How is real estate commission split? How real estate agents split commissions with brokerages and use it to cover expenses like Realtor association dues.
Q: I’m a real fan of your column, but this article on how much commission real agents make is extremely misleading.
From the way I read the column, it looks like the agent representing the seller walks away with that 5 to 6 percent of the sales price in his or her pockets. The truth is that there are huge expenses to be covered when listing a home for sale, all of which come out of the listing agent’s pocket, including advertising the property, any photos or videos that need to be taken, other materials for the showings and open houses, and the broker’s time.
And, most of that 5 to 6 percent commission gets split by at least four people, and sometimes six, if referral fees are involved. First of all, the fee is split in half between the listing and selling broker. So, each brokerage company (listing agent and buyers agent) gets 2.5 to 3 percent of the sales price.
The individual agent then splits that with his or her broker at varying amounts, sometimes in half, so the agent is now down to 1.5 to 2 percent of the sales price. For that money, the broker provides a brick and mortar office, copy machine, and a host of other services.
Add to that the agent pays national Realtor association dues, state Realtor association dues, local association dues, electronic key fees, car expenses, and errors & omissions insurance, among other expenses.
Sure, there is some room to breathe, maybe, for some people. But, not a lot. Agents won’t negotiate commissions because if they did, they’d be working for free. And, like everything else in life, with discount brokers you are likely to get what you pay for.
There is a reason why people continue to pay 5 to 6 percent to real estate companies – and not directly to the agents. It’s because they want it done right.
Thank you for listening. My suggestion is to research and write another article presenting this side of the story.
BTW: I do acknowledge that not all agents are worth what you pay them, but I’ve been a Realtor since 1987 and the majority are. Thanks for all your information. I really enjoy it and it is often very useful.
How Is Real Estate Commission Split?
A: Thanks for your question, and for breaking out how agents get paid.
You’re right – there’s a strong misconception that the listing agent receives all, or the majority, of the commission. As you note, the buyer’s agent and seller’s agent each receive roughly 25 percent of the commission that’s paid, or 1.5 percent on a 6 percent commission. The brokerage companies divide the rest, typically 1.5 percent each.
Rarely, the commission that’s paid is split unequally between the parties. When that happens, sometimes the buyer agent receives more (because the seller is trying to attract more buyers and, well, money talks). But, usually, the commission is split equally.
Expenses Real Estate Brokerages and Real Estate Agents Pay
You raise a good point about the expenses that go into running a real estate brokerage. In addition to the expenses of running an office (including advertising, an office lease, signage, phone numbers, MLS access and technology, among many other costs), brokers need to spend money to train agents, hire support staff, and keep the agents that join them. Some of the documentation expenses are now being passed along to the buyers or sellers.
Being a real estate agent is expensive, too. As you point out, there are national, state, and local dues to pay, office expenses (some real estate companies charge agents for use of office equipment, copying documents, and the time allocated by support staff), insurance premiums, outside advertising expenses, and the costs of wining and dining clients.
The truth is, there’s plenty of money in these deals for agents (on both sides) that are good, that hustle and that work hard. If you’ve been in the business for 30+ years, then you know how to do all three.
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Find a Real Estate Agent That Has Your Interest At Heart
How Do I Find the Best Real Estate Agent?
Sell Your Home Without a Real Estate Agent: Use a Multiple Listing Service
Can Real Estate Agent Help With Foreclosure Home Purchase?
Ilyce, I think your original article (unless it’s been updated) was fair in the first place, and you’re probably being a little too conciliatory to this realtor. One fact that’s not as well known is that in foreign countries, these broker fees are a LOT lower. In the UK, for example, it’s almost exactly half of the USA’s price, 2-3%. Somehow, the real estate industry there marches on, without those brokers having to eat cat food to survive. Some of the cost structure in the US is simply unnecessary, and in other cases consumers do have more negotiating leverage.
As you note, in the US, the vast majority of brokers absolutely refuse to negotiate their commissions. If there were fewer of them, it’d almost be cartel-like price fixing. In most other businesses, you can find some young gun willing to prove themselves for less and build their book of business, or figure out how to reduce the workload for your broker in exchange for them lowering their fees (see: stock trades). But as it stands now, any defense of the current system from brokers benefitting it really ought to start with them explaining why they need to be twice as expensive as the (presumably just as hardworking) brokers in the UK and other developed countries.
All the best,
Thanks for the comment and the insight. It’s true that in other countries, commissions are often more negotiated and are generally lower. Commissions are complicated and there is a common misunderstanding about how they are divided between agents and their brokers. As often as I explain it, or any complicated financial concept that people don’t use often, there are always ways to explain it better.
Let’s catch up soon!