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How Much Does a Real Estate Agent Make?

by Wayne

If you were to believe the TV reality shows, real estate agents must make big bucks.

Is that true? If not, how much does a real estate agent make? There are more than a dozen real-estate-oriented shows on television (Home & Garden Television – HGTV – has 7 of them), and in each show agents are “wheeling and dealing” to get homes sold. And, a little quick math leads viewers to conclude that real estate agents must make a lot of money. How much money does a real estate agent make on a home that sells for $400,000? Let’s see; at a 6% commission, that would be $36,000 on just one sale!

Or would it?

For those wanting to “cash in” on the high commission dollars available to real estate agents, a reality check is in order. Do some agents make a lot of money (over $100,000/yr.)? Yes. Do most agents make that kind of money? No. Can YOU make that kind of money? Well, the opportunity is certainly there, but there are variables. Some variables are controllable, others are not. Let’s have a look at a few of these variables, and then you can decide for yourself if you have the opportunity to become a top-earning real estate agent.

Variable #1: Where you live and work is important. Although real estate commission rates tend to stay within the same range across the country (3%-7% for residential sales) the actual dollar amounts of commissions vary widely. 2012 Bureau of Labor and Statistics data shows that agents in metropolitan areas such as New York had a mean (average) wage of about $88,000, whereas in rural areas of South Florida agents had an average wage of only $31,000.

It’s important to note that the average wage for the South Florida agents was calculated from the earnings of only 330 agents, whereas the average earnings for the New York agents was calculated from the earnings of almost 12,000 agents. The conclusion is obvious: commission dollars are higher wherever home prices are higher. Of course, living expenses in these areas are also higher, so agents will spend more money to live and work in these areas.

Remember, too, that the BLS data is a compilation; it includes all sorts of real estate agents, including salaried agents such as rental agents. In the real estate profession, a license is required to speak with anyone about any aspect of real estate. Why? Because real estate is a complicated amalgamation of state and federal laws (Equal Housing, for example) and brokers must be careful to not break any rules or they face fines or loss of license. Because the BLS data is taken largely from tax returns, it’s difficult to separate commissioned from non-commissioned employees.

Variable #2: High real estate turnover results in higher earnings for agents. Jobs create opportunity for everyone, and when employees are moving in and out of an area, or upwardly mobile residents are moving into larger homes, then more homes are sold and agents make more money.

Variable #3: The agent works a competitive niche. Successful agents in every market focus on a specialty. Some work with senior citizens and down-sizers; other agents specialize in condo sales or resort sales, still others in high-end properties. The best niches are those with high property turnover and high prices.

Variable #4: Expenses are kept under control. Real estate agents are self-employed. That means that they pay all of their own expenses: health insurance, auto expenses, errors and omissions insurance, MLS fees, brokerage fees, internet costs, business cards, advertising, and all other costs of running a business. Sure, all of the expenses are “tax deductible”, but only the amount that’s left after the deductions can be claimed as your spendable income. If you earn $100,000 in commissions and spend $36,000/ year in expenses, then you’re left with $64,000, from which you have to pay income taxes and self-employment taxes. Agents who want to net $100,000 after expenses have to adjust their sales goals accordingly.

Variable #5: Favorable commission splits. It’s extremely rare that an individual agent gets to keep all the commission from a sale; commissions are usually split between two to four people. If you’re not familiar with commission splits, here’s how they work: In most states, the only individuals who can get paid from a real estate sale are brokers. Brokers employ agents to work for them, and when a sale is made the broker gets the commission and pays a percentage of it to the agent. Most home sales employ a buyer’s agent and a seller’s agent, and each agent is employed by a broker. So, when a sale is made, the two brokers split the commission and each pays his own agent (even though it was the agents who did the work). There are no “hard and fast” rules for agent commission splits, though.

Although brokers will split a commission 50/50, the percentage that a broker pays to an agent will vary. Some brokers insist on half, other brokers don’t take any percentage at all; instead, they charge each agent a fixed monthly fee that covers the broker’s overhead and profit. Agents who make the most money have the most profitable broker commission arrangement.

Variable #6: Commissions are kept on the “high side” of competitive. It’s a fact: sellers don’t like to pay high commissions. Too often, agents cut their commission in order to get a listing. Cutting one’s commission is a bad idea, and here’s why: almost every real estate brokerage in America is a member of a Multiple Listing Service (MLS). An MLS is a listing-sharing organization that allows brokers to sell one another’s listings and share in the commissions generated. When an agent gets a new listing, it is posted onto the local MLS, and other agents in town can sell the property. Each property listing shows the commission percentage that a participating broker will receive if they sell the property. Properties that are listed at a low commission rate are often ignored by other agents. And, it’s to the listing agent’s advantage to have a lot of other agents out trying to sell his listing. It takes just as much work to sell a property listed at a 1.5% commission as it does a property that is listed at a 3% commission. If you were an agent, which property would you spend your time (and money) promoting?

How much does a real estate agent make? The best answer is this: in any market, a good real estate agent can expect to make as much as other professionals in their market: dentists, lawyers, stock brokers, and insurance salesmen. It doesn’t make any difference whether that market is Washington, DC or Fargo, ND. Even in a rural agricultural area where the mean household income is $40,000/yr. and homes sell for $150,000, an agent can still earn, after splits and expenses, over $2,000 on the sale of a home. Two sales a month will put an agent in the better-than-average income bracket for his area, and three sales will come close to doubling the median income for his area.

So, don’t be misled by the big bucks that are quoted on the TV real-estate-reality-shows. Real estate agents work hard for their money. But, the rewards can be great for good agents, and they don’t have to live in Hollywood, CA to realize them.

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