Why do realtors make so much money?

If you’ve ever bought a house or are in the process of buying one, you might be concerned about the commission from the agent. While homes are generally costly, the realtor fees can make them even more expensive. So, why do realtors make so much money?

There’s a perception that realtors make a lot of money. But this is wrong. The median income of realtors is $48,770 from the average of 4-6% commission on every sale. Realtors charge high commissions to make up for the hours of effort, additional fees, overhead costs, and limited sales per year.

Although the commission is between 4-6%, it could be more in some cases. But given the duties of the realtors and how important their expertise is to the success of any real estate transaction, it’s worth it. Here, we explain how much realtors make and why they charge high commissions.

How Much Do Realtors Make

According to the US Bureau of labor statistics, the median salary for real estate agents in 2021 was $48,770. On the other hand, brokers have a mean salary of $86,490. The top ten percent made over $102,170, while the top ten percent of brokers made $176,080.

How Do Realtors Make Their Money?

Real estate agents make their money through commission, and that’s usually a percentage of the cost of the house. This is another reason why these agents charge more. A realtor won’t make any money if the transaction isn’t completed. The commissions are mostly between 4 to 6%. But some estate agents work for companies and get a base salary with bonuses based on their performance. However, this isn’t the case for most agents.

The commission comes from sales proceeds at the sale’s closing, and they pay it to the broker, who splits it with the agent.

How Much Do Real Estate Agents Get as Commission?

Real estate agents get about 6% of the selling price as commission. This isn’t constant. There are instances where they might get less or more. But the 6% is usually split between the selling and buying agents. Then the agents have to split the commission with their brokers as well. So, in most cases, the commission is split four ways which means that most agents don’t make much. Lesser parties can split the commission. This happens if the agent serves as both buying and selling agent.

Why Realtors Charge High Commission?

In most cases, realtors deserve the commission they get. Here are reasons for that:

1.  Hours Of Effort

While it might seem like an agent is making a killing on commission, the work they put in is equivalent. When you break down the commission based on hours worked, you realize it doesn’t amount to much for the realtor. Selling or buying a house isn’t easy. Even with agents involved, many transactions aren’t completed. The chances of a transaction failing are higher if there’s no agent. 

There are several rules to follow when buying or selling a house. There are contracts to draft and inspections to make. All these take time and energy. If you decide to do it yourself, you might not get through. That’s why real agents are important.

2.  Additional Fees

There are also additional fees that the agent must pay. Most agents usually work with a broker and have to pay part of the commission to the broker. This can be as much as half of the commission. There are lots of efforts that go into becoming a real estate agent and remaining so. Real estate agents require a license, pay for MLS, insurance, board dues, continuing education to retain their license, and even advertise themselves.

3.  Overhead Costs

Most realtors are independent contractors with overhead costs such as marketing, office rentals, buying gas, taxes, etc. All these overhead costs can only come from the amount they receive in commission. So, a real estate agent has to charge enough to cover all these expenses.

4.  Limited Sales Per Year

Although it might seem like the agent is making a lot on commission, their annual income isn’t that high. Most realtors don’t sell many houses annually. The average income of a real estate agent is $86,400. But most salaries range between $44,900 to $132,000. The competition in real estate is also very high due to the low entry requirements. So, the best real estate agents have to go the extra mile in their service and spend a lot of time marketing to get clients.

Roles of Realtor

Realtors are agents of parties involved in a real estate contract. They act on the wishes of the buyer and the seller. To understand why realtors charge a commission, it’s important to understand what they do. These include:

1.  Valuation of Property

The realtors usually know the value of a house based on their familiarity with the market and their experience. Thus, they help the seller get a fair value. If you’re trying to sell, the price has to be just right. A house that’s too costly is as bad as a house that’s too cheap. If you price the house too high, no one will buy it on time, and even if you reduce the price, people might start wondering why it has been on the market for that long. If it’s too low, you might lose on the deal.

2.  Negotiations

Whether working for the buyer or seller, the realtor seeks to get the best deal for their client. So, they usually negotiate on behalf of the client. Of course, such negotiations are based on the instructions of the client. But they ensure the client doesn’t have to bother with the back and forth.

3.  Stage and List the House

A seller’s agent also has to present the property in the best possible way to make it desirable to the buyer. This is called staging, and only realtors can do it appropriately for the best results. After staging, they also list the property for the seller.

4.  Find and Inspect Property

The buyer’s realtor also has to find the right property for their client. This usually takes weeks of search and communication. Even after finding the property, the realtor still has the buyer to inspect the property.

5.  Finalize the Contract

It’s also the realtor’s work to prepare the real estate contract and ensure compliance with all the relevant laws. This is why part of the realtor training includes contract law and related matters.

In Conclusion

There’s a myth that realtors make a lot of money. In reality, most don’t. They make just enough based on the value of the work they do. Since real estate agent income comes from commission, the extra few thousand is fair.