Over a three stretch in 2008-2011, thousands of Realtors left from the profession as a result of the 2007-2008 housing crisis. Ten years later COVID shook up the housing market, leading to huge price gains and big commission paychecks for agents. Today, real estate is still a fantastic career or side hustle despite high interest rates the emerged in 2022.
Considering a career in real estate sales? First it's important to understand how agents get paid.
How Realtors get paid
When an agent lists a home, they earn a commission that is calculated based on the price of the home. Listing commissions can typically range from about 2-3% on average. The seller actually pays the listing commission and buyer agent commission, but generally an agent only earns one side of the commission - except for in the unique and rare scenario of "dual agency" - which occurs when one agent represents both the buyer and the seller.
Let's look at example of listing commission. If a homeowner sells their home for $400,000 home and they've agreed to a the commission of 3%, then the listing agent brokerage will earn 3% or $12,000. Notice that I wrote "listing agent brokerage". That's because the agent themselves don't technically earn the commission, but rather their broker does. The agent keeps a portion of the commission after the brokerage keeps an agreed upon "split".
All brokerage design agent splits differently. However the national average is about 80% - 20%. This means that the agent keeps 80% of the commission on transactions and the brokerage keeps 20%.
So, using the example above - if an agent sells a house for $400,000 at a 3% listing commission and with a broker split of 80%, then the agent will keep $9,600 ($12,000 x 80%).
Agent splits are often dictated by these factors:
- Source of the client
- Type of transaction
- Size of transaction
- Commission cap
- Agent experience
We will explain the commission cap a bit later, but the most important factor in commission splits is the source of the client. If the agent themselves were the procuring cause of finding the lead (home seller or home buyer), then the split is likely to be higher. However, if the brokerage provides a lead to one of their agents with little or no effort from the agent, it is likely that the broker will keep a higher proportion of the split.
How Agent Commission Work When Buying or Selling a Home
The total commission paid by sellers in the US is about 5.5%. You've probably heard that the customary total commission is 6% and that is true. However, all commissions are completely negotiable. In other words, the seller may negotiate the commission with their listing agent or offer a lower commission to the buyer agent. In addition, discount brokerages may ask for significantly lower commissions. For example, SimpleShowing offers a standard commission of 1%.
In general, buyer agent commission is always negotiable. Some agents may discourage the seller from offering a lower commission, but it is ultimately still up to the seller to set the buyer agent commission offered. The total sales commission will be spelled out in the listing agreement and agreed to between the home seller and the listing agent.
It's important to note that commissions also vary by state and city. Some regions charge lower commissions due to the competitive nature of the market or as a result of high (or low) home values.
Listing agents earn commissions by fulfilling these duties as the listing agent:
- Preparing pricing and valuation analysis (Comparable market analysis)
- MLS Listing and real estate app distribution
- Providing Seller disclosure documents and Community disclosure documents
- Responding to buyer agent/buyer inquiries in timely manner
- Formal review of purchase agreement and exhibits
- Preparing any necessary counter offer docs or addendums, as necessary
- Negotiating terms of contract on behalf of seller
- Meeting prospective buyers at property in the absence of buyer representation or if Buyer’s Agent is unable to attend
- Assisting with contract-to-close process related to inspection and appraisal findings
- Prepare appraisal appeal report if property does not appraise for purchase price
- Showing/home tour coordination
- Installation of lockbox and yard sign
- Providing professional, high resolution photography or other marketing assets
Agent fees are one of the largest expenses when buying or selling a home
Homebuyers make a downpayment of 3% - 20% of the home price, but they also have the embedded cost of their agent. Real estate agent commissions are technically paid by the seller, but in effect they are rolled into the home’s asking price.
A consumer could theoretically purchase a home for 3% less than the advertised price if the homebuyer negotiated directly with the seller and their listing agent, instead of hiring a buyer's agent. For example, you could make an offer of $291,000 on a $300,000 home and this would be equivalent to a $300,000 offer from a consumer who is using an agent. This is because a $291,000 offer with no buyer agent commission is equal to a $300,000 with a 3% buyer agent commission. In other words, the net proceeds would be the same to the seller in either case.
How much do top real estate agent earn?
The average agent in the US closes 7 home transactions per year, while the top 5% of agents in the US closes 23 home transactions per year.
The top 1% of agents close 41 homes per year, about 6x as many as the average agent.
So, let's dig into the numbers and to demonstrate what this translates into for income.
If an average agent in a typical US market, where home values are $350,000 closes 7 deals per year and the commission rate is 3%, the agent will earn $58,800 (assuming an 80% broker split).
A top 5% agent who closes 23 homes per year in the same market will earn $193,200.
A top 1% agent who closes 41 homes per year in the same market will earn a whopping $344,400!
What it takes to be a top producers
Most agents in the top 5% have been in the business for an average of 9 years. So, it takes several years to build up a client base while also attracting new clients. The other factor of course is the home values in your local market. Agents in markets like San Francisco and Seattle obviously earn much more per transaction than most of the country. However, with home price increases nationally, agents across the US can expect to continue to earn $100K per year by closing about 13-14 home sales per year.