Content of the material
- How Much Does a Real Estate Agent Cost?
- Why a real estate agent is worth the commission
- How Much Does it Cost to be a Real Estate Agent?
- How the real estate agent commission is set
- Commissions When the Sale Doesnt Close
- The Bottom Line
- Real Estate Business Expenses
- #9. Advertising Your Services
- #10. Website Hosting and Maintenance
- #11. Business Cards
- #12. Travel Expenses
- #13. Open House Expenses
- #14. Office Expenses
- How commissions have changed over the years
- Who Pays the Commission?
- Do Real Estate Agents Get Paid Hourly?
- How to avoid paying Realtor fees
- What do these fees cover?
- Do California Real Estate Agents Pay Their Own Taxes?
How Much Does a Real Estate Agent Cost?
The standard commission for a real estate transaction is typically 6%of the home’s sale price, according to most real estate websites. The commission is usually split between the seller’s agent and buyer’s agent—meaning both agents receive a 3% cut. So, if you’re buying or selling a $250,000 house, the agents would receive a total of $15,000 (or $7,500 each). Now, if you’re like us, when you’re charged a fee that big, it’d better be for a good reason, right?
So, let’s find out exactly how that 6% breaks down!
Why a real estate agent is worth the commission
Having a real estate agent on your side as a buyer can make home shopping less stressful — and you may find better properties, or get a better deal, than you would have on your own.
For sellers, it’s a better way to list your home and bring in more prospective buyers.
And for both sellers and buyers, it helps to have a professional on your side who can help navigate the complexities of such a big real estate transaction.
Also, “buyer’s agents work much harder for their money,” says Buttner. “They often work with a particular buyer for months. They show them multiple houses and make many offers before something sticks.”
For this reason, the buyer’s agent sometimes makes a bit more than the seller’s agent.
“A lot of brokerages that charge less than 6% will still offer the buyer’s agent a full 3%,” Buttner says.
Remember that an agent’s hard work is not rewarded with every client. Those national average salary statistics collected by the BLS and other sources don’t show this unpaid effort.
“Not all transactions result in them getting a commission,” says Ailion. “So the costs associated with transactions that don’t close must be factored into those that do.”
Ailion understands that 6% may seem high. But, he adds, you really get what you pay for.
“Like a good doctor or lawyer, I believe a good agent is worth their fee,” Ailion says. “You’re dealing with likely the most significant asset in your life. So choosing the best representation makes sense.”
How Much Does it Cost to be a Real Estate Agent?
Total Estimation: $1,077 – $1,640
Without the business expenses, the immediate fees to be a real estate agent can be as low as $1,077 and as high as $1,640. Depending on your location, this estimate could be lower or higher (by a small margin).
Here is the breakdown of this cost:
- Real estate school (pre-licensing program): $477 – $740
- State Exam application: $60
- Livescan (background check) fee: $22 – $35
- Real estate license fee: $245
- Brokerage desk fees: $100
- Real estate board fees: $450 – $800
The cost of entry in real estate is a challenge for some people. Jobs don’t expect you to pay a couple thousand dollars to work.
But, the reality of this price tag is that it pales to how much money you can earn as an agent. That goes for all the fees to be a real estate agent, including the business expenses. When you become an agent, you invest in your education and you invest in your own business. So, we put together a few strategies on how you can finance these entry fees to be a real estate agent.
How the real estate agent commission is set
Realtor Kevin Deselms says the commission percentage is based on several factors. This can include local real estate market conditions.
“But the amount is often based on negotiation between the seller and the listing agent or the agent’s brokerage,” he says.
In other words, the commission is negotiable. And some agents are willing to give discounts, either within the listing agreement or later.
In fact, about three out of five sellers get a discount on their agent’s commission.
“Commission rates have been trending down in recent years,” says real estate broker Matt Buttner.
“This is mostly because of the internet and technology,” he says. “The MLS now automatically syndicates the listing out to real estate websites like Zillow and Realtor.com. So a listing agent’s job is easier.”
