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How much do real estate agents make? And who pays?

Erik J. Martin
The Mortgage Reports contributor

How much do realtors and real estate agents make?

Real estate agents make a commission on each home they successfully sell. That commission is generally around 5-6% of the sales price. 

But, one agent won’t necessarily walk away with that 5-6% in their pocket. 

Real estate agent commissions are often split 50/50 between the seller’s agent (or “listing agent”) and the buyer’s real estate agent. 

However — whether they’re representing seller or buyer, both types of real estate agents are paid by the seller when the sale is complete. 

Since commissions can be high (5% on a $250,000 sale would be $12,500) it makes sense to shop around for your real estate agent.

Look for the best price AND the best service, just as you would when choosing your mortgage lender. 

Find the best lender for your next home purchase (Jul 4th, 2020)

How much real estate agents make on a sale or purchase

A real estate agent usually doesn’t earn an hourly wage. Instead, most make their income only after a home has been sold. This income is in the form of a commission, which equates to a percentage of the home’s selling price. So the answer to how much do real estate agents make will depend on how much the home sells for.

The National Association of Realtors and Redfin both reckon the average commission charged by agents is in the 5-6% range. And that’s 5% or 6% of the agreed sale price of the home.

That’s a lot. At the end of 2019, Zillow put the median sale price of a home in the US at $244,000. At 6% commission, that’s $14,600. Even at 5%, it’s $12,200.

And, at the high end of the market, the figures must bring tears to rich people’s eyes. A seller with a mansion in Manhattan or Beverley Hills worth $50 million, would be looking (through those tears) at $2.5 million or $3 million.

Who pays the real estate agent commission?

If you’re buying a house, the good news is that the seller typically pays the real estate agent commissions. If you’re selling, the news isn’t so great.

Smart buyers will often have their own “buyer’s agent.” This can be great because it gives you a skilled professional (if you choose yours carefully) who is 100% on your side and who comes with skills, expertise and knowledge. 

Usually, the seller pays for their own agent and the buyer’s agent, too. BUT, that’s not really an extra cost to the seller. The seller’s agent generally shares his or her commission with the buyer’s agent in a 50/50 split. So it’s all included in that 5-6% cited above. 

Also note — agents typically charge “commission” rather than “fees.” That means they get paid for success rather than by the hour or for services rendered. So, if a deal doesn’t go through, they’re unlikely to make any money at all on it. This sometimes results in an agent getting lucky and making a pile of money on a quick and easy transaction. But, at least as often, it sees him or her getting no reward for a lot of effort.

How the real estate agent commission is set

Realtor Kevin Deselms says the commission percentage is based on several factors. This can include local market conditions.

“But the amount is often based on negotiation between the seller and the listing agent or the agent’s brokerage,” he says.

In other words, the commission is negotiable. And some agents are willing to give discounts. In fact, three out of five sellers get a discount on their agent’s commission.

“Commission rates have been trending down in recent years,” says real estate broker Matt Buttner. “This is mostly because of the internet and technology. The MLS now automatically syndicates the listing out to real estate websites like Zillow and Realtor.com. So a listing agent’s job is easier.”

Discounts are given for many reasons.

“Say, for example, a client is selling one house and buying another using the same agent. In this case, the agent is more likely to offer a discount,” says real estate attorney/Realtor Bruce Ailion. “Or say the property is in a hot market and competitively priced. It might take less work to sell. That could lead to a discount.”

Dual agencies (when the buyer and seller use the same real estate agent) 

Sometimes, the buyer’s agent and the seller’s agent are the same person. In theory, he or she represents the interests of both sides equally. This is called a dual agency. And a seller may be able to negotiate a reduced commission rate when one of these arises.

However, dual agencies can throw up some obvious conflicts of interest. And some agents find it hard to represent both parties fairly, especially during the deal’s negotiations and if a dispute arises.

That’s why there’s a legal duty for agents in these situations to be totally transparent with both parties over their roles and actions. And it’s why dual agencies are flat-out illegal in Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas, and Vermont.

What do real estate agents and realtors do?

