How are Realtors Paid?
Realtors earn their money on commission. A Realtor only gets paid when they sell a house. Most home buyers and sellers don’t truly understand how commissions work. Let’s see how it breaks down.
Mr. & Mrs. Seller decide they want to sell their home and call a Realtor to list their property. Jane Realtor advises Mr. & Mrs. Seller that her companies commission rate is” A”% and that half of “A” will go to her company and the other half of “A” will go to the cooperating company, which is the company that brings in the buyer.
Now, how much of that commission the Realtor actually takes home depends on a few things. The main thing is that if a Realtor does not have a Broker’s license then the Realtor must work under the supervision of a licensed Broker. When working under a Broker it’s common for a Realtor to pay 30 to 50 percent of his or her commission to the Broker/company which reduces the amount of take home to the Realtor. The commission is based on the sales price, half of “A”% x sales price. Remember it is only half of “A” as the listing Realtor/company gets the other half.
So let’s pencil this out with a hypothetical total commission of $10,000.00. The buyer’s Realtor/company will receive $5000.00 (half of “A”) and let’s say the Realtor has to pay 40% to their Broker/company. So, $5000.00 x 40% = $2,000.00 to the Broker/company which leaves the Realtor with $3,000.00. Sounds simple right? Not quite, the Realtor has many costs associated with doing business; fees to the MLS (Multiple Listing Service), E & O Insurance (Errors & Omissions Insurance which is required by law), fees to maintain their real estate license, fees to the National Association of Realtors, the California Association of Realtors, their local Association of Realtors, in some cities the Realtor must purchase a business license, there is the expense of gas, marketing & other expenses that the consumer doesn’t realize.
As you can see there are a lot of costs associated with being a Realtor and how that commission is split and the actual take home for the Realtor is not as simple as it seems. Real estate is an incredibly competitive business where very few Realtors are likely to get rich.
The average salary of Realtors (in my opinion) doesn’t change that much between hot and cold markets and I believe that’s because in hot markets, the profession is flooded with real estate agents who think they can make a quick buck. With so many agents in the field, it limits how many homes any individual agent can sell. In a colder market, fewer total homes are sold, but fewer agents are selling them, so the earning potential evens out.
Hopefully, this sheds a little light on how Realtors get paid.