By Elias Magers | 03.27.20 2:00 PM
Knowing how a real estate agent commission works is an important part of understanding how to become successful in a real estate career. Real estate agents get paid through commission as opposed to an hourly or salary payment like most jobs. For some this is a challenging part of the job, but for the entrepreneurial spirit and the motivated, this is an exciting opportunity that can result in major financial payoff. In other words, financial reward will come to those who work hard for it.
A real estate agent commission is earned by selling property. Whether the property is commercial or residential doesn’t matter because all real estate agents get paid by commission in each sector. Before we learn how much a real estate agent can make, let’s first understand what commission is and how it works.
What Does Commission Mean?
A commission is a percentage of money earned in a transaction. Most sales positions get paid by a commission payment method to incentivize the salesperson to close more deals. When more transactions are closed, the salesperson earns more money since they get a fraction of money earned in each deal.
In real estate, there is no limit on a real estate agent commission. Real estate agents have no earning cap in their careers, so their salary is based on how much they earn in commission. In other words, a real estate agent’s salary is determined by how many property transactions they close and the value of those properties.
Now that we know what a real estate agent commission is, let’s explore how it works.
How much is the Real Estate Commission?
Real estate agent commission is a percentage of the real estate transaction amount. A standard commission percentage of a transaction in California is 6%. This percentage may sound small but the amount is far greater than it sounds.
Here’s how: according to Zillow.com, the average property value in California is $571,875. Therefore, the average California real estate transaction can yield a commission check of upwards to $34,312. Given that selling a home takes between 30-45 days, that’s a pretty good earning in a small time frame.
However, the real estate agent commission isn’t doesn’t the full 6% of the property purchase price. They split this 6% with their brokerage and the other real estate agent associated in the transaction.
Real Estate Commission Split Breakdown
The reason why the real estate agent commission is split with the real estate agent’s brokerage is for the legal protection if the home buyer or home seller pursue a lawsuit against the agent. Depending on the experience level of the real estate agent, they can negotiate their split percentage with the real estate brokerage.
A new real estate agent commission rate is typically 60% and the brokerage takes the other 40%. However, some seasoned professionals can negotiate upwards to 80% or 90% of the commission earned.
Along with this, real estate agents must split their 6% with the other party’s real estate agent. Typically, each party receives half, or 3%, of the commission. However, in some instances the buyer’s agent receives 2.5% of the commission split.
To find out how much money a real estate agent can make, let’s go back to the example above. Half of the 6% commission ($34,312) gives the buyer agent and seller agent both $17,156. Then each real estate agent has a 60/40 split with their brokerage. That means the real estate agents receive around $10,293.
Some real estate brokerages cap how much money the brokerage takes from the real estate agent commission in a year. In this case, the stipulation means if a real estate agent earns the brokerage a specific amount of money in a year, any earned commission after that goes fully to the real estate agent.
Most people become real estate agents because they want a career that gives them financial freedom. The reason why real estate agents have the reputation of being wealthy is because there is no limit to how much they earn in their career.
However, most new real estate agents must learn that their salary is determined by their drive and motivation to close more deals. The more they close, the more they earn. This is especially true when real estate agents work in sectors that work with the expensive property transactions, like the luxury residential and commercial sectors. In real estate, anyone can have success so long as they remain focused and committed to goals they set for themselves. By doing so, they can learn how to financially scale their earnings. However, this can only happen for those who want it bad enough.
Finally, the real estate agent commission split with brokerages should be discussed and understood before signing any paperwork. They should understand exactly how much the brokerage takes from their commission and if there is a limit to how much they take within a year. By doing so, a real estate agent has an understanding of how they get paid so they can create a fulfilling career that grants them a life of financial freedom.