Real Estate Commissions
I find people are curious about this subject. Real estate commissions are most commonly paid as a percentage of the sales price and paid to a licensed real estate broker for effecting a sale of a property. The percentage is not fixed by law, and is determined by the designated Broker's office policy in each individual office. For the examples in this article, I chose an amount of a $40,000 gross commission and gave examples of where the funds come from and to whom they will go. This is a lot of money. Some people will hear about a transaction, do a couple of quick calculations and presume that one agent attached to the transaction will get a check for $40,000.
To fully answer the original questions, I need to describe the Broker-Agent relationships and the parts (or sides) to a transaction when a piece of real estate is sold.
Real estate transactions have two 'sides'; the Listing Side and the Selling Side (If a single agent represents both the Seller and Buyer on the same property, they are credited with two 'sides' to the transaction). The majority of all real estate transactions involve more than one agent and more than one real estate company. Real estate agents are independent contractors (not employees) who are licensed as real estate agents, or licensed as real estate brokers, and have placed their license in affiliation with a real estate company*. Let's start with a list of possible agent roles in any given transaction.
- Listing Agent (Seller's Agent)
- Selling Agent (Buyer's Agent)
- Referral Agent for listing or selling agent
- Consulting Agent with or without a sale taking place
Although a Buyer can hire and pay a "Buyer's Broker" directly to represent them, the majority of Selling Agents representing the Buyer are paid with the Seller's Agent assigning a portion of the commission paid by the Seller to the Selling Broker who represents the Buyer in the transaction. The Selling Agent is responsible for writing the offer for the Buyer, assists in scheduling inspections and making sure the loan process, or purchase funds are available.
Listing Agent is the Agent who has the contract with the seller to sell the property. This is the Agent who puts the listing into MLS, advertises the property, and whose "For Sale" sign you see at the property. Listing Agents most often offer to split whatever the total commission is with the Agent who represents the Buyer in purchasing the property. That means, in our above example, the Listing Agent expects to be paid $20,000 from the Listing Broker Company.
The first apportionment of the commission funds comes between the two sides of the transaction. $20,000 in our example will go to the Selling Broker and $20,000 to the Listing Broker.
The second apportionment comes from the Broker-Agent relationship. Since there is quite a range from 5% to 50% kept by the Broker to pay for office space, staff, and other overhead. For this article, I am going to use 25%. This means the agent who is associated with the sale will get 75% of the Broker's share, or in the case of our example, will receive $15,000, Which is an amount before expenses or taxes.
Also, many agents first are introduced to a client by referral. If it is a referral from another Licensed Real Estate person, when escrow closes, a referral fee will be paid to the referring agent. In our example of a $40,000 Commission, the amount of the referral paid will usually range from $4,000 to $5,000. This is taken off the top before any split between Broker and Agent. So if I use $4,500 as the referral fee and recalculate this transaction, then the Agent would receive $11,625.00 ($20,000-4,500 = $15,500 x 75% = $11,625). An agent has additional costs (almost never paid for by the Broker company), such as automobile, phone, computer, and extra promotional costs. The net to the agent before taxes will be under $10,000.00. Their taxes of course will be based their gross annual income and on how many of transactions they do in one year. Since it's not hard to get into a 40% tax bracket, it is not at all unrealistic to expect that the agent actually netted around $6,000.00 on that $40,000.00 commission. Obviously, there are many variations and some agents will net more and some less.
A consulting Agent. Not all agents will do consultation work for a fee, but many do and can charge for this work with a flat fee, or a percent of the transaction. The same divisions will come into play, excepting that there is usually only one side involved and one side paid.
I also believe that the Buyer pays the commission even if it is indirect. For, although the commission comes out of the Seller's proceeds, the seller has gained the proceeds because the Buyer "paid" for the house and that payment included enough for the seller to pay commission.
*A real estate agent who is licensed only as an agent, and not as a broker, cannot sell real estate on his or her own. They must place their license with a licensed real estate Broker to sell property. A licensed real estate broker may work independently, or place their license with another broker (referred to as the 'Designated Broker' by the California Department of Real Estate), working together with other agents and brokers under that Designated real estate broker's license. For the purpose of this article, I am referring to any real estate licensee working under another Broker's license as an 'Agent,' even though he or she may hold a Broker's license.