How Do Real Estate Agents Get Paid?

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!

The First Two Weeks

There seems to be a persistent practice in real estate of "testing the market" with a price higher than what the agent believes that the property will bring at closing.  Sometimes there is an agreement that the price will be lowered after some stated period, often thirty days.  Agents often feel that sellers become wedded, however, to the original listing price, and forget completely that they were told that a lower price would be more in line with market expectations.

While testing the market might seem like a reasonable course of action, especially if there is a clear understanding up front that the price will be lowered in x days if not enough action, or an offer, is generated, those of us in the industry should know better. We now have access to all kinds of information that tells us who looks at a listing, when they search, and how (with what device).  We know popular hours, phrasing that captures attention, and click-through rates by property.  We can see whether they looked at it, saved it, forwarded it, or contacted us about it.  Administrators like me get a copy of every email inquiry sent to an agent on certain search engines and platforms.

And what do we know from all of that?  We know the power of the new.  Overwhelmingly, the greatest interest in a property comes in the first two weeks after it gets listed, whether it is commercial or residential, and no matter the price or location.  Some properties clearly generate more activity than others, but always get the most attention early.  Sometimes that is because prospective buyers have signed up for notification alerts, so that a new listing will show up in their emails.  Many times it is because the buyers themselves look on a regular basis, and click on anything that they haven't seen before.  The end result is the same:  They gravitate toward the newest entries.

So it's easy to see the problem with testing the market.  Your property gets the most exposure and the greatest number of views at the original price, which is higher than the agent, and perhaps even the seller, thinks is the true selling price.  Agents often talk about how much higher the likelihood is of securing a buyer in the first two weeks after the listing comes onto the market, but, in order to secure the listing, they also often sabotage that chance, by using the most useful marketing time to expose the property at the wrong price.

We know that buyers today know a lot, and often as much as agents or sellers, about the value of properties, through comparisons of available inventory, and market knowledge gained online and elsewhere.  They aren't going to overpay, and many aren't going to potentially waste their time making offers that will be refused.  They concentrate instead on properties that are listed at compelling prices, which suggest that they will sell quickly.  That motivates buyers to make speedy offers, at prices near, at, or above the listing price, especially if they see that there is a lot of activity at open houses, or with showings.  It's better to accept the reality that buyers know value, than to think that serving up higher-priced listings will change their minds about the correct price.

If there is one takeaway from this, it should be that sellers need to ask agents this question:  What price do you believe that my property will close for in the end?  Then list as close to that number as possible.  And enjoy the attention your property will receive.