Today we’re going to discuss a rather delicate topic. Forget the stories about Realtors walking in on naked people, feuding households, or crazy neighbors. The most taboo topic in the real estate industry is commissions and how they are split.
Many agents might be surprised at how the general public thinks they get paid. Based on the buyer and seller comments that I hear before, during, and after closing, the perception of how much agents get paid is equally skewed.
New Business Models Shed Light on Commissions
In recent years there have been a few new business models for earning a living in the real estate business. Most Dallas-Fort Worth-area Realtors (and certainly those working for large companies) still make their income through commissions based on a percentage of a home’s selling price. They don’t get paid a salary.
Like any sales job based on 100 percent commission, the compensation can be more lucrative than a standard salary. As a self-employed contractor working without job security, the agent is working for free until the deal is closed. Even that is a generous statement. They have monthly expenses to pay regardless of the sales they may or may not be making.
It’s pretty simple to figure out the percent of sales price. On a $300,000 sale, the commission may be 6 percent, which equals $18,000. Let’s take a look at how that would commonly be split up.
A Percentage of a Percentage
Typically, the commission is split between the seller’s brokerage and the buyer’s brokerage. That would give each side $9,000. The agent gets a percentage of that $9,000. That’s correct. They get a percentage of a percentage.
The agent share of their broker’s commission may be 50 percent, 75 percent, 95 percent, or any number in that range. The agent’s split can depend on many factors including experience and number of transactions they complete annually. Many brokerages offer a tiered split structure passed on performance.
A Lot of Overhead
As independent contractors, Realtors pay their own out-of-pocket expenses in addition to the cost to get a property sold. They get paid when a sale is finalized regardless of the amount of time spent working on a sale. Some of the usual expenses paid by the individual agent include:
- MLS Access: Membership and access to the Multiple Listing Service includes quarterly fees and annual dues.
- Lockbox and Scheduling Fees: Most agents use electronic access as well as scheduling services.
- Property Marketing: Professional photography, advertising, signage, printing.
- Association and License Fees: Membership and licensing are at the local, state and national levels. They include mandatory continuing education courses as well.
- Franchise Fee/Desk Fee: This monthly charge to the brokerage covers standard office space and supplies and can sometimes include postage, Errors and Omissions Insurance, etc.
- Car and Gas: Think of that fancy car as the agent’s storefront, lobby and office.
- Referral Fee: Paid to an outside source forwarding potential clients to the agent.
- Transaction Fee: These are often paid on each sale to a brokerage who offers a higher commission split.
- Phone, Internet, Computer, Software: Typical tools the self-employed need to handle the business and accounting aspects of their business.
- Self-Employment Income Tax, Health Insurance, etc.: This can take a hefty portion of anyone’s income.
As with typical sales jobs, the top 20 percent make most of the money. The rest are either just getting by, struggling, or supplementing their income in other ways. Depending on what sources you believe, the average income for a Realtor in Texas is between $41,000 and $80,000 a year – before expenses.
This is just a glimpse inside the financial aspects of selling real estate. Not every brokerage or agent follows the same business practices, incurs the same expenses, or works the same hours. There are various business models all over the Metroplex. Success in the real estate industry involves tenacity, some luck, and a lot of hard work.