Bart Erickson

P. Barton Erickson
BPOR, e-PRO, REOS, SFR, SRS 
REALTOR since 1987
Co-Founder of the HouseJeanie Team

LAMON Assoc.

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How Realtors Get Paid
by P. Barton Erickson, e-PRO, SRS

   How do Realtors get Paid? 

    Where does that commission money go?

    Are all Realtors paid equally?

    Are all Real Estate Companies alike?


    To answer these questions we will start with the basics of what a Realtor is and explain the Realtor to Realtor and Realtor/Broker relationships. 
    A term Realtor is a registered membership mark which may only be used by Real Estate Professionals who are members of the National Association of Realtors. They may be state licensed Real Estate Agents, Broker/Associates or Brokers. 
    Although business models may vary, Real Estate Companies or Real Estate Agencies are a group of Real Estate Agents and Broker/Associates with a single controlling Broker. These companies come in various sizes and may have one or more individual offices. They can be independent Real Estate companies or franchised Real Estate companies.
    The companies that are advertised on television, radio and magazines such as Century 21, Coldwell Banker, ERA Real Estate, GMAC Real Estate, Help-U-Sell, Keller Williams, Realty Executives, Realty World, RE/MAX, Your Home Direct, and others are not Real Estate Companies. They are franchise companies (Sales agents that belong pay a fee that is 6-8% of their commission for that privilege.) that have copyrighted and registered their name and then franchise and control the use of their name to individual, privately owned Real Estate companies. The clue to whether it is a franchised company is the small print on the ads, "Each office individually owned and operated" or "Franchised."
    In general Brokers are either owners of, or managers of, each office. Each physical office has one Broker of Record who is, by license, responsible for the actions of the sales agents that work in the office and all the Real Estate transactions that are involved with that office. All home or commercial listings, home or commercial sales and money transactions are done through and with the approval of the Broker of Record. Real Estate Agents and Broker/Associates who list and sell Real Estate (the persons that have personal contact with the sellers and buyers) are contract employees. They are responsible to the Broker of Record of the office in which they work. These contract employees are never paid directly for their work. They must be paid through the Real Estate Company and the Broker of Record.
    In all Real Estate transactions there is a listing Real Estate Company and a selling Real Estate Company. All commission money at closing of a Real Estate transaction is paid to the listing Real Estate Company and disbursed by the Listing Company Broker. The amount or percentage of commission for the sale of the property is set by the listing broker (with the approval of the home owner or seller) and published in the MLS along with the listing. The commission split between the selling broker and listing broker is also determined by the listing broker but generally the listing broker keeps 50% of the commission and pays the selling broker 50% of the commission.
    After the commission money is received by the Listing and Selling Brokers, they in turn pay the sales agents involved in the transaction. The amount that the sales agent receives is determined by the employment contract the sales agent has with the Real Estate Company. Real Estate Agents are independent contractors and receive no other financial benefit other than the sales commission. The agents payment may vary from 40% share of what the broker received (20% of the total commission) to 100% of what the broker received (50% of the total commission). When the broker/company shares the commission generally the company pays for advertising, telephone, and other office business expenses. When the agent receives 50% of the total commission the agent pays for all the expenses, including advertising, telephone, and office expense to the broker of as much or more than $2,000 a month depending on what office services the agent receives.

    This is a broad brush explanation of real estate commissions. The Real Estate industry is changing rapidly. For example, with the introduction of the internet there has risen a whole other tier of people and companies that want to grab a portion of the Realtor's commission dollar, this is in the form of referrals and referral companies. But, that is for another discussion.

 

See: Finding a Realtor, Finding a Home, or Selling your Home Using Referrals or Relocation Companies