If you’re considering a career in real estate, it’s essential to understand exactly how you’ll be paid for your services. Real estate agents are typically paid on a commission basis, based on a percentage of the property’s sales price bought or sold. However, these numbers are not always straightforward and involve negotiations with clients, managing brokers, and other considerations. This article will break down the different scenarios that can affect your compensation as a licensed real estate agent.
How Much Do Real Estate Agents Earn?
Real estate agents, or Realtors, if they are a member of the National Association of Realtors, are paid a commission on every property they help buy or sell. This is true whether the agent is helping purchase land, a condo, a primary residence, or other unique property. The customary commission is generally around 5-6% of the sales price, according to the National Association of Realtors as well as Redfin, but confirm with other agents in your area to learn what is the standard in your city.
It’s important to know that the commission is set in the sales contract for the property and is negotiable with your client. However, we do recommend setting expectations with your client early, making clear what your standard rate of commission is.
Additionally, the 5-6% rate is typically split between both the buyer and seller agents. These commissions are generally split 50/50 and normally paid by the seller of the property as part of their closing costs – once the sale is complete.
How Are Real estate commissions calculated?
Real estate agents, or Realtors, do not typically earn an hourly wage. Rather, they are paid in a lump sum commission after a property has been sold. This means as a real estate agent, you will not be paid directly for the time you take to show properties and negotiate contracts but instead earn a commission-based income, which equals a percentage of the property’s sale price. So the answer to exactly how much you earn as a real estate agent depends on the sales prices of the properties you negotiate – either as a listing agent or a buyer’s agent. To make larger commissions, you’ll need to target higher-priced markets or larger properties.
Who Pays The Real Estate Agent Commission?
In most instances, the seller of any property typically pays the real estate agent commissions. However, there are times where a contract negotiation may push a buyer to offer to pay a portion of closing costs – which could include real estate agent commissions.
Most people shopping for real estate will often have their own “buyer’s” agent. Usually, the seller pays the commission due to their agent as well as the buyer’s agent. Again, this is typically a 5-6% total commission split 50/50. By charging a “commission” rather than a “fee,” real estate agents get paid for closing deals rather than by the hour for their time and effort. If your clients do not purchase a property as their real estate agent, you’re unlikely to make any money for your time.
How Are Real Estate Commissions Set?
Real estate commissions are typically based on local market conditions. Due to internet sales and MLS sites like Redfin and Zillow, commission rates have trended down in some markets as these websites often offer discounts to their buyers and sellers.
Beyond the market, commissions are also negotiated terms of any sales contract. Many real estate agents will reduce their total commission under different circumstances. One example of this would be a reduced commission on your home’s sale after you worked with the same agent to buy your new home.
How Does a Dual Agency Affect Real Estate Agent Earnings?
Sometimes, one real estate agent or Realtor will serve as the agent for both the buyer and the seller during the same transaction. In theory, the agent would be obligated to represent both sides of the negotiation equally. This is commonly referred to as “dual agency.” When a dual agency agreement occurs, the agent involved will often reduce his or her commission to the buyer and seller.
Dual agencies can sometimes present a conflict of interest and may not be allowed under local law. Depending on the complexity of the negotiation, some real estate agents find it hard to represent both parties fairly. This can be extra difficult if a dispute arises between the two parties and the dual agent is caught in the middle. It’s important to do your homework here before agreeing to serve as a dual agent for a client or his or her prospective buyer.
What Do Real Estate Agents and Realtors Do?
Real estate agents or Realtors earn their commissions by acting on behalf of sellers or buyers in the sale of a property. The real estate agent’s job is to ensure their client is fairly negotiated with and to maximize the benefit their receive for their side of the transaction.
A real estate agent’s number one job is to be supremely knowledgeable of their local housing market to price and purchase property accurately. Understanding how to appraise the property to get a client top dollar or to prevent a client from overpaying for a home, or risk losing financing is an invaluable skill to any real estate agent.
Additionally, real estate agents must possess strong negotiating skills to negotiate the best terms for their clients. These terms go well beyond price and include important timelines, appraisal terms, inspections and repairs, financing, etc.
Successful real estate agents should have incredibly strong networks. Networks allow agents to find off-market or coming soon listings quickly to the advantage of their clients. Positive relationships with other Realtors, appraisers, and inspectors can also help move property through the acquisition process quickly and without issue.
Finally, your real estate agent should also have strong background knowledge of mortgage lending and the legal and contracting issues that can arise during real estate transactions.
Earning Your Commission As A Real Estate Agent
Buyers and sellers alike need to work with a licensed and qualified real estate agent. As a buyer, having a talented real estate agent on your side makes the shopping and purchasing of a new homeless stressful. For sellers, having an agent to list and show your property makes the sales process easier and brings in more qualified buyers than you likely would on your own. For both buyers and sellers, it helps to have a professional on your side that can help navigate the complexities of buying or selling property.
It is traditionally assumed that buyers agents work “harder” for their commissions than sellers agents have to. It’s easy to spend months with prospective buyers, looking at properties on weekends and searching for properties during the week. There’s also the possibility that your clients don’t purchase a home, which means you’ll never be compensated for that time. Some brokerages recognize these circumstances and often pay buyers agents slightly more than seller agents. There are many ways that real estate transactions fall through, at no fault of the buyer’s agent, resulting in commission loss.
Real Estate Sales Agents vs. Brokers
A real estate agent is licensed in the state in which they work and must undergo specific coursework in real estate practice, laws, and contracting before also passing an examination for licensure. Becoming a real estate agent is the first step in growing your real estate career, as it’s the entryway into licensed buying and selling of property.
A broker is a real estate agent who has been working in the field longer, has additional training, and often manages the activities of sales agents he or she supervises. Often brokers will assume supervisory roles over agents in exchange for mentorship, professional assistance, and a small portion of the agent’s commissions. As a result, you should consider any fees associated with working with your broker before determining your income as a real estate agent.
Realtors can be real estate agents or brokers; however, not all real estate agents or brokers are Realtors. To be designated as a Realtor, you must be a member of the professional organization – the National Association of Realtors. This group is trademarked, and real estate agents who are not members cannot use the term “Realtor” in their marketing materials. According to the NAR, its members have additional expertise. They have to pass a membership examination and are held to higher professional standards than other non-member real estate agents. Realtors do not make larger commissions than non-member sales agents or brokers.
Suppose you’re considering a career in real estate. In that case, it’s important to layout your goals, including your availability to work with clients. You also want to know the average home sales price in your city or the surrounding area, and then determine if you can sell the number of homes you need to sell per year or month to reach those goals.
It’s difficult to say exactly how much real estate agents earn in a year. The annual income of a real estate agent depends heavily on the number of clients an agent can take on, the average sales price of properties in the area, as well as market conditions and how quickly homes are selling in your market.
A career as a real estate agent is one that is built successfully over time, understanding that your commissions come from relationships and hard work – and not overnight. It may take a couple of years to get to your annual target commissions and build the business you want, but it’s also a rewarding career to help dreams come true for buyers and sellers alike.