When you begin a career as a real estate agent bi-monthly paychecks become a thing of the past. So if you don’t have a regular salary, how does a real estate agent get paid?
Learn more about life as an agent and get exclusive offers!
Income in the real estate industry is nothing like a salaried position. Real estate agents don’t receive a regular paycheck, and they aren’t guaranteed a certain salary. Instead, agents are paid a commission.
For each sale you make as a buyer or listing agent you’ll earn a commission. It’s typically a small portion of the sales price, however, a commission can also be a flat rate. There may also be a monetary bonus for the buyer agent. And that’s before you start factoring in brokers.
If you’re new to real estate or considering a career as an agent, it’s important to understand how commission works. The agents that do put themselves in a better position to earn more money than they did before in a salaried position.
The seller typically pays 5-6% of the sales price for realtor services. The listing agent gets half and the buyer agent gets the other half. However, it should be noted that sellers don’t pay agents directly since it’s prohibited.
Instead, a commission payment is sent to the listing agent’s broker. The listing broker will then send the buyer’s brokerage their portion of the commission. Each broker will then give the agent their split minus any fees.
So technically, the agent’s commission is paid by their broker.
When you sign on with a broker, one of the key considerations is the commission split. Real estate agents are independent professionals, but they must work in connection with a licensed brokerage that is held to high business standards. It’s part of the checks and balances that ensures agents are competent and consumers are protected.
In return for operating legally under the brokerage, agents must split the commission they earn helping a client sell or purchase a home. When your broker receives the commission funds they will deduct their portion before sending you the rest.
Let’s imagine you’re a new real estate agent that has a 50/50 commission split, which is fairly standard. A few months into being licensed you close your first sale. The commission is 5%, and the sale price is $300,000.
That means the total commission is $15,000. Each brokerage receives $7,500. Your broker will then keep their half and give you $3,750.
There’s a huge range of broker commission splits from 30/70 to 90/10. Every brokerage has their own system and financial considerations. Often the commission split comes down to two things: the amount in sales that an agent closes and the level of service that the brokerage provides. The more an agent sells the higher the commission split should be in their favor.
Instead of getting paid for the hours that you put in as you work with a seller or buyer, you’ll get one lump sum payment after settlement. As soon as the close and funding are completed the commission fees will be released. Today’s real estate agents are lucky that direct deposit allows for immediate payment.
Just keep in mind it could take time to close your first deal. And some months will be much busier than others. It’s important to manage your finances accordingly to balance out the highs and lows.
One thing a brokerage will never do is deduct taxes from your commission split. As an independent contractor, it’s up to agents to pay taxes on their own. You’ll need to carefully track all of your income and expenses. Since the IRS considers real estate agents to be self-employeed, you’ll need to pay estimated taxes every quarter.
Below is a quick overview of the commission payment process to use as a reference. Before you sign on with a brokerage or take on a listing, review the process to make sure your aren’t short-changing yourself.
Commission Split A - 5.5% commission on a $325,000 listing with 50% going to buyer agent’s brokerage that has a 60/40 split with the agent.
Commission Split B - 6% commission on a $300,000 listing with 50% going to the buyer agent’s brokerage that has a 65/35 split with the agent.
The answer is Commission Split B: Even though the list price is lower the higher commission on the sale price and slightly better split with the brokerage make this the more lucrative deal. Commission Split B nets the agent $5,850 while Commission Split A will end up paying $5,362.50
You can’t cash your first commission check until you take the required real estate courses. Get started now and you’ll be one step closer to being a paid real estate agent.