How Do Real Estate Agents Get Paid?

If you’ve ever been involved in buying or selling real estate, you might have wondered…

Good question! Here’s the scoop on how it works. Keep in mind I won’t bore you with legal mumbo-jumbo. Instead, we prefer a down to earth explanation based on our experience (at the time of this writing, anyway).

Before we get too involved, here’s a quick glossary of terms/definitions if you’re not familiar with the process or the players.

Listing Broker – the agency where the listing agent hosts their license to sell real estate. Examples would include RE/MAX, Keller Williams, Coldwell Banker, Century 21, Iowa Realty, etc.
Listing Agent – the real estate agent listing the house for sale
Seller – the owner of the house
Buyer – the person interested in purchasing the house
Buyer’s Agent – the agent representing the buyer interested in purchasing the house
Buyer’s Broker – the agency where the buyer’s agent hosts their license to sell real estate. Examples would include RE/MAX, Keller Williams, Coldwell Banker, Century 21, Iowa Realty, etc.

So, a homeowner (seller) decides to sell their house and contacts an agent that ultimately becomes the listing agent. In Iowa, it’s customary for the seller of a house to offer a real estate “commission” to the listing broker which is usually negotiated by the listing agent. The commission is typically a % of the sales price of the house.

Each brokerage has their own rules regarding the actual % used and some are able to negotiate while others are not.

The listing agent (or broker) will decide if they’re going to share that commission with the buyer’s agent/buyer’s broker. It’s pretty common to split it 50/50 – but that’s not always the case.

At the time of closing, when the buyer has signed and the seller no longer owns the house but has transferred title and everything to the buyer/new owner, everyone gets paid. Yay!

Let’s do some math:

Sales price of the house: $180,000

Commission: 6% – split 50/50 between listing and selling sides (3% each)

Listing agent earns: $180,000 * .03 = $5,400

Selling agent earns: $180,000 * .03 = $5,400

So that’s cool, the agents are RICH, right?

Well, not quite. Let’s consider the expenses involved.

The listing agent has probably worked with the sellers for a few months, maybe a long time. They’ve answered questions, provided guidance to prepare to list, connected with service providers, etc. Then, there’s the marketing expenses – the lockbox, the sign, social media advertising, Zillow advertising, Trulia advertising, Realtor.com advertising, other website advertising, MLS membership, any printed advertising. This list could go on and on and on. (You can read more about these expenses at Lighter Side of Real Estate.)

Then, once a contract is in place, the listing agent needs to manage the parties involved to make sure that things stay on track and do everything they can to avoid any delays. There’s also the time involved in negotiating the inspection requests, managing the abstract, making any deliveries to get things where they belong, reviewing title opinion, getting updates from the lender, reviewing the closing documents, solving any problems that might come up, etc. (I mean, I can go on but this is sort of boring!)

You can see there’s a lot of time and cost that goes into selling a house.

The agent is getting paid for their time but in bulk, so it seems like a lot. It’s pretty average when you think about what’s involved in the process.

The selling agent has similar expenses once the contract is in place. Prior to that they will have connected their buyer client with search results from the MLS, perhaps from their own website (like our search site at www.desmoineshousehunters.com), and they’ve probably spent a lot of time providing guidance on the process of purchasing a house, working on a negotiating strategy, etc. PLUS, they’ve probably spent time showing the buyer client houses and they’ve fronted the cost of fuel, automotive expenses, lockbox keys, liability insurance, etc.

Similar to the listing agent, the selling agent is getting paid in bulk at the time of closing. That might seem like a big amount but if it’s spread out over the time they’ve worked with their client, it’s just a normal paycheck.

Don’t forget they still have to pay Uncle Sam for taxes. Ugh!

Now you know how real estate agents get paid. And knowing is half the battle, amiright?