I am frequently surprised to learn that people who seem pretty knowledgeable at "the ways of the world" have either no understanding, or worse, misunderstanding about how Realtors get paid nor do they know why it's important to them.
Realtors, like many other occupations, are paid straight commissions - a percentage of the sale price of the home.Â No home sale, no paycheck.Â There's no salary, no company car, no expense account, no advertising allowance, no worker's comp, no company paid health insurance, no paid sick or vacation days. Understand I'm not complaining, I like the system.Â
The process works this way:Â The home seller pays a commission (usually 6%)Â to the listing agent, who pays the buyer's agent, usually half, or 3% of the sale price.Â Â For rentals it's 6% of the first year's total lease payments, split the same way.Â No Realtor makes enough commission on rentals to be worthwhile.Â We do it because we hope to make a friend, who will come to us when it's time to buy or sell.Â
Does it make sense to pay the same percentage no matter what the price of the home? Not really, but that's pretty much the system today.Â It's the same amount of work to list or sell a $100,000 home as a $1,000,000 one.Â If I were designing the system today, I'd make the commission bear an inverse relation to the selling price of the home, say 10% up to $200,000; 8% to $400,000, 6% to $800,000, and 4% for anything over that.Â Maybe those exact numbers are not it, but you get the principle, and some of that is happening in the higher price ranges.
Do I get to put that 3% in my pocket?Â I wish!Â Â First, the 3% is what's called "gross commission".
I only get my "split" from that.Â My broker gets the balance, sometimes after a "franchise fee" of, say 6% off the top.Â Depending on experience and productivity, that will range from 50% to 90%.Â Â Some firms have an annual threshold, beyond which the agent keeps the entire 3%.
Let's take a real-world example.Â Â Suppose we sell a $500,000 home.Â Â A 6% gross commission, split equally, gives each side $15,000.Â Take 6% off that and we're down to $14,100.Â A 75% split gives the agent $10,575 (50% split is $7,050).Â They give probably a third of that to the IRS & state, so now we're down to $6,980.Â If I'm the listing agent I spend up to half of that on advertising, web sites, open house refreshments, and more.Â So realistically that agent puts about $3500 in his or her pocket.Â The buyer's agent doesn't have all those expenses (but still pays about the same in taxes), but a buyer's agent usually works with a much higher percentage of clients who don't buy at all, so the buyer's time is spread over many transactions that don't happen, so no paycheck at all on those.Â Did I mention many Realtors pay a monthly "desk fee" or "IT support fee" to their firm? It ranges from $75 to $200.
Why do you care?Â Because the system keeps the Realtor's focus on making the sale AND making a happy client in the process.Â If we don't do that, we don't get paid.Â
If you're a buyer, don't try to work with more than one agent, at least not more than one at a time.Â One principle is that the agent who first shows a buyer a home is the one who earns a commission from that sale.Â If you're working with two agents, both of whom show you the home you buy, one of them earns nothing.Â
I like the system.Â I get paid when I put someone in the right home for them or when sell their home so they can move on.Â I like to say my job is making people outrageously happy with their home purchase or sale.Â