If you’re considering buying or selling your home, especially if it’s the first time, you probably have a million questions about the process. What even is escrow? How much do I need to put down? Do I have to pay my real estate agent? How does the real estate business even work? In this blog, we’re going to answer question number 3 — how do real estate agents make money? Let’s dig in.
Buyer’s Agent Vs. Listing Agent
Before we start, let’s define what a realtor, or real estate agent, is. A realtor is someone working on behalf of another person, usually a seller or home buyer, to act on their behalf in real estate. In Illinois, every transaction has two real estate agents.
You have the listing agent who represents the seller and then the buyer’s agent who, surprise surprise, represents the home buyers. There seems to be a common misconception that most real estate agents take home tons of money on every deal. So how do both of these agents make money?
How Real Estate Agents Make Money
Everyone knows that real estate agents make commissions on a home sale. But where does that money come from in real estate transactions? Real estate commissions come from when the seller pays the listing agent, usually a percentage of the sales price between 5% and 7%.
This amount will be outlined and agreed upon with the seller in the listing agreement. From there, it’s the listing agent’s responsibility to determine how much they are going to give for the buyer agent’s commission, so it’s important to understand that the seller is at the top of the food chain here.
Out of that 5-7% they’re getting from the seller, the listing agent is really only taking home 2.5-3% after giving the buyer’s agent their share, so the agent’s earnings might not be as much as you think they are. Plus, at the very end, most agents also have something called a split with their brokerage.
How Brokerages Make Money
A listing agent is always going to have to split their commission with the house (the brokerage where they hang their license) as payment for being able to be associated with that brokerage. The split for an average real estate agent can range quite broadly and is usually negotiated on an agent-by-agent basis, running from 0% in some models all the way up to 50% in others. The buyer’s agent will also have a split to take into consideration.
Let’s Look At The Math
Let’s use an example. Let’s say there’s a home that is listed for a million dollars, and the listing agent has negotiated with the seller a commission of 6%. That listing agent can decide how much they want to offer out to any buyer’s agent who’s going to bring them an offer. So, let’s again make the assumption that the listing agent is offering out 2.5%.
That means that $25,000 goes to the buyer’s agent, and $35,000 goes to the seller’s agent. And as we discussed, after that $25,000 goes to the buyer’s agent and that $35,000 goes to the listing agent, they each have their own separate arrangements with their own brokerage, and they’re going to have to hand over their split percentage.
But we’re not done yet — let’s not forget that we real estate agents are all 1099 employees, so we also have to factor in somewhere between 30% and 35% for taxes. All of this to say, not all of that money is going into a real estate agent’s pocket.
Why Should You Care?
So why is it important for you as a seller to understand how your real estate agent is making money? If you’re gonna be spending, in our example, $60,000, you’ll want to make sure that you’re getting the most for your money — the best possible real estate agent with the best possible experience, who’s going to spend the right amount of money marketing your home.
If we’re talking about the city of Chicago, there are a ton of real estate agents, and in my opinion, only 5% of them really deserve the chance to win your business. Some people are in the business of selling properties, and others are in the business of getting you the best possible deal for your home and understanding your financial goals — we recommend finding someone that does the latter.
Now, if you’re a buyer, why is it important that you understand how your real estate agent makes money? Well, first of all, in Illinois, you do not pay your real estate agent, and by proxy, the seller is actually the one who’s paying them. So now that you know how they make money, it’s important to understand why they’re choosing to make their money this way.
Is it because they want to make as much money as possible and do as many transactions as possible? Or are they like me or the real estate agents on our team, who are trying to establish serious long-term relationships with you and potentially your whole family?
Whoever you choose to work with, make sure you’re partnering with a real estate professional who wants the best for you and not just the paycheck after the deal.
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