How Do Realtors Really Get Paid?

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.

Commission split

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%.

The listing agent

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.

The numbers

Let’s assume, and this varies, that the average Realtor spends about .25% to 1% of the sales price to advertise (this percentage may be higher on a smaller sales price and it may be lower 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%
-.25% to 1% costs (ads, open  house, catering, fliers, postage, etc)
=1.40% to 2.15%

On the sale of a $600,000 home, for example, $8,400 to $12,900 is a final net commission. It is pretty easy to put 80-100 hours into each deal, after you consider open houses, marketing, showing the home, fielding questions from other realtors, negotiating offers, etc. So that is about $100/hour, on average, which is far below the price of a good lawyer, and for a transaction that is just as complicated as a legal issue! Realtors play many roles, such as home inspector, marketing person, realtor, lender, psychologist, financial adviser, and more.

Should commissions vary?

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 think Realtors are as overpaid as everyone thinks they are.

The average realtor

As a matter of fact, the average Realtor makes a very modest living. And when you consider the round the clock hours and the weekends that Realtors have to work, and having to subordinate your personal life to your professional one as a Realtor, the compensation becomes even more modest. Think about your own salaried job where you quit work in the evenings and have the weekends to yourself to spend time with friends and/or family. How much more money would you need to be paid to give all of that up?

Tax implications

There are also tax implications to consider. Almost all Realtors are independent contractors, and as such they pay higher taxes because they have to pay both sides of the self-employment tax for Social Security and Medicare, whereas salaried W2 wage earners only pay one side of those taxes. This means most Realtors pay a minimum of 42% of their taxable incomes in taxes. And successful Realtors, who are presumably the ones who clients want to hire, pay at even higher rates. And Realtors are responsible for the cost of their own health insurance, which is another fiscal drain on the final compensation a Realtor gets.

How to choose a realtor

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. Successful Realtors you get successful results. Asking a realtor to cut their commission may not be 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 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.