Inside the Life of a REALTOR® - Working on Commission

I'm sure that many of you love to watch TV. I know I do, at least sometimes. And if you're interested enough in real estate to be reading this blog, I'll go out on a limb here and say that you occasionally like to watch shows on channels like HGTV that feature my chosen profession. I've seen some of those shows. And I'll let you in on a little secret: Like most other stuff that passes for "reality" on TV, it's usually a load of BS. So what I thought I'd start this week is an occasional look into how things in our profession really work.

I'm going to start it off this week by giving you some insight into how we actually make money. I know that there are a lot of interesting ideas that the public has about that topic. I'll sometimes talk to someone who will enviously tell me "Gee, you guys get 6% of every transaction that you work. All you have to do is sell 5 or 6 houses a year, and you're rolling in the dough". I wish that were true. At an average sales price of around $200,000, that would be $12,000 in my pocket every time I closed a transaction. Sweet.

Before I go any further here, I want to make something very clear. None of what I'm about to share with you here should be read as any kind of complaint. I love what I do, and I wouldn't want to do anything else for a living. I just want to educate you on how this really works.

The truth is somewhat less lucrative than that $12,000 figure might lead you to believe. Here's the reality: Let's say that we have a very typical (for our market) $200,000 transaction. I have the listing, and someone from another office brings us a buyer. Most of the time we set these up on a 6% commission (there isn't a "standard" rate, but that's pretty typical). In order to actually get the other agent to sell this property, we have to be offering them compensation - almost always half. Now I'm down to 3%. $6,000 still seems like an OK deal, right?

But wait a minute - I don't own my office. That listing that I have isn't really my listing from a legal standpoint. It belongs to my broker. That 3% is, technically speaking, his share of the deal. He's got an office to keep open and he has expenses just like any other business. So the way this typically works, each agent has an agreement with their broker on what is known in the industry as a "split". That split depends on the broker's policy and a negotiation between the broker and his/her agents. Every office has their own policy on this. What we usually see is that newer agents get somewhat lower splits, sometimes as low as 50-55%, and as agents get more productive, those splits increase. In the case of the very top end producers, they'll often have splits in the 85% or more range.

Let's use a 70% split as an example. That $6,000 just became $4,200. But that still isn't what's going to be in that commission check. There are usually other fees to be paid in there for which could include office fees for things like a transaction coordinator, errors and omissions insurance, franchise fees, etc. So the check gets a little smaller, probably under $4,000. Now, it is possible that you can avoid this whole split issue in this business by getting a broker's license and striking out on your own. There are a few independent brokers in our market that have had varying levels of success. You can go that route and keep more of that commission for yourself, but you aren't going to have the name recognition and national advertising of a franchise behind you.

But there's more! There are a lot of ongoing fixed costs associated with just being in this business. We have licensing fees, association fees, MLS membership fees, and so much more. And most offices have some form of desk/technology/resource fee that we pay regardless of our transaction level. And we have general business expenses as well. And if it's a short sale and the lien holders cut the commission? Smaller payday. If that deal goes south and doesn't close? No payday.

And let's not even talk about how much time goes into closing a transaction. I'll save that for another episode. But the bottom line is, you have to be doing more than 5-6 transactions a year to be making a decent living in this line of work. Suffice it to say it's nothing like the "list a house, get a big check" business model that you might think it is.