Real Estate July 18, 2023

“Commission: A Risky Business”

Let’s crack open the topic that a lot of people are afraid to ask about: how Realtors get paid. Here’s how we get paid “THE BIG BUCKS.” (Insert only a very slight eye roll followed by a genuine smile.)

Starting out here are the very very very very basics: there are 2 sides of every transaction: the buying side & the selling side. Therefore, it’s typical that 2 Realtors are involved: One represents the buyer & one for the seller.

The listing agent is the Realtor that works with the sellers to market, or list, their home. At one of their first meetings, commission is going to come up. The listing agent negotiates with the seller the amount of commission associated with the entire transaction.

The seller can either pay a percentage of the sales price or sometimes a flat fee is agreed. The flat fee is typically for homes or property under about $60,000. At that price, even a reasonable commission percentage doesn’t often cover the costs of a Realtor handling the transaction. So, for homes around $60,000 or less – a flat fee is common.

The commission – regardless as to if it’s a flat fee or a percentage, typically comes out of the seller’s proceeds at closing. This commission not only pays the listing agent but also goes to paying the other side of the transaction: the buyer’s side. Essentially, the seller pays BOTH Realtors involved.

Let’s say that a seller decides that they are going to offer a 7% total commission on the sale of their home. The listing agent would likely market the property with a 3.5% commission (half of that total 7%) for the Realtor who brings the buyer. At closing, the total 7% amount will appear as a line item deducted from seller’s proceeds.

Let’s say that the listing agent actually has their own buyer who is looking for this exact home! She lists the house for the seller then shows her buyer the house. They love it & write up an offer that gets accepted. This Realtor is working as both the listing agent as well as the selling agent. She’s doing both sides of the transaction & would be due the full commission amount of 7%.

When people factor the commission off of the sales price, they don’t realize that we, the Realtors, don’t get this full amount. We have to hand that check directly to our broker. There are many many fees that get taken out. That amount gets portioned off between the broker, fees, insurance, marketing costs, multi-list fees & we then get paid the rest.

A Realtor is an independent contractor, so I have to reserve a portion of my take-home for taxes as well as health insurance. Those don’t come out of my check automatically.

The biggest fee typically deducted are referral fees. One of my Realtor friends moved out of state & still had a nice book of established business in our area that she couldn’t service. Whenever one of her former clients reaches out to her, she puts them in touch with me. I then pay a referral fee to this Realtor for the lead. Referral fees can be anywhere from 20% to more than 35% of my take-home.

Some people think that our offices, like Coldwell Banker, pays us to show properties to buyers. That’s not the case. We don’t get paid to show homes. We ONLY get paid after a closing & can ONLY be paid by our broker.

There have been many times that we will show 15, 20 or even over 30+ homes to a buyer. Then… they decide to rent. I’m supportive of whatever situation makes sense for my clients. But, there’s no compensation for the time or gas that we spend if a buyer decides not to purchase a home. That’s the risk we take in this business.

On the flip side, I’m working with some out-of-state buyers. Just this week, I showed 3 properties in the high $300,000 range via video. The first time out, they saw the home for them, submitted an offer, got it accepted, & now we’re progressing to closing. We have a lot of hurdles to go through as we move along, so my paycheck isn’t guaranteed until it actually closes. Again…that’s the risk we Realtors take in this business.

One of my recent transactions was for a $125,000 home that I listed. As always, I pull out all the stops. Yes, I hire a professional photographer even for homes that are $125,000! I had paid for photography, videography, marketing, mailers – all that fun stuff – even before we get any offers. That’s the risk we, as Realtors, take. We spend money in hopes of making our clients money.

It paid off! We got nice interest on the home, & it closed for $130,000. It sold for $5,000 above the asking price! My seller was thrilled. At this point in the transaction, however, I’m already in the red, & I have about a month & a half to go before I get paid.

If you calculate the entire commission on this $130,000 property, it’s about $8,000. Not bad right? Ah, ah, ah! Not so fast! You have to pay the other agent. We’re down to $4,000 now. Don’t forget – you hand this check to your broker & all the fees are deducted AND there was a referral fee on this listing. That means that the lead came to me from another Realtor, & I agreed to pay them for this lead when it closed. This 2-month transaction, when the check made it to my bank account, was a little over $2,000.

I save half of my check for insurance & taxes. So, $1,000 goes into my savings account so I have those funds available when those payments are due, & $1,000 made it to my checking account.

Just a little fun tidbit… this transaction took place in 2022. My notes on this client started in 2017. I had talked to them for 5 years before they listed their home.

I’m very fortunate because my closing ratio is higher than the average agent. On average, 1 of every 6 transactions falls through & never closes. Then, the Realtor is starting back at square 1.

It’s like getting to the very tippy top of the Chutes & Ladder board & landing on that darn square with the longest slide that takes you all the way to the beginning. Yeah… sorry… I’m bringing up emotional childhood trauma that you had all but forgotten. I, to this day, HATE Chutes & Ladders.

Imagine that feeling with hours upon hours of invested time, nights & weekends away from your family & thousands of dollars on the line. Something completely out of your control takes you all the way back to square one. That’s actually the best analogy I think there is for being in the real estate business! It’s a big, expensive, emotional game of Chutes & Ladders!

Imagine if at your own job, every month & a half or so after you do all your work & the paycheck just doesn’t come. That’s the risk that Realtors take.

Obviously, I wouldn’t do this job unless it was financially beneficial. I’m very fortunate that I have a job that I LOVE doing! It’s not the get rich quick career that people portray on HGTV. It’s a grind… you gotta love it… & I. DO.

To recap:

  • That commission negotiated between the listing agent & the seller will pay both the buyer’s & seller’s Realtor.
  • Realtors do not get paid for showing homes.
  • 1 out of every 6 transactions fall through before closing.
  • Commission doesn’t go directly to the Realtor. The commission check goes to the brokerage where all the fees are taken out first before an agent is paid for the transaction.
  • As independent contractors, we have to be very good at reserving a healthy portion of those funds for our insurance & taxes.
  • It’s very feasible that an $8,000 commission turns into $1,000 of actual spending money in your pocket.

That’s the risk that Realtors take.


I’m Always Here & Happy to Help!

Katina Hunter

Team Lead for the Katina Hunter Team with Coldwell Banker