[M03/S11] How a Real Estate Agent gets Paid

If agents were free, everyone would use one, right? But not everyone knows exactly how a real estate agent gets paid, or what they get paid for.

Agents are mostly paid on commission, which they only get if the home actually sells. That is, an agent works for free until the very last moment, when the deal closes. Many agents spend weeks or months working on a listing, only to have it end up not selling, often times through no fault of their own. That’s tough, but that’s the system.

When the home fails to sell, it works out better for the seller than the agent – after all, the seller didn’t have to spend thousands of dollars for all the time that the agent put in on trying to get the home sold. It’s strictly a pay-for-performance deal. If the agent doesn’t perform, for whatever reason, the agent gets nothing.

When an agent does actually do the job they get hired to do, they do often get paid a handsome commission, it’s true. When the home sells in a week, it can seem like the agent is really getting a lot of money for very little work. On the flip side, an agent can do a tremendous amount of work, and then get paid nothing. It’s a winner-take-all, loser-gets-nothing system.

When an agent takes on a listing, they’re also assuming a significant amount of risk that they’ll not get paid a dime – and higher risk means higher reward. And that begs the question – in a hot market, when you’ve got a well-priced and desirable property, there’s a lower risk that it won’t end up selling, right? Then shouldn’t the commission be negotiable?

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In fact, commissions – like everything else in real estate – are negotiable. If you are thinking your home is going to be an easy sale (or even if you don’t think so) – go right ahead and try to negotiate the commission. Don’t take it as a bad sign if the agent isn’t flexible on their commission. Many agents are worth every penny they charge. If they won’t budge on the commission and they really seem like they are going to do a first-rate job getting you top-dollar for the home, keep them in the running.

Realize, too, that the commission is typically split 50/50 between buyer’s agent and seller’s agent. That’s not always the case, but it’s typical. Ask your agent how much of the commission he will be giving to the buyer’s agent. It’s not a bad idea to give the buyer’s agent a higher split, or offer the buyer’s agent a flat cash bonus on top of the split. Incentivizing the buyer’s agent to show your property is not a bad idea.

It’s important to understand that the listing agent will have to share his portion of the commission with his brokerage – he might only walk away with 70-80% of the commission earned. Out of that will come taxes and expenses for marketing the property, his staff costs, etc. At the end of the day, the commission that a listing agent receives is much smaller than it may at first appear.

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