Discounts are given for many reasons.
“Say, for example, a client is selling one house and buying another using the same agent. In this case, the agent is more likely to offer a discount,” says real estate attorney and Realtor Bruce Ailion.
“Or say the property is in a hot market and competitively priced,” Ailion says. “It might take less work to sell. That could lead to a discount.”
Commissions When the Sale Doesnt Close
Commissions are generally paid only when a transaction settles. There are instances, however, when a seller is technically liable for the broker's commission even if the transaction is not complete. If the broker has an offer from a buyer who is ready and able to make the purchase, the broker may still be entitled to a commission if the seller:
- Changes their mind and refuses to sell
- Has a spouse who refuses to sign the deed (if that spouse signed the listing agreement)
- Has a title with uncorrected defects
- Commits fraud related to the transaction
- Cannot deliver possession to the buyer within a reasonable time
- Insists on terms not listed in the listing agreement
- Mutually agrees to cancel the transaction with the buyer
Listing agreements vary and each is individually negotiated. They may include contingencies that require sellers to pay a commission even if the home doesn’t sell.
The Bottom Line
Agents cannot be solely judged on commissions. For example, top agents often charge more than newer agents.
If you are a buyer, you do not directly pay the commission, so a discount would not affect you. There are a few agencies who offer to pay buyers to lure their business, but that's unusual.
In some cases, agents are seeing a reduction in the amount of commission paid to buyer's agents. The commission is often not split 50/50 between listing and selling agents, and many listing agents make more than the buyer's agents.
Ultimately, whether you're buying or selling a home, make sure you're clear on your agent's commissions and how they work. In most cases, the seller pays the commissions out of the home's sales price, but that can vary. It's best to ask if you're uncertain.
Real Estate Business Expenses
Total Estimation: $6,830 – $12,880/year
Calculating the costs and fees of your business expenses will vary from agent to agent. Nobody will know how much you should spend on your business better than you. So, to calculate your total expenses, you should create a business plan. This will help you identify how much of your budget you should spend on where. The costs and fees calculated in this section are derived from the average agent’s expenditures.
#9. Advertising Your Services
Estimation: $1,750 – $3,500/year
Advertisements come in different shapes and forms. They can be ads on social media, newspapers, and search results. Advertisements are effective. They can boost your leads with speed and ease. Because of that, they can be expensive. Weigh your options and understand your market, because they can be a worthwhile investment when used right.
#10. Website Hosting and Maintenance
Estimation: $180 – $3,480/year
From starting your website to the occasional maintenance cost, your website can come with a hefty price tag. Not all websites need complexities. You will realize the more intricate your site is, the more expensive it is. Some agents can do a lot with little. Before you make a website, know what you want and build around this.
#11. Business Cards
Business cards are how people remember your services after a meeting. The classic card stock is cheaper in comparison to a ritzy gloss stock. So, when it comes to deciding on business cards, know the message you want to send. Business cards help people remember you, so the style, design, and integrity of the card should compliment you.
#12. Travel Expenses
One unspoken fee to becoming a real estate agent is the travel. Agents drive a lot. So, they will have to afford car insurance, gas, and car maintenance. If they don’t own a car, then they have public transit expenses. Additionally, there are plane tickets or other modes of transportation for national events, if applicable.
#13. Open House Expenses
Estimation: $1,000 – $2,000/year
Open house expenses include signs, drinks, snacks, and other nice amenities. This budget category can be wide or small depending on what scene you want to set for open house visitors. Consider the cost of signs, though. Signage can burn a hole in your budget because of their unexpected price.
#14. Office Expenses
If you turn your house into your private office, then expect to pay office expenses. These vary from the internet bill to folder dividers depending on your office (and organization skills.) Some agents can avoid the recurring office expenses by working from their brokerage. Offices and work areas are sometimes provided to agents through their desk fee payments.
How commissions have changed over the years
Since the early 1990s, Realtor commissions have seen a fairly steady decline. In 2021, the average commission was 5.5 percent — down from more than 6 percent in 1991.
