May 1, 2017

How Much Do Realtors Make

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The median pay of a real estate agent is $45,610. Most realtors work on commission and only get paid when a house sells. Learn how the business works.

Just how much do realtors make and how are they paid? You'll want to know this answer as you go through the home buying process.

The costs that accompany buying a house may seem extreme. If your head spins at the thought of the different costs involved, you aren't alone. There's a big one that doesn't have anything to do with the loan - it's the amount you'll have to pay your realtor if you use one.

According to the National Association of Realtors, 88% of homebuyers used a realtor in 2015. It does make sense, as realtors are helpful. They have access to the freshest listings. They also have a thorough understanding of the home buying process. They know what to look for and what to avoid. Why wouldn't you use their expertise?

How Realtors Earn Their Way

Many realtors work strictly on commission and make their money on the final sales price of the homes they help sell. They don't receive a salary. They could work for you for weeks or months looking for a home. If you don't find and/or purchase a home, they aren't paid.

Realtors Median Salary
Realtors Median Salary © CreditDonkey

Real estate agents make a median pay of $45,610, according to the U.S. Bureau of Labor Statistics.

Certain realtors work for discount brokers. Sometimes, these brokers offer a small salary in exchange for lower commissions. Each brokerage differs, though. There is no standard across the board.

Many people wonder if, as a homebuyer, do you pay the realtor's fees? The answer is tricky. In reality, you don't pay it. You are not the one physically handing over thousands of dollars to the realtor. However, there is a catch. We will discuss it below.

The Seller's Role

Technically, the seller pays the real estate agent fees. At the closing, the closing agent usually takes the agent's fees directly from the proceeds of the sale. This suggests that the seller pays the agent. However, most sellers increase their sales price enough to accommodate the cost of the real estate agent. Of course, the price of the home must align with the value, so there is a little give and take.

There is one exception to this traditional arrangement. If the seller owes close to the amount of the value of the home, there isn't room for agent fees. In this case, the seller may ask the buyer to split the real estate commission as a part of the deal. It doesn't mean you must agree to it, but the seller may hold out for someone willing to take this deal.

How Much Are the Realtor's Fees?

Real estate commissions vary by area and realtor. It is against the law to have flat fees or non-negotiable percentages. All agents must negotiate. This doesn't mean they must take the work, though. They obviously need to make a profit to make it worth it.

How Much Do Realtors Make?
How Much Do Realtors Make? © CreditDonkey

Today, the general average cost to use a realtor is 6% of the sales price. This is the agreed-upon price between the buyer and the seller. It is not the asking price. Either way, this may seem like a lot. Let's say you have a $200,000 home to sell and you get the full asking price:

6% of $200,000 = $12,000

That could be a hard pill to swallow. Here we will show you how they split the money up and just what it covers.

Tip: You should understand the principal-agent problem. Simply put, a real estate agent has more information regarding the real estate transaction. He can use this information to persuade you one way or another. Because he is the "expert," you might do what he says. If this means selling your house for less than you really wanted to, you could lose money. When he uses words like "prices are plummeting" or "the housing market is slow," you are more apt to do what he says and keep your price low too. In reality, a $5,000 higher sales price only means $150 in commission to him. He doesn't have much of a reason to work harder or wait for a higher bidder. However, you stand to gain $5,000. Staying informed and knowing the true value of your home can prevent this problem from occurring.

The Difference Between a Broker and an Agent

First, you must understand the difference between a real estate broker and a real estate agent. The broker is the company the agent represents. No one can pay the agent directly - this is prohibited. Any agent must work for a broker and both must be licensed. The commissions realized from the sale of a home go directly to the broker on the buyer and seller's side. The broker then pays the agents accordingly.

The Types of Real Estate Agents

This is where it gets tricky. There are several types of agents involved in the sale/purchase of a home:

  • Listing agent: This agent creates the home's listing. He represents the seller in the process. However, he also provides the buyer with appropriate details regarding the property. Everyone must practice honesty in the transaction.

  • Buyer's agent: This agent brings the buyer to the home. They see the listing that the listing agent created and determine if it is a good fit for their buyer.

  • Dual agent: If one agent represents the buyer and seller, it is a dual agent. This is rare because of the conflict-of-interest issues it may cause.

The listing agent negotiates the terms of the commission before listing the home. The buyer's agent receives payment according to the listing agreement. Generally, listing and buyer's agents split the commission evenly. This is always up for negotiation, though. It depends on the common practice in your area.

Paying the Various Agents

Going back to the $12,000 commission from above, let's say you have a listing agent and a buyer's agent. Each is from different brokers. The listing agent's agreement with the seller is a 50/50 split. This means each agent's broker receives 50% of the $12,000, or $6,000.

This does not mean each agent actually receives $6,000. The agent has an agreement with the broker regarding what he receives. New agents, or those with little experience, usually receive smaller commissions than more experienced agents. Every agency differs, though. Some offer 50/50 splits, while others offer a higher percentage to the agent than the broker receives.

In this example, let's assume a 50/50 split for simplicity. Each broker (listing and buyer's) received $6,000. In a 50/50 split, each agent then receives $3,000. From there, the agent must pay taxes and cover any business expenses that go along with his job. Many realtors work out of their own home, which means more expenses than those who work in their broker's office. In reality, they don't walk away with $3,000.

There is the rare circumstance when the listing agent also finds the buyer. In this case, there is only one broker and agent receiving payment. The commission remains the same. Let's use the above listing agreement example of 6%. If the home sells for $200,000, the listing broker keeps the entire $12,000 commission. He then pays the listing agent as agreed upon in the listing agreement. Because there isn't another broker splitting the commission, this realtor would receive a higher commission. If the listing agreement was 50/50 like above, this realtor would receive $6,000 rather than the $3,000 from above.

Paying When a House Doesn't Sell

As we discussed above, realtors don't usually receive payment until a house sells. This doesn't mean when the buyers and sellers sign a contract. It means when you close on your loan and pay the seller. At the closing table, the broker receives payment. There are some cases, however, when the seller is still liable for the agent's fees. This only occurs when there is a suitable offer from a qualified buyer, but the seller doesn't complete the sale.

This only happens in rare cases and is usually a result of a seller's fraudulent activity. It may also happen if the seller suddenly refuses to sell the property. Brokers may also require payment if the seller demands terms not in the original listing agreement. Lastly, if the seller and buyer agree to cancel the sale, the broker may still require payment. This helps them cover the cost of the work they already put into the process.

The Bottom Line

Real estate agents work a highly volatile business. They usually go through cycles of highs and lows. Sometimes they go many months without making a dime. Other months they make a ton. They do have the advantage of limitless income as opposed to a salaried position. However, most of them work hard for their money.

Realtors do provide buyers and sellers with a great advantage. It helps to have someone on your side helping you make the right decision. This home could be the largest investment of your lifetime - take all the help you can get.

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