One of the benefits of a career in real estate is the unlimited earnings potential. Unlike salaried or wage-paying jobs, a commission-based job allows you to get back in income what you put into it in effort and energy.
If you watch enough TV programs about real estate, you might think that all real estate agents make millions. Realistically, that’s not the case.
According to the NAR 2016 Member Profile Report, the median gross income of REALTOR® (and remember, REALTOR is a professional designation; not every real estate agent is a REALTOR) was $39,200 in 2015. Those with 16 years or more experience earned the highest income: approximately $73,400 on average.
How real estate commission works
How much will you make when you sell a home? On real estate reality television, we often see agents sell a home for $400,000 at a 6% commission rate. That would be $24,000 with just one transaction. Or would it be?
Commissions are typically paid by the property sellers and—by law—are negotiable. “Standard” commissions typically range from 3% to 7% for residential sales, depending on the local area. That commission is split between the buyer’s agent and the seller’s agent. For the purposes of this example, we’ll use 6%.
If you sell a home for $400,000, the 6% commission is $24,000. If another agent was involved in the transaction, your split becomes 3%, or $12,000.
Now you need to take into account your brokerage split. New agents typically have to give their broker a bigger split, because commission splits are typically tied to experience and the amount of business you bring in. If you have a 70/30 split with your broker, that leaves you with $8,400.
Granted, $8,400 for one property is not too shabby. Just remember that you need to set aside a portion of that money for taxes (you’re an independent contractor now), and you’ll want to recoup some of the money you likely spent on advertising the property and shuttling clients around to see the house.
Some progressive brokerages are moving to a salary-based structure to appeal to new agents—particularly Millennials. These “hybrid brokerages” are a sales alternative that, in some cases, replaces commissions with flat fees and offers a menu of a la carte services. Mainstays of traditional brokerages, like manning a Sunday open house or printing a glossy brochure, are hybrid line items that determine how much a client pays for services rendered. See if a hybrid real estate brokerage is for you.
Compensation structures for real estate agents
Depending on what brokerage firm you work for, your compensation structure as a real estate agent may look different. Here’s a glance at the percentage of REALTORS who work under different compensation structures.
Compensation Structures for all REALTORS® in 2015
% of REALTORS in this structure
|Percentage commission split||70%|
|Commission plus share of profits||5%|
|Salary plus share of profits/production bonus||2%|
|Share of profits only||1%|
Source: NAR 2016 Member Profile Report
For more information on how much money does a real estate agent make, as well as how to become licensed and succeed in our free download: Is a Real Estate Career Right for You?