Selling a house can be a great way to free up some cash to finance the upgrade of a larger house or to cash-in on its appreciated value. Most likely you will either buy or sell your house using an agent. The 2015 Profile of Home Buyers & Sellers published by the National Association of Realtors, states that 92% of sellers & 87% of buyers used a realtor or broker for the most recent real estate transaction. While real estate agents might love to help you sell or buy a house, they can only do so much.
Difference Between A Real Estate Agent & Real Estate Broker
Before going into detail about how real estate agents earn income from a house sale, it’s necessary to distinguish the difference between a real estate agent and a real estate broker.
Real Estate Agent- A licensed salesperson, employed by a real estate agency, who represents people wanting to buy or sell a house. Most agents only earn an income, paid by a broker, once their client buys or sells the house. Very few are paid a base salary.
Real Estate Broker- A licensed person or agency that normally represents clients selling real estate property & is paid a commission when a property is sold. A broker can employ real estate agents & distributes the sales commission to the selling & buying real estate agents.
To better understand the difference between the two positions, “Jane Doe” can be a real estate agent for the broker “John Smith Realty, Inc.” If Jane is going to list a house, the sign in the front yard will have the name of the broker “John Smith Realty, Inc.” & her name listed on it. When the house sells, the law requires the seller to pay the commission to the broker/real estate agency instead of directly to the agent(s). For Jane to earn money from helping people buy or sell their homes & property, she needs to work for a broker. This is because the broker who lists the house pays the commission to the real estate agents that represented the seller & buyer.
The average buyer or seller might not distinguish the difference between an agent & broker, but federal & local laws have made it necessary for real estate brokers & agents to be involved in a sale. Also, some states might prohibit the selling real estate agent from also representing a prospective buyer.
How Do Real Estate Agents Make Money?
The seller, not the buyer, pays the commission fees when a house sells. Federal law requires commission fees to be negotiable, but the average fee is based on a percentage of the selling price, but flat fees can be negotiated as well. The nationally expected rate is 6% per sale. The fee can be lower or higher depending on the circumstances, although most agents will be reluctant to list a house with a commission lower than 6%. This is because the real estate agent who sells the house, most likely will not see the entire commission fee, even though the seller pays the entire commission fee to a real estate broker.
Ideally, the same real estate agent that lists the house will also find a buyer for the house to receive the entire commission (the real estate agent would make $6,000 on a $100,000 sale). When a different agent is representing the buyer, the commission fee is normally split 50/50 between the selling & buying real estate agents. Each agent would receive 3% of the final selling price & would earn $3,000 on a $100,000 sale.
But, the earnings split can be even more complex if the agent needs to give a percentage of their commission earnings to a real estate broker who is also involved in the sale. Remember that most agents are “junior partners”, not owners, of a real estate brokerage so they must split the commission. Every broker takes a different percentage of the commission, an agent can expect to give 30 to 50% of their commission to the broker. So of the $3,000 commission that the selling or buying real estate agent receives, they might only get paid $1,500 assuming the broker splits sales commissions 50%.
This is a lot of numbers, so let’s put it into a chart for a more clear understanding of how what a real estate agent can make on the sale of a $100,000 house with a 6% commission fee that is divided evenly among the selling & buying real estate agencies. Let’s also assume that the real estate broker for the buyer & seller both retain 40% of the sales commission & their agent receives the other 60%.
|How A $6,000 Real Estate Commission Is Split|
|Listing Broker (Keeps 40%)||$1200|
|Listing Agent (Keeps 60%)||$1800|
|Buyer’s Broker (40%)||$1200|
|Buyer’s Agent (60%)||$1800|
If the same listing agent also represents the buyer, then they would earn $3600 instead of $1800 in commission because no additional real estate agents were involved.
What If A Sale Is Canceled At The Last Minute?
Because most real estate agents earn income solely from commission fees, they usually will not receive any compensation if a sale “falls through” in the final stages. Depending on the circumstances why the sale was canceled, such as the seller decided not to sell after serious commitment from a buyer or transaction fraud, the seller may still have to pay the negotiated commission as if the house had actually sold. In this case, the agents will usually receive partial or full compensation.
This is one reason why real estate agents will only make serious inquiries for buyers if they are pre-qualified & pre-approved for a mortgage. Real estate agents only make money if they sell a house.
Average Annual Income of a Real Estate Agent
According to the United States Bureau of Statistics, the median annual salary for a real estate agent is $58,410. The highest percentile of agents make approximately $110,000 annually while the lowest percentile had a median income of $21,780. Using the previous example of a $100,000 house, a real estate agent would have to sell 17 homes at that price to earn the median income if they represented both parties & 33 houses at the same $100,000 price tag if they only represent one party, either the buyer or seller.
Of course, the income range of real estate agents can vary widely depending on the geographic area. It will be easier for an agent in high cost of living areas like New York City or Los Angeles to earn the median income than an agent in the rural South where home values are lower. Regardless of regional home values & cost of living differences, a seller can expect to pay at least 6% when their house or property sells.