Does anyone know how Realtors really get paid? I know people love to complain about Realtors and how they "get 6%" of the sales price, but that is not the whole story. It's barely any of the story. I love to beat up on any industry with grossly overpaid and inefficient workers as much as the next person, but only if it is merited.

First, each Realtor will only get their share of the total commission. If the total commission is 6%, then each Realtor gets 3%. But they really don't get 3% each. Each Realtor's employing broker will take their share first. Let's assume that our imaginary Realtors in this story are on an 80% split, that means they each get 2.4% after their employing brokers take 20%. We are already a long way from 6%…

And as for the listing agent we'd have to deduct expenses to further show an accurate picture of their earnings on each deal. Since it is part of a listing Realtor's job to advertise the home for sale, and those costs come out of the Realtor's pocket BEFORE ANY EARNED COMMISSION, we have to net those costs out as well.

Let's assume, and this varies, that the average Realtor spends about .5% to 1% of the sales price to advertise (this percentage may go way up on a smaller sales price, and it may go down on a larger sales price) the home for sale. So now the listing agent's net commission is down to:

3% gross
x 80% split
=2.4%
-.5% to 1% ad costs
=1.4% to 1.9%

On the sale of a $600,000 home, for example, $8,400 to $11,400 is a final net commission.

There are lots of variables to this story, so we could debate it endlessly. I know that a seller paying a 6% commission for a house that sells in a week with multiple bids sounds wrong, and some think the seller should pay less in this situation. But would a homeowner pay 9% for the house that sits on the market for 6-9 months and takes an enormous amount of marketing costs that comes out of the Realtor's pocket? Likely not.

So some Realtors get sales that are quick and easy, some get sales that take a long time and involve a lot of hours and cost, and some work with clients for numerous hours only to never get paid because the house never sells or the buyer buys through someone else! So when you average it all in, I don't know that Realtors are as overpaid as everyone thinks they are. As a matter of fact, the average Realtor makes a very modest living.

When I choose a Realtor I want to work with someone who makes a LOT of money, and I hope they profit greatly from their exchange with me. When you work with successful Realtors you get successful results. When you beat up on a Realtor for making too much money, or if you ask them to cut their commission, I am not sure you are doing yourself a favor. Buyer's agents are less likely to show a house that offers a reduced commission, and selling agents won't have as much inducement to spend as much money on marketing when they are getting paid a reduced commission.

Now, different models of selling and buying real estate (online Realtors, fee for service Realtors, For Sale By Owner, etc.), and different models of compensation for those different ways of buying and selling real estate, is a whole different discussion, and one I will blog about in the near future.

But for now, it seems 97% of all real estate is sold in the traditional way, with traditional Realtors, being paid traditional commissions, and trying to deviate from that may cause you to end up shooting yourself in the foot.

Tags: realtor, realtor commission

This entry was posted on Tuesday, June 8th, 2010 at 6:48 pm and is filed under housing values. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.