Real Estate Commissions
Real estate agents play a vital role in the buying, selling, and renting of commercial and residential properties. They invest a lot of time and work upfront in hopes of completing a transaction on behalf of their clients. Among their many responsibilities, agents host open houses, provide pricing guidance, help clients navigate paperwork, and negotiate contracts. Most real estate agents perform this work entirely on commission, which, in real estate, means that they earn a pre-negotiated percentage of the cost of the home or building they help their clients buy or sell.
As opposed to earning a base salary with a steady monthly paycheck, real estate agents do not get paid until a property closes, completing a transaction that can take a few months. Thus, the commission system incentivizes them to work hard to close deals. A typical real estate commission is 5-6% of the price of the home and is split between the buyer’s agent and the seller’s agent. Because of the percentage-based payout, the more expensive the home, the higher the commission. However, the total amount an individual agent pockets also depends on the brokerage they work for because they share that commission with their employer as well.
How Real Estate Commissions Work
With most real estate agents working solely on commission, their income is directly tied to their success in closing deals. Agents can anticipate closing a few deals per month, but this number varies based on the market, level of experience, and marketing efforts. Previously, the seller would pay the entire commission amount for both agents. However, as of 2024, unless the seller chooses to pay both agents, the buyer and seller each pay their own agent’s commission as a part of the closing process, meaning that agents on both sides of the transaction spend weeks or months working with a client without receiving any money. In addition to the time, effort, and money required to ensure a deal goes through smoothly, agents are often responsible for their own licensing, marketing, and transportation costs.
Overall, the commission-based structure offers great opportunities for earning, but it also requires an ability to weather slow periods and unpredictability. It also takes time, up to a few years, for new agents to build their business and see a steadier flow of clients, so preparing ahead of time will make a huge difference in an agent’s ultimate success. In other words, there’s no “get rich quick” scheme for real estate careers; it’s a slow burn that increases in momentum with time and hard work.
What Percent Commission Do Real Estate Agents Make?
There is no federal or state law that governs commission rates, and technically, sellers can negotiate the rate they pay. However, the traditional model of real estate commissions sets the standard at 5-6% of the sale price of the home (most agents consider 6% a fair rate), with half going to the buyer’s agent and half going to the seller’s agent.
Thus, each agent receives 2-3% of the price of the property sold, but they don’t pocket that full amount because the brokerage they work for also takes a cut of that commission. That amount must also cover the out-of-pocket expenses spent throughout the sale process, such as marketing and transportation.
The amount an agent’s brokerage receives from each transaction varies from one brokerage to another and depends on a number of factors, including the agent’s experience. The most common brokerage splits are 50/50, 60/40, and 70/30.
Brokers who run their own businesses do NOT share their commission, and if they hire real estate agents to work for them, they can earn a cut from each of their agents’ transactions. However, advancing to that level usually requires extra testing and licensing after working as a real estate agent for at least a few years, depending on each state’s particular laws, yet another reason to career plan well ahead of time.
How Much Does the Average Real Estate Agent Earn a Year?
According to HomeLight, most brokerages pay agents solely on commission. However, some pay a salary plus commission, and a small minority offer a salary only.
As of January 2024, The Close reports that the nationwide average earnings of a real estate agent is $90,506. This amount varies widely based on brokerage splits, housing market, competition, and experience. The report includes a state-by-state breakdown of earnings and shows that agents in Kansas, California, and Arizona take home a much higher amount, while agents in Montana, West Virginia, and Wyoming bring in considerably less.
However, most real estate agents operate as independent contractors and are responsible for paying their own state and federal taxes, which the reported earnings do not reflect.
Real Estate Commission Changes
How Will the Keller Williams Commission Lawsuit Affect Agents’ Income?
In 2023, Keller Williams, one of the nation’s largest brokerages, along with the National Association of Realtors (NAR) and several other large companies, went to court for contributing to the corruption of the commission system. As the Associated Press states, in multiple lawsuits across the country, the plaintiffs argued that “​​the country’s biggest real estate brokerages engage in practices that unfairly force homeowners to pay artificially inflated agent commissions when they sell their home.” The goal of these lawsuits was to create more transparency and fairness for home buyers and sellers regarding their agents’ commission structure.
As part of the proposed settlement, Keller Williams agreed to new rules of transparency, and the new real estate commission model rolled out officially late in 2024. Now, all agents must let clients know that commissions are negotiable and that no set minimum required by the brokerage or by law exists. Additionally, sellers no longer have to pay both their own and the buyer’s agent unless they choose to do so, and agents cannot include that commission information as part of the official MLS listing (they can advertise it elsewhere, though). Agents working with homebuyers must now disclose their compensation structure upfront, including in situations of cooperative compensation (when the seller pays the buyer’s agent’s commission as well as their own agent’s commission). And, buyers must now sign a written agreement with their agent that outlines the negotiated compensation terms.
Going forward, homebuyers will negotiate their agent’s commission rate separately, which, according to Bankrate, may spark a higher rate of competition amongst buyer’s agents and lead to lower commissions. But, with housing prices continuing to climb, even at a lower commission rate, agents would still bring in a sizable amount of money.
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– Written by Lori Walker
