Real Estate Agent Commissions – How it works.
Real Estate agents are usually paid on commission. Most are not employees and most receive a 1099 instead of a W2 at the end of the year. There are a million different types of brokerage models, so many so that it would be impossible to list even a few. What I am going to explain is just the easy part. How real estate agents through their brokerages get paid.
- Step 1 – a seller decides to sell their property and hires an agent who contracts with the seller a commission. For this purpose lets say that is 6%. Six percent of the sales price.
- Step 2 – the seller’s agents offers a % of this 6% (usually 3%) to any agent that brings a buyer, executes a contract and closes the transaction at escrow.
- Step 3 – the buyer’s agent is paid on the day of closing just like the seller’s agent is paid. Six percent is deducted from the sellers HUD-1 statement via the escrow company and 3% is sent to the Listing Firm and 3% is sent to the Selling Firm.
At this point the Designated Broker distributes the funds to the agent broker. In Washington State real estate agents/brokers can only receive compensation from their Designated Brokers. They can not receive a check directly from escrow.
The check an agent receives will be less any charges the real estate brokerage is to charge them. It is the responsibility of the agent to pay their own IRS taxes and other business fees.
A real estate agent/broker only receives a pay check for their services when a property closes and changes hands. A real estate agent does not make an hourly wage, isn’t paid per showing, only paid when a property closes.
Your real estate agent whether you are selling or buying is spending money on your behave, their money on your behalf to market your property, show your property, prospect for buyers for your property without any kind of compensation. A buyer’s agent shows property to buyers free of charge, using all of their time and money without any compensation until a property is found and closed.
A seller signs a contract with an agent to sell their property, just like a buyer should sign a buyer’s agency contract to hire an agent to help them find, negotiate and close on a property.
So, think about preforming hours and hours of work on the internet researching properties, mapping out tours, calling and setting appointments for a buyer and then driving a buyer around the town for several days only to have the buyer contact someone else to write up the contract. Lots of work for NO pay.
This has happened to me twice in 20 years. The first time I was a brand new agent and the second time was a year ago this last spring. Each time I had trust that the buyer was faithful to my service. I found out the hard way that they were not. I showed property, the property the buyer wanted to purchase and they wrote the contract with another out of the area agent. They straight up lied when asked if they were working with anyone else. Their agent from the Seattle area just didn’t want to make the drive over to the Kitsap Peninsula. Shocking as it seems the agent that didn’t even see the home received the commission.
We all, all of us real estate agents work very hard for our clients. We stay up to date on the inventory, on the market trends and on the laws of real estate. We are required to take continuing education at our expense to become more proficient in our practice, we are audited by the state for our policies and procedures and most agents practice the “code of ethics”.
So please, before you start to ask questions of a real estate agent, before you pick their brain about the real estate market in your area, decide to work with them in a professional relationship. If you already have an agent, call them to ask questions. Make sure you are making the agent that is going to receive the commission do the work. Don’t cheat someone out of their livelihood.