How Does A Real Estate Agent Get Paid?

How Does A Real Estate Agent Get Paid?


In the U.S., the subject of someone’s
personal income is always touchy. We think of it as off-limits. With that in
mind, I’m going to go ahead and explain how it works in real estate, just so you
don’t have to ask. Here goes: the short answer is that almost all real
estate agents make a commission when either their buyer client or seller
client closes a transaction. So if that’s enough of an answer for you, then go
ahead and close this window, because the rest of this video just gives some
background, context, and some examples. My name is Jason Allen-Rouman, and I’m a real
estate agent in beautiful Palm Springs, California. This question around how real
estate agents are paid usually comes up in the context of, “why is the real estate
commission so much?” So, to answer that, let’s look at the alternatives. For
starters, we should be clear that real estate agents and brokers provide a
valuable service. After all, we’re not the ones with the property to sell. Rather, we
work for buyers and for sellers. So in some ways, we’re no different from, say, an
electrician or a plumber. We do something for you and then you pay us for it.
However, unlike many service providers, you can’t really standardize how long
buying and selling property takes so finding a reasonable hourly rate is
nearly impossible. Or from our side of it, what hourly rate would we charge that
covers our cost of doing business while also enabling us to make a profit? I mean,
we are in business after all. I suppose we could look to attorneys for some idea,
as they seem to have arrived at a dual- fee structure. In one model, you get
charged a high hourly rate and in exchange he or she does something
specific for you. Typically, you’re either proactively pursuing a goal, like, let’s
say filing patent papers or defending yourself in a lawsuit. All of that
is open-ended, but at least in theory your engagement of legal services will
achieve some particular aim. In the other model, if you were in a position to
receive a large settlement of some kind, well, you guessed it, they
take a percentage, which is sometimes as much as a third or, as we would see it, a
33% commission. Alright. Enough about lawyers for now. Let’s think about how an
hourly rate might work in real estate. If you decided you’d like to sell your
house, you hire an agent on a time and materials basis before the property hits
the open market. Your agent researches recent sales, visits similar houses for
sale, recommends an asking price, has the house photographed, writes a compelling
description, produces literature, enters everything into the Multiple Listing
Service, holds open houses, and, ideally, helps you negotiate the best possible
deal if a buyer comes along. And in that scenario, because you’ve sold your house,
you’ve got some money to pay your agent’s time and materials bill. But what if the
house doesn’t sell? And you decide to take it off the market. How much money
have you spent in this fruitless exercise? I mean, it happens.
You sometimes list your house, and it doesn’t sell, or you change your mind, or
that new job in another city falls through. Well, you get the idea. If we used
an hourly rate, like an attorney’s, we’re talking about several thousand dollars.
And, moreover, at what point would the pressure of mounting real estate charges
influence your decision to lower your price and sell the property rather than
returning it to market later when the timing is better for you? Remember, in a
time and materials arrangement, you’re going to have many of the same fees all
over again when you re-list the property. Or let’s say you’re a buyer and you hire
an agent on an hourly basis to find you a home. After spending months in your
pursuit nothing, and I mean NOTHING, meets your needs.
But now you’ve invested a lot of money in bills from your agent who has worked
diligently to find you a place by researching homes, scouting brokers open
houses, driving you around to properties, and maybe even writing a few
unsuccessful offers. Let me ask you: do you compromise and settle
for a home you don’t really want as a way of avoiding more hourly bills from
your agent? Ask anyone who’s been in a lawsuit and see if they’ve ultimately
settled because of the mounting legal bills, DESPITE being the victim in the
case. Now, do you see how paying a real
estate agent on an hourly basis doesn’t work really well? I mean, you can do it,
but really? So that takes us to the idea of a commission paid only when the
transaction between parties closes. Now before I continue to talk about
commissions and how they’re often structured I need to say two things. First, some agents do work on an hourly and/or flat fee basis. If that’s
important to you, ask around or if your real estate needs are that specific, find
an attorney that practices real estate law in your area. As we’ve established
attorneys are familiar with charging hourly rates and in most states can
engage in the practice of real estate directly. And, second, commission rates are
not standardized and are completely negotiable with an individual brokerage.
I want to emphasize that. It’s against California law for us to present real
estate commissions as fixed or standard or established. They are NOT. An
individual a broker may choose to have a minimum commission rate, but that’s up to
them and it shouldn’t be generalized to mean that all brokers in an area charge
that minimum. If you hear an agent saying commission rates are standard, do me a
favor and call his or her managing broker or even better report them to the
California Bureau of Real Estate. All right. We’re moving on. Commissions are
the norm, so how’s that work? First of all, there are two parties to a transaction:
the buyer and the seller. In nine hundred and ninety-nine point nine cases out of
a thousand, and yes I’m making that statistic up to drive home a point, the
seller has a formal written agreement with their broker
to represent them in the presentation of their property. Included in that
agreement is language stipulating what that broker will charge for their
