Monday, January 28, 2008

How do Realtors Get Paid?

The common misconception is that when a Realtor sells a home they get 6% of the sales price. Now we all know commissions are negotiable and technically this statement is true, but what people don't realize is that half of the commission goes to the buyer's agent, or selling agent. Let's look a the following example on how a new-to-the-business agent would get paid on a $300,000 sale at a 6% commission.

Sales Price: $300,000

$18,000 Gross commission to Listing Broker
-$9,000 Given to cooperating Buyer's Agent

$9,000 Gross commission to Listing Agent
-$540 Most large companies charge a 6% affiliate fee

-$4,230 Most new agents start at a 50% split with their company

-$635 Let's assume the agent spent 15% of their commission marketing the property

-$1,079 Take out 30% for tax purposes

$2,516 Agents Net Income

If the agent sold 13 homes at at average sale of $300,000 that's $4 million worth of real estate sales in one year! Wow! This agent must be rolling in the dough! But in reality that would equate to a net income of $33,500 for the entire year. And that does not include any other costs such as buying office supplies, gas and other business expenses such as magazine, newspaper and direct mail ads. You can see that a "successful" agent in this business can very easily net less that $30,000/ year with 13 sizeable transactions.

So the next time you see an email or postcard from a Realtor that says, "Multi-million Dollar Producer", you should probably feel sorry for them.

1 comment:

  1. I agree with most of your logic here, but I think you take it one step too far. When discussing annual salaries, no one talks about their net incomes. If you add taxes back into your equation, that's $43,140 annually.

    I think that's a respectable income for someone who's selling little more than one average-priced house a month.

    The complaint most people have about the 6% system isn't that Realtors are paid too much. It's that the 6% system doesn't make sense. Selling a $250,000 house and selling a $500,000 house aren't all that different, but the commission is double on the $500K house. That makes no sense to me. What's the rationale behind it?