How Do Real Estate Commissions Work?

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How Do Real Estate Commissions Work?

Real Estate deals and arrangements may look pretty simple and straightforward on the outside but it works like an onion. It comes with layers and more layers underneath as you peel the skin off. It can get really thorny and complex if the agreement is not laid out on the table. At the onset, these arrangements must be clear as crystal. 

There is no single type of real estate transaction. The agreements vary from one real estate transaction to the next. One of the chief goals is to provide for all the investors involved in a certain transaction and to make sure that everything plays out well and comes together well. 

From the buyer’s perspective, he sees a real estate agent who takes his needs and preferences under consideration. From his end, he sees the real estate agent looking for properties, showing him what’s available, getting him a good deal, etc. 

From the seller’s eyes, he sees a property that he needs to sell. He knows it’s not going to be easy and this will take time. To speed things up, it’s better to zero in on one serious buyer who will finish the deal quickly than entertain a dozen who are just tire kickers. 

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Table of Contents

So what is the real estate agent’s primary job?

Both the buyer and the seller do not really see what exactly is going on. The real estate agent goes through several procedures to get the deal done. He makes presentations, schedules the viewing, gathers pertinent information for the client and all that jazz. 

Now, how much money can a real estate agent make? 

As you know, real estate agents earn from commissions and it usually ranges between four percent to eight percent. It all depends on the rate discussed and settled by the parties. There is no set requisite percentage. 

The commission is then divided among how many agents were involved in the sale. If it’s one huge payment, the commission payout will be more or less quick and straightforward. However, if it involves multiple payment schedules, it gets thorny and complex. 

If you hate math, you’ll hate it more. But of course, just like in any other business, you will get the hang of it. Not to mention, a license is necessary for this type of job. The nuts and bolts and the nitty-gritty are not easy to deal with. 

There should be transparency on how the real estate agents get paid. Both the real estate agent and the real estate company must have a clear and transparent arrangement. And a clear summary of the payment procedure. This should include what happens should the client get a change of heart and how both parties could lose their commissions. 

Nothing is more frustrating than vague agreements. Needless to say, every part involved cares about the transparency in every real estate transaction.

The point here is real estate agents put in a lot of hard work in dealing with property transactions. Time, blood, sweat, and tears are put into a transition to make sure all parties are satisfied with the sale. And the best real estate agents take a considerable amount of elbow grease to make sure both parties are happy. Once the deal is done, it’s time to talk about and work on the split. 

Once the final payment is made, the seller gives the commission to the real estate company and this is how it plays out. Here’s how commissions are shared. 

Typically, in real estate transactions, commissions are divided between several parties. Normally, it’s split into four. 

  • One for the listing agent. This is the agent who acquired the listing of the property from the seller.

  • Two, the listing broker. This is the real estate company from which the agent works for.

  • Three the buyer’s agent. This agent, as the name suggests, is the one who stands for the buyer.

  • And finally four, the buyer’s agent’s brokers. This is the real estate brokerage or company from which the buyer agents work for. 

To make things more clear, here’s an example of how commissions are split. 

Let’s say a real estate agent takes a listing on a $300,000 USD house with a commission rate of 6%. This means a total commission of $18,000 USD. If the house is sold for that price, both the seller’s real estate company and the buyer’s real estate company each get half of the commission, that’s $9,000 USD each. ($300,000 USD selling price X.6 commission divided by 2) Then the companies split the commissions with their real estate agents. 

Typically, a split is sixty-forty. Sixty percent to the real estate agent and forty percent to the company. However, the split could be fifty-fifty or seventy-thirty, depending on the agreement between the company and the broker. Most of the time, the top real estate agents get a higher percentage of the commission. 

Let’s take a look at a sixty-forty split. Each real estate agent in the example above gets $5,400 USD  ( $9,000 x .6) and both real estate companies keep $3,600 USD ( $9,000 USD x.4) The final commission run down would look like this: 

Listing real estate agent: $5,400 USD

Listing real estate company: $3,600 USD

Buyer’s real estate agent: $5,400 USD

Buyer’s agent’s real estate company: $3,600 USD

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