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.
Real Estate Commission Basics
Who Pays a Real Estate Agent’s Commission
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.
Broker Commission Split
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.
When Commission is Paid
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.
Real Estate Commission and Taxes
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.
Commission Payment Process Step-by-Step
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.
- Step 1 - Sign on With a Licensed Real Estate Broker - The broker/agent agreement will specify the commission split. If possible, see if a sliding scale commission split is possible so that you earn more as you sell more.
- Step 2 - Take on a Listing/Get an Offer to Purchase Accepted- The listing agreement between the seller and the listing agent’s broker will spell out the commission for the sale. The average is between 5-6% commission on the sale price. Typically, the higher the price is the lower the commission will be. The listing agent will then specify the commission split with the buyer agent’s brokerage.
- Step 3 - Transaction Closes - All the documents must be signed and the funding from the buyer must go through for the commission fee to be taken out of the seller’s proceeds and sent by the escrow company to the listing broker.
- Step 4 - The Brokerages Split the Commission - Once the listing broker receives the commission they will promptly send the buyer agent’s broker their half.
- Step 5 - Each Broker Splits the Commission With the Agents - Last but not least comes the split for the agents. Once your broker receives the commission, they will direct deposit your portion or cut you a check.
Test Your Knowledge: Which Commission Split is Best?
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.