I've started writing about common questions that buyers and sellers have, and, believe it or not, how we get paid is still one of them. To understand the payment process, we first have to go over the legalities of licensing. Each real estate company has one broker for legal purposes. At Pearce, for example, I'm that person. All agents at Pearce "hang" their licenses with us, although some of them are salespeople (who must work for a broker), and some are brokers themselves (who could work independently or can work for another broker). Over 90% of real estate companies across the country have fewer than ten agents, and the broker sells him- or herself. That makes Pearce Real Estate one of the largest firms in the State, and across the country. The principles of agency, however, are the same regardless of size. It's also useful to note what Realtor designates (and it needs a trademark sign, which is above my pay grade on a computer!): It means that the company, and therefore all of its agents, belong to the National Association of Realtors, agree to abide by its Code of Ethics, and can participate in the Multiple Listing Service (MLS). Most local firms are Realtor firms if they sell residential real estate, and, increasingly, commercial firms are not. We are, and we handle both types of property.
When a seller signs a listing agreement, or a buyer signs a buyer broker agreement (and those two contracts are basically equivalent), they sign with the broker in charge. Only the broker in charge sets the rules--commission rates and terms--or can legally change or cancel the agreement. Most compensation is offered through the MLS: When a listing is posted there, it has a BBC (Buyer Broker Commission) offered, and the listing firm is required to pay that amount to the broker who represents the buyer, unless a change is agreed to by both firms, or firm if it is a sale with both brokers at the same company (which we call an "in-house" sale). In order to have an in-house sale, both buyer and seller must sign a Dual Agency agreement.
When the property closes,in most cases, the closing attorney makes out a check or checks to the brokerage firm--checks cannot be made out to individual agents. Firms differ widely in the way they compensate agents within their firms, both in the percentage of the check that goes to the agent, and in what expenses they pay toward the transactions. In addition, some (usually national) firms also charge buyers and sellers "transaction fees", which are paid on top of the commission, and go only to the real estate company. In some cases, the commission is divided evenly between the listing side of the transaction and the selling side. Increasingly, the listing firm keeps a higher amount, and offers a BBC that is less than half of the total.
Agents are legally independent contractors, so they don't get a salary, or a regular paycheck. They earn money only when property closes or rents, and they share that with their firm. It used to be that the firm got half and the agent got half, but now it can vary. Some companies pay higher amounts (sometimes much higher percentages) to the agent, but often charge them for their desk, their postage, their copies, and their marketing. Many transaction-related expenses are borne by the agent personally. If he or she takes you to lunch, that comes out of his or her pocket. If a problem arises during the selling process, and is paid for by the broker, that is also often coming out of the agent's share. If you were referred to your agent or agency by another real estate agent or company, either here or somewhere else, that agent's firm can be receiving up to half of the total amount paid.
If all of this is making you feel as though the poor agent is at the bottom of the heap, you could be right, especially if you don't end up selling or buying, and they get nothing for all of their work. What my goal is, however, is to make you understand what they make, and when, and to help you appreciate their excellent efforts on your behalf!