A real estate agent can streamline the complex process of selling or buying a new home. In return for their guidance and expertise, your agent will typically collect a commission based on a set percentage of a property’s selling price. Read on for an in-depth look into how your agent will be compensated for his or her services.
Digging Deeper into Commissions
Most real estate agents earn a living through commissions, which are essentially payments made directly to brokers for all the necessary services rendered in the purchase or sale of a real estate property.
A commission is typically a percentage of the home’s selling price, although it can sometimes be a flat fee. While agents rely on commissions for income, they usually only get a slice of the pie. To understand how agents are paid, it helps to know about the relationship between agents and brokers.
Agents and Brokers
Professional agents are licensed salespeople who work under the umbrella of a designated real estate broker. It’s important to note that an agent is not able to work independently and is prohibited from being paid any commission directly by a consumer.
On the other hand, a broker is able to work independently and/or hire real estate agents. In most cases, real estate commissions are paid directly to the broker, who then splits the commission with the agent or agents involved in the transaction.
The broker’s compensation will almost always be specified in the listing agreement, and the rate of the broker’s commission is usually negotiable. Commissions are funded by sale proceeds, and it’s usually the seller who pays them, unless the seller and buyer negotiate a split.
Most sellers factor agent/broker commissions into a home’s asking price, so it could be argued that the buyer pays at least some portion of the commission in either case due to the inevitable increase in the overall asking price.
How Commissions Get Divided
Real estate commissions are often divided among several different people. In a standard real estate transaction, the commission might be shared between up to four professionals, including:
- Buyer’s agent
- Buyer’s agent’s broker
- Listing agent
- Listing broker
For instance, let’s consider an example of an agent who has taken a listing on a $400,000 property at a 6% commission rate. If the home sells for the asking price, the listing broker and the buyer’s agent’s broker would get 50% of the commission ($400,000 sales price x 0.06 commission ÷ 2 = $12,000 each). The brokers would then split the commissions with the agents.
It’s common for commissions to be divided so 40% goes to the broker and 60% goes to the agent; however, the split could also be split at whatever ratio the broker and agent have agreed upon. In a 60/40 split, each agent in the above example would receive $7,200 ($12,000 X 0.6), and each broker would receive $4,800 ($12,000 X 0.4). The final breakdown would be:
- Buyer’s agent—$7,200
- Buyer’s agent’s broker—$4,800
- Listing agent—$7,200
- Listing broker—$4,800
Commissions are sometimes divided among fewer people. For instance, when brokers list a property and also identify a buyer, they may keep the full 6% commission. Or, if a listing agent sells a home acting as both the buyer’s agent and listing agent, he or she would only need to split the commission with the sponsoring broker.
Of course, as with almost every other financial transaction, all parties must contend with taxes and business expenses. This includes everything from federal, state and self-employment taxes to the many costs of doing business, including dues and fees, insurance and advertising. All of this can turn what appears to be a substantial commission into a much more modest profit.
Things to Consider
Commissions are typically only paid when a transaction settles. There are certain instances, however, when a seller might be liable for the broker’s commission even when a real estate transaction is not closed. For example, if the broker already has an offer from a willing and able buyer, he or she may still be entitled to claim a commission if the seller:
- Chances his or her mind and refuses to sell
- Has a title with uncorrected defects
- Agrees with the buyer to cancel the transaction
- Commits any sort of fraud in relation to the transaction
- Insists on terms that weren’t included in the listing agreement
- Can’t deliver possession of the home to the buyer within a reasonable timeframe
- Has a spouse who refuses to sign the deed after already signing the listing agreement
The Bottom Line
In rare instances, real estate agents are employed by their brokers and paid an annual salary. Most commonly, however, agents earn income through commissions paid to brokers when real estate transactions are settled.
Thinking of buying or selling a home? The Wheaton Team can help. With 60-plus years of combined experience, our team specializes in residential real estate throughout Colorado Springs and all of El Paso County. Let us guide you through each step of the selling, buying and financing process, so you can turn your vision into reality.