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Lori Ballen is a member of the Amazon Associates Program and earns money from qualifying purchases. Posts contain affiliate links that benefit Lori as well.

According to the Zip Recruiter, $82,084 is the national average salary for a real estate agent.

🏡 Real Estate Agents can use this link to try Listings To Leads, real estate listing marketing tool

The Truth

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Who Pays The Real Estate Agent

It’s important to understand first that the relationship between the home seller and the home buyer is with the brokerage. They are agreeing to pay the brokerage, not actually you, the agent.

Then, you are acting on behalf of the broker as an assigned or designated agent and the brokerage pays you.

You are being compensated by the brokerage, not by the buyer or seller.

Each brokerage will have its own fees that it deducts from the total commission before you get paid. These can include annual brokerage fees, franchise fees, transaction fees, occupancy fees, technology fees, insurances and so forth.

You will almost never see the entire commission.

There are a few brokerages that pay hourly or salary, but most still pay on commission. As these large ibuyer companies expand, we will see more real estate agents switch to salary.

This also means that they will become less valuable and paid less. An when I say “they”, I mean “we”, because I too am a real estate agent. (I’m Lori Ballen with Keller Williams in Las Vegas (Lori Ballen Team).

Buyer and Seller Contracts

Commissions are never “standard” and always negotiable. Some brokerages will have their own “standards” of doing business and request a minimum commission.

Talk to your brokerage about their terms.

It is the seller of a house that pays the commissions. They offer a certain commission amount to the listing agent. From that total, they offer an amount to the buyers’ side. This is generally called a co-broker or co-op.

Example: John signs a listing agreement with Jane Realtor® to sell his house. He agrees to pay 6% of the home selling price in total commission. He and Jane discuss that she will get 3% and the buyer’s agent will get 3%.

In some markets, there may be a variable commission amount based on if Jane also procures the buyer.

Jane may be entitled to the entire 6% or might reduce the entire commission amount to 4% keeping 4 as representing both sides.

This is all determined in the listing contract.

Rarely do we see a buyer pay commission but there are some circumstances.

Mike chooses Patty Realtor® to help him buy a house. Patty is well known, has a solid reputation, and only represents buyers through a buyers contract. Her buyers’ agent contract states that she will require 3% of the total purchase price.

Her terms state that if there is a co-op, the seller can pay her commission on behalf of the buyer.

Mike is contracted for 3 months. During those 3 months, he happens into an open house. He falls in love and wants THAT house. It’s a for sale by owner and the owner is not willing to pay any commission. He is selling it himself. Mike and Patty are under contract.

Patty is entitled to 3% of the purchase price in which Mike now is obligated to pay her at closing.

It is possible that Mike stumbles into a new home builders neighborhood rather than the FSBO (for sale by owner) and decides to buy new. That home builder is not paying a commission so Mike has to pay Patty the 3% himself.

Many buyer’s agents do this because they do a lot of work with the buyer and then would lose out if that buyer decides to buy new or FSBO or goes out with another agent for any reason.

Buyer brokerage agreements are a very smart practice.

Calculating Commissions

Jane agrees to sell John’s house. John agrees to pay a total of 6%. They are going to offer 3% of that to the buyer’s agent as a co-op.

The house sells for $500,000. The total commission is $30,000 to be split between the 2 brokerages (buyer’s and seller’s).

The house sells for $500,000. The total commission is $30,000 to be split between the 2 brokerages (buyer's and seller's).

Jane’s brokerage receives the check and pays out the buyer’s brokerage and has $15,000 remaining.

Jane sells the house with John's acceptance of $500,000. 3% times $500,000 = $15,000 in commission. The buyer's agent will also earn $15,000. The seller pays $30,000 in commissions total.
Jane sells the house with John’s acceptance of $500,000. 3% times $500,000 = $15,000 in commission. The buyer’s agent will also earn $15,000. The seller pays $30,000 in commissions total.