Whether acting on behalf of sellers or buyers, the duty of a real estate agent is to maximize the benefits his or her client gets from the home transaction. They do this by having:

  1. An intimate knowledge of the local housing market, including expertise in appraisal
  2. Negotiating skills to secure the best or optimum price for the client
  3. Local contacts in the marketplace who can help with the rapid acquisition or sale of a home
  4. A close knowledge of the legal and mortgage processes involved
  5. Troubleshooting skills that keep a transaction on track when issues arise
  6. Interpersonal skills that allow clients to feel comfortable and in control throughout the process

If you pick a good one, your agent can be highly valuable.

Why a real estate agent is worth that commission

Having a real estate agent on your side as a buyer can make home shopping less stressful — and you may find better properties, or get a better deal, than you would have on your own.

For sellers, it’s a better way to list your home and bring in more prospective buyers.

And for both sellers and buyers, it helps to have a professional on your side who can help navigate the complexities of such a big transaction. 

Also, “buyer’s agents work much harder for their money,” says Buttner. “They often work with a particular buyer for months. They show them multiple houses and make many offers before something sticks.”

For this reason, the buyer’s agent sometimes makes a bit more than the seller’s agent.

“A lot of brokerages that charge less than 6 percent will still offer the buyer’s agent a full 3 percent,” Buttner says.

Remember that an agent’s hard work is not rewarded with every client.

“Not all transactions result in them getting a commission,” says real estate attorney/Realtor Bruce Ailion. “So the costs associated with transactions that don’t close must be factored into those that do.”

Ailion understands that 6 percent may seem high. But, he adds, you really get what you pay for.

“Like a good doctor or lawyer, I believe a good agent is worth their fee,” Ailion says. “You’re dealing with likely the most significant asset in your life. So choosing the best representation makes sense.”

Real estate agent vs. broker

A real estate agent is someone who’s passed his or her state’s relevant exams and who’s been licensed to practice as an agent. It’s the lowest level of qualification for people able to facilitate the buying and selling of homes. Each state sets its own exam standards and it’s easier to get a licence in some than others.

A broker has gone the extra mile and taken additional exams. So he or she should — theoretically — have greater knowledge and expertise than an agent. And a broker is more likely to have a senior post in an agency, often managing agents’ activities.

Realtors vs. real estate agents

All RealtorsⓇ are real estate agents or brokers. But not all real estate agents or brokers are RealtorsⓇ. (It’s like how all squares are rectangles, but not all rectangles are squares.) 

RealtorsⓇ are members of the professional body the National Association of Realtors (NAR). And that registered trademark is intended to stop those who aren’t realtors claiming they are.

The NAR would say, with some justification, that its members have greater expertise (they have to pass additional exams) and are held to higher professional standards than other real estate agents.

Alternatives to using a real estate agent or realtor

Many sellers perceive real estate agents’ commissions as too high. So they try to avoid them.

They have three main ways of selling their home without such high costs:

  1. For sale by owner — At its most basic, this might involve putting up a yard sign, printing and distributing some flyers and telling everyone you know your home’s for sale. It’s cheap and sometimes works. But the risk of undervaluing or overvaluing your home is high
  2. Flat-fee MLS listing by owner — The MLS is the Multiple Listing Service. It’s the online resource that real estate agents use to let other agents and buyers know that a home is available. Owners can add their listings (which may appear on Realtor.com and Zillow, too) by paying a flat fee — or a smaller flat fee with a success charge on sale
  3. Some agents offer lower commissions for a more basic service. You might get a menu — from MLS alone through increasingly complete levels of service — from which you choose what you want and how much you’re willing to pay. Sort of like choosing real estate agent services à la carte

Are these better ways to sell? That will depend on many factors: how strong your local property market is; how good you are at appraising your own home’s value; how much effort you’re prepared to put into finding a buyer; how confident you are in your ability to shepherd your sale through to closing … 

If you’re sure you can handle all those as well as an agent, feel free to sell without enlisting one.

But for many people, working with a real estate agent, broker, or Realtor gives them peace of mind that they’re getting the best price on their home from the most qualified buyer. 

Ready to sell your home or buy a new one? 

Whether or not you decide to use a real estate agent, it’s a great time to get serious about selling your house and buying a new one. 

Rates are incredibly low — so buyers are going to be motivated, and you can likely get affordable financing on your next place.  

Ready to get started?

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