This isn’t to say the total amount Realtors earned decreased, however. In strong selling markets, home prices are high and sellers receive multiple offers. This allows more room for negotiation on the commission, so Realtors may accept a lower commission to earn a higher amount overall.
As the market slows down, Realtor commissions may rise again and become less negotiable. Even so, a seller with a high-priced listing may still be able to negotiate a lower commission more effectively.
Who Pays the Commission?
The commission comes out of the proceeds of the sale before the seller receives any money. So the buyer is the one who is obligated to pay.
However, since the sale price includes the commission, the buyer is also paying the commission. Sometimes buyers may be able to negotiate a lower price if a seller is representing himself or herself and therefore doesn’t have to pay a seller’s agent commission.
A seller without a listing agent may still be called upon to pay the buyer’s agent a commission. However, the commission will likely be lower than the full commission that would be paid if there were buyer and seller agents on the deal.
Like everything about commissions, a buyer and seller can negotiate the way the commission is paid. A seller could agree to pay a portion of it.
If neither buyer nor seller is represented by an agent, there is no sales commission. Often in this case one or both parties would hire a real estate agent, broker or attorney to oversee preparing documents for closing.
Do Real Estate Agents Get Paid Hourly?
There are probably no real estate agents that get paid hourly. It would be a lot less efficient and probably cost more. Real estate agents rely on earnings from commissions instead of salary.
Secondly, it is rare for a company to pay a salary to real estate agents. This means that the amount they earn increases with the number of houses the agent can close.
How to avoid paying Realtor fees
In 2019, just 11 percent of home sales were sold by owners without the help of an agent, according to the National Association of Realtors (NAR). In addition, NAR says, for-sale-by-owner homes (FSBOs) typically sell for less money than homes sold by Realtors. In many instances, FSBO sellers already know the buyers who end up purchasing their homes. Buying without a Realtor is also doable, but the jury is out about whether it’s a wise move — especially in this market.
When you shop around for Realtors, ask them from the outset what their commission is and compare the terms of each person you talk to. If you think the fee is too high, talk to them about lowering it.
“In certain situations where there’s a competitive environment for a prime or trophy listing, Realtors sometimes will negotiate the commission upfront,” Duffy says. “For example, if I’m listing a $4 million home at 6 percent, that’s a lot of money. In a situation like that there is greater flexibility to negotiate the commission — if you get $100,000 or $80,000 instead of $120,000, it’s still a good payday.” If the transaction is being handled on both sides by agents from the same brokerage, you might have more leverage as well.
What do these fees cover?
While many of today’s buyers often prefer to house hunt on their own, others decide to work with an agent to find a home. For those who choose to work with a traditional buying agent, they’ll find that their agents spend most of their time pulling home listings, driving to tour homes and doing pricing analysis to help them make strong offers.
Once the buyer’s offer is accepted and enters escrow, the agent will spend their time helping coordinate inspections and appraisals, negotiating repairs costs, handling all of the closing paperwork and some light accounting (the agent is responsible for maintaining the financial account used to pay inspectors and appraisers).
Do California Real Estate Agents Pay Their Own Taxes?
Last but not least is the tax factor. California is notorious for having high taxes, and the broker isn’t deducting anything when they pay an agent their share of the commission. That means the agent must subtract taxes each time they receive a commission check.
As an independent contractor, real estate agents must pay the IRS estimated taxes every quarter. The estimated taxes include income tax and the self-employment tax, which covers Medicare and Social Security taxes. You’ll need to reference the latest tax brackets to determine how much should be paid each quarter.
California also has a state income tax. California has 10 income tax brackets – the most in the country. Unfortunately, the state is also known for having the highest state income tax bracket at 13.3%. But that only applies to income over $1 million. California agents and brokers will pay anywhere between 0-9.3%.
At the end of the day, real estate is a profession where your salary isn’t set in stone. Set your sights high and you could be one of the best-paid agents in the country.