Jane’s brokerage charges $20,000 per year to be part of that brokerage. Jane did her research and realized that transaction fees at a 100% company could be as high as the annual brokerage free and appreciated the training, culture, and technology of this brokerage.

In order to reach the 20,000 annually, there is a certain percentage of each check kept by the brokerage based on Jane’s production. Jane’s brokerage assumes she will close at least 7 homes around this price range and keeps 20% of each check which is $3000 in this case.

In order to reach the 20,000 annually, there is a certain percentage of each check kept by the brokerage based on Jane's production. Jane's brokerage assumes she will close at least 7 homes around this price range and keeps 20% of each check.

Now, Jane has a remaining $12,000. $15,000 – $12,000 = $3,000.

Her brokerage is part of a national franchise. They charge 5% of the seller’s commission ($15,000 in this case) from each transaction.

Some will have a cap. This means that when the total amount is paid (let’s say $4000), then there is no more deducted from future commissions until the annual reset date.

$15,000 * 5% = $750

Some will have a cap. This means that when the total amount is paid (let's say $4000), then there is no more deducted from future commissions until the annual reset date.
Now, Jane has a remaining $12,000. Her brokerage is part of a national franchise. They charge 5% from each transaction. Some will have a cap. This means, when the total amount is paid (let’s say $4000), then there is no more deducted from future commissions until the annual reset date.

Jane might also have E & O Insurance, technology fees, occupancy fees, transaction management fees, or whatever else she agreed to pay through her commissions rather than an office “bill”.

$15,000 – $3,000, – $750, – $250 = $11,000.

Jane picks up her check for $11,000.

If Jane closes 7 homes like this, she would earn $77,000. If jane closed 10 homes like that in a year, assume the last 3 were “capped” and she had no more fees, she would earn $77,000 + $45,000 ($15,000 * $3,000) = $122,000.

Jane would be considered a good producer in her office with a total sales volume of $5,000,000 and a total commission of $150,000 tracked for awards and rankings.

Business Costs

There will be a cost of doing your real estate business. These will be things like:

  • Marketing and Lead Generation
  • Software
  • Education and Licensing Requirements
  • Memberships (such as the National Association of Realtors)
  • IDX and Website Fees
  • Fuel
  • Auto Insurance and Maintenance
  • Phones and Internet
  • Occupancy fees (desk/office)
  • Meals out with clients
  • Closing Gifts
  • Office Supplies
  • Admin or Transaction coordination fees potentially

Let’s assume Jane is 75% profitable. Yay Jane!!

Then 25% of the earned commission (before splits) is spent on the costs of doing business.

Jane the spends 25% of $150,000 (total commission earned) =$37,500 per year or around $3000 per month.

Jane’s total earnings this year are $122,000 of which she spends $37,500 on advertising and cost of doing business, she profits $84,500.

You’ll notice that the larger teams and higher producing agents tend to be less profitable as they now have salaries and employers insurances and larger overhead.

40% -50% profit is much more common and agents that are no longer in production may only see a 20% – 30% profit.

Some calculate total earned commissions and others calculate after the company splits.

Taxes

As a real estate agent, you are required to report and pay your own taxes. At the end of the year, your brokerage will give you a 1099 reporting your earnings. Be sure to note if they are counting the total commission or commission after their fees.

Let’s say you get a 1099 for the total of $150,000.

You would line item deduct:

  • amounts paid to the brokerage.
  • amounts paid to your employees.
  • costs of doing business as shown above

In our example we are using, Jane keeps $84,500 after her deductions. Jane is then reporting her profitable income on her taxes as $85,000. Jane is responsible to pay her taxes.

Real Estate agents can often get in trouble with this. My suggestion is that you download the IRS.gov app. You can then pay in estimated taxes out of each check, or each month, or quarterly although I suggest out of each check.

Otherwise, you will forget. Please note: I am not an accountant. Talk to your certified professional. I’m a real estate agent who got in trouble with taxes in the past not paying ahead of time.

