3 Factors to Consider When Calculating Real Estate Commissions

It’s a well-known fact that real estate agents work on commission (a percentage of the final deal). Therefore, their revenue is strongly connected to the type of property they sell or rent and the final price they manage to negotiate.

The real estate commission is established in the initial contract signed between the customer (seller or buyer) and the agent or agency. On average, the commission is around 5-6% (closer to six) of the total price paid for the property. Now, depending on the value of the property and the agent’s negotiation skill, the value of the commission may seem overblown. After all, a 6% commission for a property worth $500,000 is $30,000! This is quite a generous amount for one deal, especially considering the fact that realtors work with several customers at once.

However, it’s important to understand that the real estate agent doesn’t cash in the entire commission. In fact, there are several factors that come into play when you calculate commission, such as:

#1: The Commission is Split

If we consider the example above (the $30,000 commission), it’s important to know that it won’t go to just one person (your realtor). In most cases, the amount is split between the agents and brokers representing the buyer and the seller.

Quick note:

The broker also gets a cut for having intermediated the transactions and more (agents can’t work independently or cash in commissions without the support of a broker).

Therefore, in most cases, the $30,000 in commission will be split at least four ways, between:

  • The agent who found the seller and got their listing (aka listing agent)
  • The broker who supports the listing agent (aka listing broker)
  • The agent representing the buyer (buyer’s agent)
  • The broker who supports the agent who represents the buyer (buyer’s broker)

Each of these four entities gets a cut of the commission, but the value of each cut varies from one broker to another. First, the commission is split between brokers (usually a 50/50) and then, each broker splits the commission with their agent(s) according to the rules established in their agency. Still, the most common situations are 50/50 or 70/30 (with the broker getting 70%).

#2: Taxes & Business Expenses

While there are situations where the commission is split between fewer players (so the amount everyone gets is bigger), the final amount is still subject to taxes and business expenses.

Since real estate agents are not standard employees, they have to pay self-employment taxes, which also allows them to deduct some of the business expenses. This includes expenses with:

  • transportation,
  • marketing materials & equipment used to promote the property,
  • insurance and MLS (Multiple Listing Service) fees
  • office supplies, stationery, and others

Overall, when you put everything together, that fabulous amount you thought went directly into the agent’s pocket has quite shrunk.

#3: The Amount of Work That Goes Into a Successful Sale

As we mentioned before, real estate agents are paid by commission. This means they don’t receive a monthly salary and they must get by with the money they make from sales. Furthermore, there is no way of knowing when a deal will be closed, which means real estate agents don’t have a reliable stream of income to support their efforts (they have to plan for darker days).

Plus, in most cases, the agent only gets paid if they find a suitable buyer for their customer’s property and everyone agrees on the price and conditions.

Yet, despite all this uncertainty, a real estate agent will pour hours of work into promoting your property, looking for buyers, and devising sale strategies to up the price (it will benefit both of you). Also, they will organize open house events, bring interested buyers over to see the property, and draft the documents needed for the transaction. Not to mention they will lend you their professional network of specialists (notaries, bank representatives, contractors, and more).

Key Takeaways

The real estate market is dynamic, competitive, and constantly evolving and so are the commissions and fees that come with it. Therefore, depending on your location and type of property, the agent’s cut may seem a bit hefty. However, it is well-earned and, in most cases, it represents the work of several people and agencies.

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