate, negotiate! The commission to sell your home doesn’t have to be what everyone says it should be.
Buyers, you also have the ability to negotiate, so feel free.
The commission will typically be expressed in terms of a percentage. For example 6% or 7% of the final sales price of a home. So for a final sales price of $350,000, the commission would be $21,000, assuming a 6% commission.
Let’s continue with the $21,000 commission example to demonstrate where the money goes.
Commissions: How is it split?
As a seller you might be thinking that’s a lot of money to pay to sell my house! However, that $21,000 is about to get carved up, multiple times.
The first split is between brokers. Typically that $21,000 will be divided in half with $10,500 going to the seller agent’s broker and $10,500 going to the buyer agent’s broker.
The second split between the brokers and the agents. The contract determines how much the your real estate agent actually grosses out of this transaction. These agreements can be anything from a per transaction payment (say a flat $350 per transaction) to a 50/50 split of that commission coming to the broker after closing.
Now consider that real estate agents are typically contract workers. They are 1099 broker contractors and not employees. They do not receive any company benefits healthcare/retirement/etc.). Many times the brokers will charge the agents to be part of their brokerage, between a few hundred dollars a year to thousands of dollars a year.
Expenses continue. Real estate agents will have to pay for their own health insurance, professional associates, MLS access and those fancy key fobs that get them into all the houses. Other expenses will also include business equipment, supplies, transportation, phones, internet etc.. When it comes down to it, independent real estate agents, these solo entrepreneurs with hopefully realize 50% gross profit.
This is a huge discrepancy. And unless you know an agent, you don’t know.
In our example the agent commission from this transaction could be as much as $10,150 to as little as $5,250. Net income before taxes then, could be as little as $2,625 for up to 100 hours of work in 6 to 8 weeks. Full time real estate agent averaging 8-12 home transactions per year could be grossing only $31,000 a year depending on their average home sale price.
Add the Relocation Management Company
Now, let’s say you hire the agent referred to you by the employer’s relocation management company(RMC). These agents are busy and have lots of experience. Perhaps 24 homes a year or more. This is due to the “hot leads” provided to them by the RMC.
These RMC real estate agents will receive all of these hot leads and in exchange pay between 30 to 50% of their commission. On top of that many brokers take their split off the whole commission rather than what’s left. This is a double negative for the agents.
So in our same example of a $10,500 commission, at 40% the RMC would receive $4,200. The agents would then pay their broker, at a 70/30, $3,150. The agent would then receive $3,150 before expenses and taxes. Even if they managed a 60% profit margin, this agent only receives $1,890 for at least 100 hours of work.
As to the relocating family this is important to know!
By having to focus on multiple clients at the same time dilutes the attention they can give to you and your home sale or purchase. And if a million dollar home client comes, who do YOU think is getting the most attention.
As relocating families, we do not have time to chase down some one’s finances or manage how people think. We need to find agents of character who have the ability to overcome this type of human nature.
We need to come to a formal agreement with our chosen real estate agent as to:
- How often and what they will communicate
- When they will be available
- How they will track dates and documents
- How they will manage our real estate contract from execution to close
- Who is their back up when not available.
This may be the way the system works but by knowing it we can prevent innate negative incentives from impacting our relocation.
Last week’s blog talks about how to hire talented, effective relocation real estate agents. https://relomoms.com/the-right-real-estate-agent/
Have conversations, contract expectations and follow up, follow up, follow up. This is a delegated process not an abdicated one.
Knowing how real estate agents are paid, helps all of us understand more about the industry and how it works as we make decisions about Our Relocations.
More This Week
Join Annette Walters on Thursday’s ReloMoms Podcast to expand the disscussion of how real estate agents get paid. On iTunes and other podcast players.
Other information about real estate agents can be found online at www.ReloMoms.com