How Do Realtors Get Paid?

Real Estate Agent Responsibilities

Listing Agents / Brokers

Legally speaking, only brokers can list homes. So, while you may work with a listing agent and agree to the terms of the deal, their broker legally holds the listing. What’s more, all commissions flow through brokers, on both the buy side and sell side of the transaction. This isn’t super important to know, as a consumer, but it’s something most people don’t know and it’s somewhat interesting.

Listing agents represent their customers (sellers). Their typical fee is 5% to 6% to list and market a home. Prices are negotiable and vary by market, based on local custom. For example, homes for sale in Los Angeles are generally listed at a 5% fee. It’s illegal for real estate agents and brokers to collude and fix listing fees; a practice that violates of antitrust laws.

Some discount brokers and for sale by owner (FSBO) companies agree to be paid less than the local norm for listing a home. However, low listing fees can be problematic as there is very little commission left over to split with buyers’ agents. What’s more, with less money on the table, discount brokers are less likely to spend what is required for professional photography, advertising and the myriad of other expenses needed for properly marketing and selling a home.

So just how are homes marketed? Marketing and advertising budgets are deployed the following ways.

Advertising

  • Print publications like newspapers and specialty publications
  • Personal website
  • Office website
  • International syndication (especially for luxury properties)
  • Billboards
  • Internet advertising
  • Direct mail
  • Yard signs
  • Mailers
  • Premium placement on real estate portals
  • Television
  • Social media
  • Directories
  • Telemarketing
  • Flyers
  • Yard signs

Marketing

  • Local MLS (annual membership fees)
  • Property photographs
  • Video
  • Copywriting
  • Open houses
  • Home staging

Buyer’s Agents

As explained above, agents who represent buyers get paid a portion of the proceeds of the listing fee. Buyer’s agents incur marketing and advertising expenses, too; all agents need to spend money on advertising to gain market share, attract customers and increase awareness of their brands.

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Procuring Cause

When you ask a buyer’s agent to show you property, you’re implying that you’ll eventually write an offer through that agent. “Procuring cause” is the complex process that determines which buyer’s agent is entitled to the real estate commission when a buyer works with more than one agent.

Generally, it's the agent who actually writes the offer who gets paid. You might ask an agent to spend weekends driving you around, sharing knowledge and helping you to select a home. Then you switch to another agent who shows you the home of your dreams. This agent actually writes the offer for you when you decide this is the property you want to buy.

In this case, the first agent would most likely not receive any commission or compensation for her time and effort.

Types of real estate agents

You may hear the terms ‘real estate agent,’ ‘Realtor,’ or ‘brroker’ used interchangeably. But there are some key differences between these professionals.

Real estate agent vs. Realtor

All Realtors are real estate agents or brokers. But not all real estate agents or brokers are Realtors.

Realtors are members of the National Association of Realtors (NAR). And the Realtor trademark is intended to stop agents who aren’t Realtors from claiming they are.

The NAR would say, with some justification, that its members have greater expertise (they have to pass additional exams) and are held to higher professional standards than other real estate agents.

Real estate agent vs. broker

A real estate agentis someone who has passed his or her state’s relevant exams and who’s been licensed to practice as an agent.

A real estate license is the lowest level of qualification for people to facilitate the buying and selling of homes.

Each state sets its own exam standards and continuing education requirements. It’s easier to get a licence in some states than others.

A real estate broker has gone the extra mile and taken additional exams. So he or she should — theoretically — have greater knowledge and expertise than an agent.

And a broker is more likely to have a senior post in a real estate brokerage, often managing other agents’ activities.

The Bureau of Labor Statistics reports the national median income of a real estate agent was $51,220 in 2020.

By contrast, the BLS also found real estate brokers tend to make about $10,000 a year more than sales agents.

How the real estate agent commission is set

Realtor Kevin Deselms says the commission percentage is based on several factors. This can include local real estate market conditions.

“But the amount is often based on negotiation between the seller and the listing agent or the agent’s brokerage,” he says.

In other words, the commission is negotiable. And some agents are willing to give discounts, either within the listing agreement or later.

In fact, about three out of five sellers get a discount on their agent’s commission.

“Commission rates have been trending down in recent years,” says real estate broker Matt Buttner.

“This is mostly because of the internet and technology,” he says. “The MLS now automatically syndicates the listing out to real estate websites like Zillow and Realtor.com. So a listing agent’s job is easier.”

Discounts are given for many reasons.

“Say, for example, a client is selling one house and buying another using the same agent. In this case, the agent is more likely to offer a discount,” says real estate attorney and Realtor Bruce Ailion.

“Or say the property is in a hot market and competitively priced,” Ailion says. “It might take less work to sell. That could lead to a discount.”

How commissions have changed over the years

Since the early 1990s, Realtor commissions have seen a fairly steady decline. In 2021, the average commission was 5.5 percent — down from more than 6 percent in 1991.

This isn’t to say the total amount Realtors earned decreased, however. In strong selling markets, home prices are high and sellers receive multiple offers. This allows more room for negotiation on the commission, so Realtors may accept a lower commission to earn a higher amount overall.

