If you’re looking to buy or sell a home, it’s important to understand how real estate
agents are paid. Agents’ fees are deducted directly from your sale proceeds at
closing and can lower your profit by thousands of dollars. In an effort to help home
sellers, agents and brokerages often advertise a reduced commission rate. While
this might sound tempting, it’s important to understand the math behind this type of
arrangement. This article will walk you through how home sales commission
payments work and how the total amount of your home’s sale is calculated.
Most people don’t give much thought to how real estate agents make their money or
from which side of the deal they are paid. The simplest answer is that the seller pays
the agent, but this isn’t entirely accurate. In fact, the buyer also contributes to how
agents are compensated by paying a portion of their own fees in order to complete
How home sellers pay their real estate agents can vary, but most are paid in the
form of a percentage of the final sales price. The percentage is typically negotiated
and detailed in the listing contract. In a typical situation, if the home sells for
$200,000 and the agreed-upon commission rate is 5%, the agent would receive a
check for $10,000. However, that check isn’t actually theirs to keep. It is first sent to
their broker who then distributes it among the agents that worked on the sale. For
example, the agent might be working with one or more buyers’ agents and each of
those agents could get a portion of the commission, which may range from less than
half to as high as two thirds.
The overall commission payment to an agent can vary significantly based on local
market conditions. Hot markets with robust demand for homes typically lead to
higher average sales prices and a higher amount of commission income. Conversely,
slow markets and sluggish property values can cause an agent’s take-home income
to decrease significantly.
Real estate agents are also responsible for paying their own taxes, just like any other
business owner. As a result, they must track their expenses and submit quarterly tax
payments to the IRS. Additionally, they can claim many of the same tax deductions
as other business owners, including mileage, home office expenses and marketing
While it might seem counterintuitive, a discount brokerage firm like Redfin or Realty
ONE Group offers a different way for an agent to earn a living. Instead of a
traditional commission structure, these firms offer a flat salary for their agents in
exchange for the right to represent home buyers and sellers.
Whether an agent is receiving a commission or earning a salary, the most important
factor in their success is providing exceptional service to both their clients. It takes a
lot of time, energy and resources to sell homes, and in return, the client should feel
they are getting value for their fee.