How Real Estate Agents are Paid

As part of my first meeting with a prospective client (buyer or seller) I ask if they know how real estate agents get paid …. and they usually answer “YES, you get commission.” Ok then I ask if they know any more about that. …. I also hear “Real estate agents make a lot of money.”

So let’s get real and talk about money where it comes from and who receives it.

The funds paid to real estate brokerages and their agents starts with terms in the real estate Listing Agreement. The Listing Agreement is a legal contract between the seller and the real estate brokerage which spells out terms including list price, length of the contract, and the professional services fee (often called commission or compensation) to be paid by the seller to the listing brokerage.

The amount to be paid to the listing brokerage is usually a percentage of the sales price. The Listing Agreement also specifies any compensation to be offered to the real estate brokerage that represents the Buyer. When the Listing Broker/Agent adds the property in the Multiple Listing Service (MLS), the info includes any compensation being offered to the Buyer’s Brokerage.

In most cases the agreed upon Professional Services Fee is paid when the real estate transaction closes (property transfers from seller to buyer). The Listing Brokerage receives the agreed upon compensation out of the proceeds of the sale and then the List Brokerage issues the agreed upon payment to the Buyer’s Brokerage.

At this point the real estate agents receive their payment from their respective brokerages. The amount the agent receives is based upon their contract or agreement with their Brokerage. Most real estate agents are self-employed independent contractors for the broker. So once compensated by their brokerage the real estate agent will need to pay their taxes including the self-employment tax, insurance, reimburse any marketing expenses, their own team, and licensing costs, education and more.

All of this is often invisible to the seller and buyer because their primary point of contact with the Real Estate brokerage is the agent - and someone they usually get to know very well. The agent is the face of the transaction - but it isn’t the agent who is paid directly - the payment goes to their brokerage.

So while the seller or buyer may look at the Compensation offered and think “Wow! Real Estate agents make a lot of money,” please remember this doesn’t go to the agents, but to their brokerages. And the real estate agent you see every day is working mightily to receive their compensation at the end of the day to grow their business and feed themselves and their families.