services. Again, brokers establish what their fee is to represent a seller and
it is typically expressed as a percentage of the total sales price of
the property. That’s the commission, and it’s
calculated on the ultimate sales price, not the asking price, as the asking price
may be higher or lower than the final sales price. No sale. No Commission owed.
Some brokerages have higher commission rates, while others have lower commission
rates. And some have a flat fee structure or some combination of the two.
Investigating prevailing rates is part of the sellers responsibility when
they go to hire someone to be their agent. Okay. Let’s keep going. Let’s say
you are the seller and when you sign your listing agreement there’s a section
that says you’re going to pay your broker X percent commission. Now long
before we had formal REALTOR® associations and multiple listing
services, home buyers would go from broker to broker to see who had what
houses for sale. When they found one, the listing broker would sell them the
property and keep all the commission. But this practice didn’t leave room for a
buyer to bring their own agent to the table to help them negotiate a better
deal. Why? Because home buyers would have to
hire and pay an agent for that service. As we discussed, that could get very
expensive. But this also meant that if you were a broker with lots of buyers,
but no listings to show them, you are losing clients to other brokers. Likewise,
if you had lots of listings, but no buyers, you had lots of unhappy sellers.
Okay. Eventually, brokers realized they could
cooperate with one another. They said things like, “Okay Mr. Buyer’s Agent from
another brokerage, if you bring us a buyer, we’ll give you some of the
commission we’re collecting from that seller and that way your buyer doesn’t
need to pay you.” GREAT! Then the State of California stepped in and said
you can do that, but it has to be up to the seller, not the listing broker to
decide how much of the commission goes to the cooperating broker. This was done
in part so brokers couldn’t favor one broker over another or game the system in
some other way. Alright. That was a lot of information. I’m gonna say it again a
little differently. While the seller and his or her broker negotiates the total
commission rate up front, they also negotiate how much of that commission
the listing broker will share with any cooperating buyer’s broker.
So, if Arnie Agent from another brokerage brings you –the seller– a buyer, your
broker is going to give Arnie’s broker some of the commission. With this in mind,
the age-old question of who pays the agents can be answered. It’s the seller.
Now, we can argue all day long that if there were no commissions, then the
buyer would pay less for the property. And since it’s the buyers money, then
really they’re paying the commission. No. We’ve already established that real
estate agents provide a valuable service. If a seller doesn’t need an agent
because they do all the listing, marketing, and negotiating themselves,
then they are still going to ask the market rate for their property. I mean,
why would they leave money on the table? That doesn’t make any sense. If anything,
without an agent involved, the seller is doing more work himself or herself and
would feel justified in asking for more money for their property. In other words,
the work is still getting done and in the end when you look at the closing
disclosure the real estate broker fees are almost always taken from the sellers
side of the ledger. Of course, since this is negotiable, like just about everything
in real estate, then it’s possible for a buyer to pay the brokerage fees, but that
really is the exception. Now, let’s get to the agent level of the transaction, since
most people deal with their agent and not their broker. The real question
becomes, how much of the commission in a transaction does the agent earn? Well, that depends on a particular agent’s compensation structure
with his or her broker. And it’s not specified in the listing agreement. With
the exception of one large national brokerage that I can think of, most
agents are in what’s called a “split” with their broker. In other words, when a
broker collects a portion of the commission paid by the seller, he or she
then “splits” that portion with their particular agent involved in the
transaction. The seller’s broker has a split with the listing agent, while the
selling agent’s broker has their own split with the buyer’s broker. Now, what I
just said may sound funny to some people, but it makes more sense if you watch my
video about a selling broker in a transaction. All right, back to splits.
These splits generally fall into the range of 50/50, what’s known as an even
split, to as much as a 90/10 in favor of the agent. Now, there are some brokers
that offer a 100% percent split, but then they turn around and charge the agent
all sorts of fees, so it’s not truly a 100% takeaway. Now, how all this
plays out depends upon factors like the volume of business an agent does to how
new they are in the business to how long they’ve been with that particular
brokerage. And again like just about everything in real estate, the individual
agent and his or her broker negotiates their split. It’s important to mention
that most real estate agents are independent contractors and not
employees of a broker. That means the individual agent must pay their own
taxes, health insurance, car expenses, and so on. So just think of any commission as
gross income, not all profit. Now for anyone curious to know what my split is
well…I hope this explains how real estate agents get paid. If you have any
comments or questions, please leave them in the section below, and I’ll do my best
to answer them. Know that you can always write to me personally, if you
need real estate help, and if I can’t assist you myself, I probably have
someone in my network that can. Lastly, if you’re looking for a real estate agent in
Palm Springs or anywhere in the Coachella Valley, we’re here to lend a
hand. That’s all for now. Thanks for watching. :~)

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