As the market slows down, Realtor commissions may rise again and become less negotiable. Even so, a seller with a  high-priced listing may still be able to negotiate a lower commission more effectively.

Are Realtors overpaid?

The median income for Realtors was $51,220 in 2020, according to the U.S. Bureau of Labor Statistics. Median income represents the middle of the scale: Half of all Realtors made more, half made less.

Though home sellers may feel that Realtor fees of up to 6 percent are too high, Duffy argues that they’re not high enough. After all, a lot goes into listing a home, such as:

  • Performing a comparative market analysis to establish a competitive price
  • Arranging for photo shoots, sometimes including aerial shots via drone
  • Writing descriptive listing copy to attract interest from other Realtors and potential buyers
  • Providing staging guidance
  • Showing the property multiple times to prospective buyers
  • Hosting open houses on weekends
  • Providing yard signage
  • Making sure listings are populated on all major property search websites
  • Helping the seller review and negotiate buyer offers

When an offer comes in, the listing agent negotiates on behalf of the seller, often presenting one or more counteroffers. And with the volatility of the current market and record low levels of inventory, Realtors frequently deal with multiple potential buyers to help you get the most out of your property.

Average real estate commissions by state

Overall, the national average Realtor commission in 2021 was 5.5 percent, according to data from Clever. In most states, the commission ranged between 5 and 6 percent. But in states like California and New Hampshire, where expensive properties abound, the commission was typically under 5 percent. Find the average commission in your state in the table below:

State Average commission rate
SOURCE: Clever
Alabama 5.61%
Alaska 5.25%
Arizona 5.36%
Arkansas 5.91%
California 4.92%
Colorado 5.50%
Connecticut 5.41%
Delaware 5.75%
Florida 5.38%
Georgia 5.87%
Hawaii 5.25%
Idaho 5.55%
Illinois 5.21%
Indiana 5.87%
Iowa 5.90%
Kansas 6.00%
Kentucky 5.73%
Louisiana 5.19%
Maine 5.45%
Maryland 5.08%
Massachusetts 4.97%
Michigan 5.98%
Minnesota 5.68%
Mississippi 5.54%
Missouri 5.92%
Montana 5.50%
Nebraska 5.29%
Nevada 5.00%
New Hampshire 4.83%
New Jersey 5.18%
New Mexico 6.21%
New York 5.11%
North Carolina 5.45%
North Dakota 6.00%
Ohio 5.84%
Oklahoma 5.89%
Oregon 5.19%
Pennsylvania 5.60%
Rhode Island 5.15%
South Carolina 5.83%
South Dakota 5.00%
Tennessee 5.56%
Texas 5.78%
Utah 5.17%
Vermont 6.00%
Virginia 5.15%
Washington 5.17%
West Virginia 5.54%
Wisconsin 5.93%
Wyoming 5.48%

Real Estate Commission and Taxes

One thing a brokerage will never do is deduct taxes from your commission split. As an independent contractor, it’s up to agents to pay taxes on their own. You’ll need to carefully track all of your income and expenses. Since the IRS considers real estate agents to be self-employeed, you’ll need to pay estimated taxes every quarter.

Understanding “Procuring Cause”

If you’re in the market to buy, then you need to understand how “procuring cause” works. This is a rather complex process that determines which buyer’s agent gets paid the commission if you work with more than one agent. Only the agent who writes the offer that leads to the home sale gets paid. If you hire one agent to show you different homes and share their knowledge, but then hire another one to write the offer then that first agent gets nothing for their hard work. To protect against this, most buyer’s agents will ask that you sign an exclusive agreement with them. This binds you to the agent, meaning that they will be paid the commission for any sale, even if another agent writes the offer letter.

However, procuring cause can get a little complicated as each state’s realtor association has its own guidelines for establishing procuring cause. It can sometimes happen that the agent who wrote the offer letter gets the commission, despite you having signed an exclusive agreement with an earlier agent. You can risk getting yourself into trouble if you purchase a home through a different agent than the one you first signed an agreement with. The best way to avoid this is to be upfront with every agent you meet about who represents you. Take some time to interview different Exclusive Buyers Agents before finding the one that’s right for you. 

What If a Home is Listed As For Sale by Owner?

Sometimes, people list their property as For Sale by Owner in order to reduce the costs of listing fees or paying an agent. However, if a buyer who is represented by an agent purchases the property, the seller is still generally expected to pay the buyer’s agent commission. In this instance, sellers will often include a clause that determines the amount they will pay the buyer’s agent upon the sale of the home. This amount is usually in the range of 2%-4%, but as mentioned above, buyer’s agents should be diligent in ensuring their commission is covered in writing. 

It’s important to remember that real estate agents do plenty of hard work in order to guarantee the satisfaction of their clients and act in their best interests. They deserve the commission that they make, so due diligence should be taken when navigating the payment of commissions to ensure that no conflicts arise. 

While there are multiple costs included in a real estate transaction, agent fees tend to be the single largest expense. Because of this, it’s important to have an understanding of who is expected to pay what. Although the money for the buyer’s agent commission is technically coming from the seller, this cost is nearly always factored into the price of the home, which means that contrary to popular opinion, the buyer usually ends up being the one footing the bill. 

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