How Do Real Estate Agents Get Paid?
Well that's the million dollar question, isn't it?
Before I even get into this, I want to clarify and stress that there is NO standard or set commission structure. Real estate commissions are negotiable, not set by any government or organization, not agreed upon by local boards, etc. Every company has its own policies and can charge whatever they choose to charge. And even within certain companies, agents may also even have the flexibility to charge what they want as well. In addition, the structure of payment may differ from one region to the next. There is absolutely NO price setting in real estate.
In this article, I’ll be discussing how listing agents and buyers agents typically get paid as is fairly customary in the Charlotte, NC region and I’m sure much if not most of the rest of the country as well.
How do listing agents get paid?
So let's say John and Jane Seller want to sell their home. They can go one of three ways. They can try and sell their home without a listing agent (“for sale by owner” or “FSBO”), they can sell their home using a “discount real estate agent or discount broker,” or they can go the “full service” route.
With the full-service route which is essentially what you get when you hire a traditional real estate agent to help you find a home, agents will often charge between 5-7% (let’s just say 6% for the sake of simplifying it but again, there is NO standard) of the purchase price. With that 6%, the listing company (the seller's agent) is expected to help with pricing, preparing home to be shown, marketing it, contract negotiation and handling, etc…full service. Now, out of that 6%, 3% of it is typically offered to whichever company procures/brings the actual buyer.
John and Jane agree to list their home with ABC Realty for 6%. The home will be listed at $200,000. ABC Realty offers to compensate whichever company brings the buyer 3% of that (ABC Realty decides what to offer buyers agents but 2.5-3% is often seen). Pretend Realty comes along with one of their buyers who loves the home and buys it.
In this example, ABC Realty grosses $12,000 (6% x 200K) and out of that, turns around and pays/compensates Pretend Realty $6000 ( 3% of 200K just as they publicly offered on the MLS), leaving ABC Realty with $6000 for their share. The contract to list the home was between the sellers and ABC Realty and that’s why initially ABC Realty received the entire 6%.
Now, what if ABC Realty had not only listed the home but found the buyer for it too?
Well, since the listing contract was for 6%, ABC Realty would make $12,000 and would not need to pay any of that out to another company because it was ABC Realty who found the buyer and not another real estate company. In many cases, there may be an agreement within the listing contract that addresses this. If ABC Realty lists the home AND finds the buyer for it as well, the total commission will be 5% instead of 6%, hypothetically.
It’s important to note here that payment always goes to the real estate company.
From there, the agent for each company is paid based on whatever agreement they have with their brokerage. People often think that the Agent makes All of that 3% or 6% or whatever but they’re actually only getting their “split” which could be much less. There could be referral fees on top of that which could reduce the agent’s portion to an even lower amount.
If John and Jane Seller went the discount broker route, they might have an agreement to pay a flat fee to the listing agent + an amount to be offered as compensation to whoever brings the buyer similar to the full-service route.
Using a discount broker often means that the seller pays a flat fee such as $500-$995, for instance, to have their listing placed on the MLS but they may be limited to only that service while having to provide their own photos, negotiate their own contract, etc. Being that most listings on the MLS are offering to compensate buyer agents 3%, the sellers may still offer that as well in an effort to compete with other listings even though they’re trying to save money on the listing end of it.
In cases where the sellers are trying to avoid paying to list the home altogether and sell it themselves by going “for sale by owner”, they’re not agreeing to pay anything to a listing company. However, they may or may not still be offering to compensate a buyer’s agent if they bring a buyer along which is typical in real estate transactions.
How do Buyer’s agents get paid?
Buyer’s agents are typically paid when they help a buyer find and purchase a home. The vast majority of the time, they are paid by the listing company representing the seller of the home that their buyer purchases. In our market, you’ll most often see listing companies offering 3% to whoever brings the buyer and therefore, that’s what the company who brings the buyer usually makes. The actual buyer’s agent gets their “split” from there.
What if a buyer agent’s client buys a home in which the listing agent was only offering 2.5%?
Well, that depends on the agreement the buyer’s agent had with the buyer client. In some cases, the buyer’s agent may not have an actual agreement with the buyer but instead is simply showing them homes and acting as a “subagent of the seller”. In that case, this agent is probably limited to only receiving the 2.5% or whatever was offered by the listing agent. (If you're being shown homes by an agent but you haven't signed anything this is probably the arrangement you're under.)
In most cases, however, an agent and a buyer will have a “buyer agency agreement” which is essentially a contract for representation between the agent and buyer. In this case, the compensation is spelled out right in the contract. Take a look here at what our contract says:
COMPENSATION OF FIRM.
(a) Firm acknowledges receipt of a non-refundable retainer fee in the amount of $_________________which shall 0
shall not 0 be credited toward any compensation due Firm under this Agreement.
(b) Buyer agrees that Firm's fee for services hereunder shall be in the amount of 3% of gross purchase price
("Fee") (Insert dollar amount, percentage of purchase price, or other method of determining Firm's compensation for each type of
property the Buyer may purchase, such as resale, new construction, land/lot and/or unrepresented seller. Do not insert N/A or a
(i) Firm shall seek the Fee from a cooperating listing firm (through the listing firm's offer of compensation in MLS or
otherwise) or from the seller if there is no listing firm, and Buyer agrees that Firm shall be entitled to receive same in
consideration for Firm's services hereunder.
(ii) If Buyer purchases property where the compensation offered by the listing firm and/or seller is less than the Fee, or where
no compensation is offered by either the listing firm or the seller, Buyer and Firm agree that Buyer will pay the difference
between the Fee and the compensation offered unless prohibited by law. Firm will timely inform Buyer if the
compensation offered is less than expected.
Now, in this example, the agreement stated that the buyer’s agent would be paid 3% for his/her services. Since the cooperating listing firm (see i.) was only offering 2.5%, technically the buyer owes the buyer agent’s company an addition .5%. However, you’re very likely to see that amount just slide and for the buyer’s agent to be content with whatever was offered through the MLS and cooperating listing firm.
I hope this gives a little clarity to understanding how real estate agents get paid. It can be confusing! Still have questions about how real estate agents do what they do? Call us. We love to talk shop.