Mysteries-How Do Agents Get Paid?

Real Estate Mysteries...
How Do Real Estate Agents Get Paid?

Provided by Jay Burnham

Home sales have been hot around the country during the past few years. So many people believe that real estate agents are getting rich. But, statistics tell a different tale. According to the National Association of Realtors, a typical Realtor earned $10,000 in 1948. In 1996, the median gross income for a Realtor was $33,500.

Granted, these are national statistics, and nationally, there's a wide variation in home values. An agent working in rural Tennessee, where sale prices are relatively low would have to sell a lot of homes to keep pace with a successful real estate agent working in the costly Silicon Valley. There's usually a direct correlation between price range and an agent's income: the higher the price, the higher the income.

Guaranteed salaries are rare in the residential resale business. Most real estate agents work for a commission, most often a percentage of the sale price of the home being sold. Agents usually don't receive any up-front compensation for their efforts. Instead, they are paid when the sale goes through. If a deal falls apart, the agent makes nothing for his or her efforts.

In a conventional home sale, the seller pays the commission. It is negotiable, but is usually in the range of five to seven percent of the sale price. The seller's broker typically shares the commission on a 50-50 basis with any other broker who finds a buyer for the property. There is often another commission-splitting arrangement which occurs between the brokers involved and the agents who work for them. It is often these agents who work directly with the buyers and sellers to consummate the transaction.

For example, let's say you're selling a house for $300,000 and you have agreed to pay your listing broker six percent of the sale price as compensation for completing the sale. The commission in this case is $18,000. If another broker is working with the buyer for your house, that broker will receive $9,000 at closing, leaving $9,000 for your broker.

Expenses are usually deducted from the commission to pay overhead costs before the agents are paid. Overhead includes such things as the cost of running the office and advertising properties. So by the time your agent actually gets paid, it's likely not to be anywhere near the six percent you agreed to pay for his or her services.

Also, agents incur expenses as a cost of doing business. Typically these expenses include such things as a decent car, gasoline, a computer, access to the Multiple Listing Service, errors and omission insurance, to name a few. Agents are also responsible for paying their taxes, medical insurance, establishing their own retirement plans and paying the salaries of any assistants that work for them. One broker calculated that she would have to earn over $200,000 in gross commissions a year to equal the $80,000 annual salary her daughter earned at Xerox when all the benefits and costs were factored in.

FIRST-TIME TIP: One may wonder why agents choose to work long hours with no guaranteed compensation, under the continual threat of deals falling apart. The most successful agents are those who love the challenge of putting deals together. They have a strong entrepreneurial spirit and they understand that to get ahead requires a business plan.

THE CLOSING: As a consumer of real estate services, you'll have the greatest success if you work with a dedicated professional who puts your needs first, manages his or her finances well, and who has made a long-term commitment to the business. The easiest way to find such an agent is to ask a trusted friend for a recommendation.

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Dian Hymer is author of "Starting Out, The Complete Home Buyer's Guide," Chronicle Books, Revised 1998.

Copyright 1998 Dian Hymer

JAY BURNHAM, VP
Coldwell Banker Residential Brokerage
PREVIEWS International® Property Specialist
54 Dodge Street
Beverly, MA 01915
978.233.2828

Designations Earned: CRB, CRS, GRI, RECS, SRES