If you were in real estate the year before, you can calculate estimated taxes based on last years filing. Figure in a safe 20% growth margin.

If you are new, assume 18% to 30% of your income will be paid in taxes.

I’d rather err on the side of paying in too much and getting a refund than not paying in enough and receiving penalties!

Jane gets her commission check in the example above for $11,000. Jane deposits the check in her real estate business account. She sends in 25% of that to the IRS through her app. She rounds it and sends $25000 to the IRS.

Jane wants to leave her operating expenses in the account (which we figured was 25% on the $15,000 = $3,750 (round to 4K).

11,000 – $2,500 – $3,750 = $4,570 to spend.

Remember, janes last several deals would be worth more since she won’t have caps. So she would have more like $7000 on those deals.

So basically, if Jane sells $500,000 homes and earns around $15,000 commission, after taxes (assuming 25% of gross), brokerage fees, and costs, if she sold one home per month, she’d earn around

$180,000
– 20,000 Brokerage
– 5,000 Franchise
=$165,000

$165,000
– 37,500 Costs of Doing Business
= 127,500

$127,500
– 45,000
= $82,000

Jane would earn $180,000 as a real estate agent, $127,500 as Profit, and $82,000 in her pocket after taxes.

Again, this is assuming Jane has a 75% profitable business which most agents do not.

If Jane overspends for example, on buying leads and only functions now from a 50% profit point, she could keep as little as $40,000. If Jane sells less than 12 homes, this amount declines.

If Jane pays less in brokerage and franchise fees, clearly there would be more profit there.

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Many variables.

It’s safe to say that as a real estate agent if you close at least one home each month, you’d earn between $40,000 and $100,000 at the end of the year.

Figuring in Referral Fees

If you are going to aggressively promote yourself to other real estate agents for referrals, you need to assume a 25% referral fee off the top before you get paid

Let’s say 25% of Jane’s business is agent to agent referrals.

She sells 12 houses and earns $15,000 per home. = 180,000 before splits, costs, taxes.

3 of those are agent referrals.

From that $15,000, a 25% commission is sent to the referring agent. $3,750 is paid out in referrals leaving Jane with a remaining: $11,250. Most brokerages will still figure their percentages on that total $15,000. So Jane would still pay 25% of that $15,000 (3,750) in her brokerage and franchise fees.

Jane would be cut a check for around $7,000 – $7,500 of which she would then have operating expenses and taxes.

Agent Earnings on a Team

This looks quite a bit different. For many, the end of the day take away and quality of life is worth it to be on a team.

In most cases, the team will cover your advertising, occupancy fees, and transaction coordination.

The team member will often still have their own licensing, auto, fuel, phone, etc. so it’s not all profit.

Let’s assume your cost of doing business is 10% of your checks at the end of the day.

Bob is an agent on Mary’s Team.

Bob works with a buyer who buys a $500,000 house. Bob’s brokerage is paid a co-op of 3% which is $15,000.

Bob and Mary have a 50/50 team agreement in which Mary gets 50% of the check (and covers most expenses including lead generation) and Bob gets 50% for representing and working directly with the buyer.

Bob is then designated $7,500 for his side and then pays his splits with the brokerage. If Bob is at the same brokerage as Jane in our previous example, he may have a full $20,000 brokerage fee or he may have a team discount. Many brokerages offer discounts to team members.

So Bob now has a $5000 annual cap. He pays 20% from each check plus 5% franchise fee. Bob will issued a check of around $5600 If his costs of doing business are only 10% of his “keep” amount, he would put $500 – $600 in his operating expense for fuel, phone, insurance, licensing. And if he pays 22% in taxes, he’d send $1,500 to the IRS.

Bob would keep about $3,500 at the end of the day after costs and taxes for that transaction. If buyers agent bob did that 12 times per year, Bob would earn around $42,00 in spending money. If he closed 24 homes, he’d keep about $84,000 in spending money.

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