How real estate agents are paid

How payments to agents work can be confusing. Let’s use a $250,000 home as an example to illustrate how commissions turn into agent earnings.

An overview of payments in real estate.

The home sales transaction and brokerage commission

A home sells for $250,000. The seller had agreed to a 6% commission of which, 3% goes to the buyer's agent and 3% goes to the seller's agent.

On completion of the deal, the seller pays a $15,000 commission (6%) to the brokerage of their agent. To reiterate, the payment is to the brokerage, not to the agent, and this is important. The brokerage of the seller’s agent makes a payment of $7,500 (3% of the total sale) to the buyer’s agent brokerage. At this point, the brokerages of the buyer and seller each have collected 3%. But that money doesn’t go to the agents yet.

How a brokerage pays agents

Agents have a split with their brokerage. This means that the brokerage gets a percentage of each transaction. Let’s assume the seller’s agent has a 70% split (the brokerage takes 30%), and the buyer’s agent has a 60% split. This means the seller’s agent will collect $5,250 ($7,500 x 70%) and the buyer’s agent will collect $4,500 ($7,500 x 60%).

Understanding industry terms on sales and payments

The value of a home sale is the sales volume. So, if an agent sells two $300,000 homes, they are generating $600,000 in sales volume. Each transaction has two sides: one for the buyer and one for the seller. Sides simply account for the fact that there are two parties involved in each deal. Often, top brokerages and real estate agents rankings are by sales volume or sides.

The sales volume times the agent’s commission on the side is their gross commission income or GCI. Let's say an agent sells a $300,000 home and receives a 2.5% commission (5% shared between buyer and seller side). The agent's GCI will be $7,500 (2.5% x $300,000). GCI is usually a well-known metric in brokerages. An agent’s GCI usually drives their split with their brokerage. The higher their GCI, the more perks they may get with their brokerage. Often it also means they pay lower brokerage fees. This is because high-performing agents generate large profits for brokerages.

For example, a $100K GCI agent on a 80% split returns $20K in fees to the brokerage. A $350K GCI agent on a 90% split earns $35K in fees the brokerage. The brokerage is happy giving the better split to the higher-GCI agent in this case. Often when a brokerage tries to raise their fees, an agent will consider changing firms. Splits and incentives are usually formalized in employment documents. These documents are independent contractor agreements or ICAs.

While somewhat dated, TheRealDeal published a good article on NYC real estate splits. In NYC in 2014, most agents with under $100K in GCI paid almost half of their commissions to their brokerage. Agents generating over $350K paid closer to 30%. In other markets, splits are often more favorable to agents.

Splits in 2014 NYC. Source: TheRealDeal.


Agent payment models

There are a few ways that agents make money depending on their brokerage.

The traditional model

Using the example above, you’ll notice that the buyer’s agent is collecting only $4,500 on the sale of a $250,000 home. Agents are almost always independent contractors. This means that their commissions are pre-tax, pre-benefits, and pre-expenses. The example below for a Keller Williams. It shows that compensation is an estimate from commissions.

A typical traditional agent role posting (via Google).

Full-time and fixed-price models

Alternative models such as Redfin's provides salaries and benefits to real estate agents. These companies segment agent roles by function. This would include prospecting, showings, and transaction support. As a result, agent performance is more about completing tasks than it is commissions. But agents lose personal control over their schedule and marketing as full-time employees. Below is a sample job posting from Redfin. It showcases how the roles differ significantly from traditional agent positions.

Redfin’s posting for full-time agent roles (via Google).

Flat-rate services are sometimes used by agents who specialize in certain functions. Many agents charge a flat fee to handle listing a property online. This can have some value to sellers who want their property on the agent portal, called the MLS. This also allows agents to avoid cumbersome commission negotiations. The marketing from Redefy below is an example of flat fee services.

An example of a flat-rate agent service. Source: Redefy.

Generating income with lower-effort referrals

Referrals and relocation fees generate lower commissions but are less work. In these cases, an agent hands a client off to another agent. In return, they get a part of the closed commission from the agent they referred the client to. Usually, the referral fee for sales is 15-30% before the brokerage split. On rentals it's usually 5-25%. Often agents use referrals if they don't specialize in a neighborhood or location. Other agents might specialize on relocation if they have a strong relationship with employers.

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