How Do Realtors Get Paid?

Real Estate Agent Responsibilities

Listing Agents / Brokers

Legally speaking, only brokers can list homes. So, while you may work with a listing agent and agree to the terms of the deal, their broker legally holds the listing. What’s more, all commissions flow through brokers, on both the buy side and sell side of the transaction. This isn’t super important to know, as a consumer, but it’s something most people don’t know and it’s somewhat interesting.

Listing agents represent their customers (sellers). Their typical fee is 5% to 6% to list and market a home. Prices are negotiable and vary by market, based on local custom. For example, homes for sale in Los Angeles are generally listed at a 5% fee. It’s illegal for real estate agents and brokers to collude and fix listing fees; a practice that violates of antitrust laws.

Some discount brokers and for sale by owner (FSBO) companies agree to be paid less than the local norm for listing a home. However, low listing fees can be problematic as there is very little commission left over to split with buyers’ agents. What’s more, with less money on the table, discount brokers are less likely to spend what is required for professional photography, advertising and the myriad of other expenses needed for properly marketing and selling a home.

So just how are homes marketed? Marketing and advertising budgets are deployed the following ways.

Advertising

  • Print publications like newspapers and specialty publications
  • Personal website
  • Office website
  • International syndication (especially for luxury properties)
  • Billboards
  • Internet advertising
  • Direct mail
  • Yard signs
  • Mailers
  • Premium placement on real estate portals
  • Television
  • Social media
  • Directories
  • Telemarketing
  • Flyers
  • Yard signs

Marketing

  • Local MLS (annual membership fees)
  • Property photographs
  • Video
  • Copywriting
  • Open houses
  • Home staging

Buyer’s Agents

As explained above, agents who represent buyers get paid a portion of the proceeds of the listing fee. Buyer’s agents incur marketing and advertising expenses, too; all agents need to spend money on advertising to gain market share, attract customers and increase awareness of their brands.

Who pays the real estate agent commission?

Here’s some good news for home buyers: 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, sellers pay for their own agent and the buyer’s agent, too.

Of course, you could argue that the seller pays commissions using money from the buyer. So the question of “who pays the total commission” is open to interpretation.

No matter how you look at it, buyers won’t pay extra to hire their own agent. If you don’t have a buyer’s agent, the seller’s agent will keep the entire commission without offering you any representation.

Also note that the average real estate agent charges “commissions” 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.

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When do agents receive their commission?

Agents are paid when the home is sold and the transaction is completed. In a real estate transaction, this is called a “closing” or “settlement”.

At closing, a third party — typically a title or escrow company — facilitates the transaction, preparing closing statements and writing checks to the agent’s broker out of the sale proceeds.

How do the agents share their commission?

A real estate commission is usually shared evenly between a buyer’s agent and seller’s agent. Each agent shares their commission with the broker they work for, giving them as much as half of their share. With a starting total commission of 6%, this means that each agent would end up with a 1.5% commission.

Are You Supposed to Pay Your Real Estate Agent?

Consumers don't pay real estate agents directly. Brokers receive the commission, which is taken from the total proceeds of the sale. This amount is then split between the broker and the agent.

Procuring Cause

When you ask a buyer’s agent to show you property, you’re implying that you’ll eventually write an offer through that agent. “Procuring cause” is the complex process that determines which buyer’s agent is entitled to the real estate commission when a buyer works with more than one agent.

Generally, it's the agent who actually writes the offer who gets paid. You might ask an agent to spend weekends driving you around, sharing knowledge and helping you to select a home. Then you switch to another agent who shows you the home of your dreams. This agent actually writes the offer for you when you decide this is the property you want to buy.

In this case, the first agent would most likely not receive any commission or compensation for her time and effort.

How Real Estate Commissions Work

When a property is put on the market, the seller and the listing broker sign a listing agreement, which is a contract detailing the terms of the listing, including the broker’s compensation—usually a commission. It’s important to note that the commission is always negotiable. In fact, it is a violation of federal antitrust law for members of the real estate profession to attempt, however subtly, to impose uniform commission rates.

Commissions generally range between 5% and 6% of the final sale price, though they may be higher or lower based on market conditions. Unless the buyer and seller negotiate a split, it is the seller who pays the commission. Most sellers factor the commission into the asking price, so it could be argued that the buyer always pays at least part of the commission, either directly or indirectly (through a higher purchase price).

Both the seller's agent and the buyer's agent have agreements with their sponsoring brokers that specify the agent's cut of the commission. It can be a 50/50 split between the broker and the agent or any other split they choose.

How Commissions Are Shared

Real estate commissions are often divided among several people. In a typical real estate transaction, the commission is split four ways:

  • Listing agent—the agent who took the listing from the seller
  • Listing broker—the broker who employs the listing agent for the seller
  • Buyer's agent—the agent who represents the buyer
  • Buyer's agent's broker—the broker who employs the buyer's agent

Alternatives to using a real estate agent or Realtor

Many sellers think real estate agents’ commissions as too high and try to avoid them.There are three main ways of selling a home without such high costs:

  • 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, especially in hot real estate markets. But the risk of undervaluing or overvaluing your home is high
  • 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
  • Trimmed-down services — 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

Are these better ways to sell? That will depend on many factors, including:

  • 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 they’re getting the best price on their home from the most qualified buyer.

Understanding “Procuring Cause”

If you’re in the market to buy, then you need to understand how “procuring cause” works. This is a rather complex process that determines which buyer’s agent gets paid the commission if you work with more than one agent. Only the agent who writes the offer that leads to the home sale gets paid. If you hire one agent to show you different homes and share their knowledge, but then hire another one to write the offer then that first agent gets nothing for their hard work. To protect against this, most buyer’s agents will ask that you sign an exclusive agreement with them. This binds you to the agent, meaning that they will be paid the commission for any sale, even if another agent writes the offer letter.

However, procuring cause can get a little complicated as each state’s realtor association has its own guidelines for establishing procuring cause. It can sometimes happen that the agent who wrote the offer letter gets the commission, despite you having signed an exclusive agreement with an earlier agent. You can risk getting yourself into trouble if you purchase a home through a different agent than the one you first signed an agreement with. The best way to avoid this is to be upfront with every agent you meet about who represents you. Take some time to interview different Exclusive Buyers Agents before finding the one that’s right for you. 

What do these fees cover?

While many of today’s buyers often prefer to house hunt on their own, others decide to work with an agent to find a home. For those who choose to work with a traditional buying agent, they’ll find that their agents spend most of their time pulling home listings, driving to tour homes and doing pricing analysis to help them make strong offers.

Once the buyer’s offer is accepted and enters escrow, the agent will spend their time helping coordinate inspections and appraisals, negotiating repairs costs, handling all of the closing paperwork and some light accounting (the agent is responsible for maintaining the financial account used to pay inspectors and appraisers).

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