Buying or selling a home can be difficult and confusing, especially if you try to navigate through the entire process on your own. That’s why many people hire a real estate agent to help. If you are selling, the real estate agent’s job is to help list, market, and close on the home. If you are buying, the agent is tasked with helping you find, tour, and close on the home. Either way, they are motivated to help you because if you close, that’s when they make money. So, how much to real estate agents make?
The answer to that question is that it depends. That’s because agents get paid commission for each home that is bought or sold. They are not paid an hourly or annual salary, so it is up to them to get out there and find clients entering the real estate market. In order to fully understand how the buying and selling process works, and how it affects a real estate agent’s earnings, we must first break down several terms:
- Real estate agent- a person who is licensed to help people buy and sell homes. They work for a real estate broker.
- Real estate broker- a person who manages a real estate business and provides real estate agents with clients who need to buy or sell a home. Brokers can also perform the job of a real estate agent.
- Real estate firm- a real estate business run by one or more real estate brokers. Larger firms have more than one branch. Some of the largest in the country have thousands of local branches, each with one or more broker.
There are also two types of real estate agents:
- Listing agent: a person who is working for the seller of the home.
- Buyer’s agent: a person who is working for the buyer of the home.
There is almost always a listing agent working to help close the home sale. In 2013, 91% of all individuals selling their home used an agent. Additionally, 88% of all homebuyers also used an agent.
When a home is sold, the listing agent, buyer’s agent, and broker/firm get commission. The average commission rate is between 5 and 6 % of the total home sale price. That commission is then divided amongst all individuals involved in the sale. The portion that each person receives is agreed upon before the sale.
Let’s take a look at an example:
A home sells for $250,000. The seller had negotiated with the listing agent for a 5% commission rate. After the sale, the commission is $12,500. This money gets divided four ways: to the listing agent, buyer’s agent, listing broker, and buyer’s agent’s broker. After every home sale, the brokers are the first to automatically receive the commission. They each get half, or $6,250 a piece. Then, the brokers split their portion of the commission with their agent. The percentage owed to the agent depends upon the agreement made beforehand with their broker. In this example, both the buyer’s agent and listing agent made agreements with their brokers to split the commission 60/40. So, both agents receive 40% of $6,250, or $2,500. Broken down more simply:
- The listing agent received $2,500
- The listing broker received $3,750
- The buyer’s agent received $2,500
- The buyer’s agent’s broker received $3,750
The $12,500 has been split four ways, based on the agreed upon percentage of the commission. Essentially, the agents each received 1% of the home’s sale price in commission, and the brokers each received 1.5%. If the buyer chooses to shop for homes on their own without an agent, then the entire commission would be split between the listing agent and broker, thus giving them a larger sum of money on the sale of the home.
As can be seen in this example, real estate agents must successfully help in the purchase or sale of homes on a regular basis in order to make a living wage. According to the Bureau of Labor Statistics, the average yearly pay for agents was $43,370 as of May 2015. The highest ten percent made $110,560 or more. Usually, these agents work in urban areas with a good housing market and high home prices. The lowest ten percent made less than $21,780. This could be due to a number of factors, including the agent’s negotiated commission rate with their broker, a depressed local housing market, the number of hours an agent devotes to their job, and much more. Typically, the more experience the agent has, the higher their annual wage.
It is important to note that the individual selling the home usually pays the total commission fee. Sellers are allowed to negotiate the commission rate with the broker and agent. The rate is established before the home is put on the market. So, a seller may start with a higher listing price as a way to compensate for the commission fees. Essentially, this means that the buyer is paying indirectly for the commission.
When a buyer and seller are negotiating the sale of a home, a buyer may offer to pay some or all of the commission fees as a way to make their offer more appealing. If the offer is agreed upon, and the buyer has to pay some of the commission, this will be included in their closing costs. As a potential buyer, you should consider this possibility when shopping for homes. Your mortgage lending company will want to know how much you can afford to pay as a down payment on your new home. If you cannot afford to pay the closing costs, you can potentially add these fees to the balance on your home loan.
As a seller, make certain that you are committed to selling your home; if you change your mind too late in the process and decide not to sell, you might still be on the hook for paying the commission. Once there is an offer on the home from a motivated buyer, the seller will have to pay the commission even if they change their mind or attempt to disrupt the closing process by trying to change the sale’s terms, commits fraud, refuses to correct issues with the title, or other issues.
Therefore, it may seem like an unnecessary and added expense to an already expensive process, but real estate agents depend upon the commission from a home sale in order to get paid. It is one of the key factors that motivate them to work efficiently and effectively for the homebuyer or home seller. With a appealing commission rate, a real estate agent will help you to get a good price on a home.
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