Real Estate Agent Commission: How Does it Work?
The real estate industry continues to be one of the largest in the country, which means that there is money to be made by real estate agents. Lets see that how much do realtors charge.
According to the National Association of REALTORS®, 5.64 million existing homes and 822,000 newly constructed homes were sold in 2020, and data suggests that final tallies for 2021 will be even higher.
A real estate agent makes money on commissions, not through hourly wages. A successful full-time real estate agent learns to maximize their time to increase earning potential, while part-time agents using real estate as a side hustle set flexible schedules to get the job done.
This article offers a quick overview of how commissions work and how real estate agents get paid.
How Do Real Estate Agents Get Paid?
Real estate agents are paid on commission and, according to Indeed, the average salary of a real estate agent is $95,624.
A real estate agent’s yearly salary will depend on several factors, including the overall number of sales they complete, commissions on those sales, and the percentage of that commission that they pay a sponsoring broker.
How Much is the Real Estate Agent’s Commission?
When an agent is paid on commission, they get a percentage of the final sale price of the property they sold. The average commission for a real estate agent can vary, but it is generally around 6%.
Who Pays a Real Estate Agent’s Commission?
The seller is responsible for paying the real estate commission. A real estate agent will not see their share of the money until the deal is closed, all closing costs have been paid, and the agent’s sponsoring brokerage releases their cut.
Is there a Limit to a Real Estate Agent’s Commission?
There is no cap on how much a real estate agent can make. It is rare for a real estate commission to exceed 6%-7%, but rock star agents have made millions through high-volume sales of luxury homes. With real estate, you ultimately get what you give.
How Does the Real Estate Commission Get Split?
However, 6% is split between the seller’s agent and the buyer’s agent. That amount is then shared with the agent’s broker, usually at a ratio of 60/40 in the broker’s favor.
Let’s say an agent successfully sells a home for $1M. The breakdown would look something like this:
- 6% total commission on the sale ($60,000)
- split between the listing agent and buyer’s agent 50/50 ($30,000)
- 60/40 split between agent and broker ($12,000)
Often, these numbers change with experience, particularly the ratio of the split that an agent shares with their sponsoring broker. Over time, the split may shift in the agent’s favor, or the agent may become a licensed real estate broker themselves and make additional money sponsoring others.
How Commission Gets Split Between Real Estate Agents
The commission is split between the seller’s agent and buyer’s agent right down the middle. Usually, the commission is paid directly to the brokerage, who distributes it to the agent.
How Commission Gets Split with the Broker
The typical commission split between an agent and broker is 60/40 in the agent’s favor. Over time, however, the brokerage fee may decrease depending on an agent’s productivity and experience. Still, the agent will always pay a brokerage fee, even if it’s just 20% of their half.
Can Real Estate Agents Negotiate a Higher Commission Split?
An agent can negotiate a higher commission split with a brokerage the same way they would ask for a raise in a more traditional job. Performance, experience, productivity, and even better offers from other firms are solid arguments for negotiating a higher commission split.
What is the Average Real Estate Agent Commission in California?
The average California real estate agent commission rate is between 5-6%. However, commission on higher-priced home and property sales average 4-5% percent. The seller and agent usually negotiate the commission amount before entering into a listing contract.
The average salary of a California real estate agent is $99,575. However, there is a wide gap in the salary range, with the lowest earners making $24,970 and the highest earners topping out at $123,700 per year.
Can a Real Estate Agent Split their Commission with a Buyer or Seller?
California, and at least 39 other states, allows agents to share their commission with buyers and sellers. It may act as an incentive for the client to work with the agent. Another motivation may include lowering your commission rate. Since there are no set commission rates, agents can negotiate their fees.
Final Thoughts on a Real Estate Commission Works
While being a real estate agent does require hard work, the payoffs can be phenomenal. Since agents work on commission, there is no limit to how much they can make in the industry. Agents set their own hours, work at their own pace, and ultimately control their own commission rates.
An agent gains will experience and be more successful over time, thus allowing them to negotiate lower brokerage fees and higher commission rates. So, their potential for a higher salary increases over time.
For agents working in California real estate, the sky truly is the limit.