The Dirty Word
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The ‘dirty word’ of real estate: Commission
Most homeowners think of commission as a dirty word. And it can be… but not for the reasons you’re thinking…
Here’s how commission works: Most real estate agents are Independent Contractors. As such, they work for themselves, but by law, must conduct their real estate activities on behalf of a Broker. Anything the agent does is under the name of the Broker. So even the commission earned is earned by the Broker. The agent is compensated according to their employment contract with the Broker. Some offer a percentage split but provide office space and other benefits. Some offer full compensation of earned commission but charge a ‘desk fee’ where the agent pays the Broker a specified amount per month to help cover the Broker’s operating costs among other things.
The Agent is responsible for all other expenses, including computers & supporting technologies, cell phones, software, stationary, postage, mileage, office supplies, printing etc., etc., as well as costs of annual Board dues and fees, educational costs and a host of other expenses including health insurance, FICA and Federal and State Income Taxes. The agent is also responsible for all marketing costs associated with marketing your property outside of what the Broker may offer, which is usually minimal.
The general public has this notion that real estate Agents make huge sums of money at the Buyer’s and Seller’s expense and are laughing all the way to bank, making millions of dollars every year Take a look at how commission really works and judge for yourself if your agent is over-paid.
Here is a scenario that can help explain what happens to an Agent’s Commission:
Agent Brown with XYZ Realty lists a home for $210,000 and agrees upon a 6% commission with his seller as set by his company. Agent Brown places this listing on the MLS and offers any agent 50% of this agreed upon commission to any agent who can help sell this property. In the meantime, he places advertisements for this property on his web-site, in the local paper, a monthly home magazine and also in the local real estate cable channel, as well as holds Open Houses, does a mass postal mailing and shows the property at least a dozen times.
Agent Green with ABC Properties represents a Buyer. Her buyer offers $200,000 for this property. The Seller accepts. At closing, the total commission the Seller must pay according to his Listing Agreement with XYZ Realty is $12,000. The closing attorney cuts a check to XYZ Realty for $6,000 and another check to ABC Properties for $6,000.
Each agent returns to his/her office and submits the checks to his/her respective Brokers. XYZ Realty’s policy is that they split commissions 40/60 with their agents.
So XYZ pays Agent Brown $3,600. Out of this $3,600, Agent Brown is responsible for this own Federal and State Income taxes and FICA withholdings. His CPA recommends that he set aside at least 30% out of each of his earnings towards taxes. He is now looking at $2,520 after taxes. Agent Brown then must deduct any marketing expenses he incurred to get true net earnings on this transaction. Real estate agents must pay for marketing expenses out of their own pocket so anything he does to market the property is money he must re-coup if he wants an accurate accounting of his earnings.
If he spent $800 over 6 weeks in marketing this property in the form of advertising in different media such as newspaper, magazines, television and internet as well as gas, printing costs, postage etc… his net is now $1,720.
The amount netted can be less for properties that have been marketed heavily over a long period of time and can often reduce the net earnings to $0 or below if not careful.
So the general assumption of most people would be that Agent Brown sold the home for $200,000, therefore, he made $12,000 (or 6%). Those with a little more knowledge on the details would then assume he made $6,000 (or 3%). In truth, he grossed $3,600 - 1.8% of the sale price and netted even less, $1,720 or .8% of the sales price after taxes and expenses.
If the home were on the market for 6 weeks and it took another 4 weeks until closing, during those ten weeks, if Agent Brown were to calculate how many hours he spent on activities related to that property, i.e. phone calls, creating & mailing fliers, sending & responding to e-mails, updating his website, holding open houses, showing the property, presenting offers, negotiating offers, assisting with closing details, attending closing et al, he may discover that he spent over 150 hours on this transaction.
At 150 hours, he netted only $11.46 per hour on this transaction, less than what some retail sales associates earn, only Agent Brown isn’t simply selling a some article of clothing or bath towel sets, he is coordinating the sale of one of the largest investments in a person’s life.
Commission – it can be a dirty word… for Agent Brown. But Agent Brown, like the rest of us, enjoys what he does and puts everything into perspective and continues onto his next transaction, earning a living helping people buy and sell real estate.
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