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How much commission do real estate agents make? Wondering if a career in real estate is the right one for you? What are the prospects and opportunities in real estate today? If you were pondering on these subjects, this blog will answer all your questions.
Real estate is a dynamic market and changes frequently as the economy changes. This affects how much real estate agents make per annum as the sales commissions are linked to the value and number of properties they sell in a period.
By understanding the income breakdown of a real estate agent, we can easily estimate how much an agent makes, how the sales commission structure works and the potential to earn in this industry. In this blog, we will navigate through various topics relating to agents' income structure, earning potentials, challenges, expenses, taxes and other factors that influence a real estate agents’ income.
Earning potential of real estate agents
Real estate agents make a lucrative income in the US. The properties and real estate in the country however have a sharp disparity as some cities have a very high end real estate market whereas other states and cities do not.
The average income of a real estate agent in the US is estimated at 95,251 USD which is a pretty handsome pay. This figure is supported by almost 98,700 employees in 2023 which means that even in a period where real estate is not at its best, agents are still able to make close to 100,000 USD in the USA on average.
There are many factors that affect the income of a real estate agents income such as:
- Location where the agent works from
Tier 1 cities such as LA and NY contribute to the highest average income value whereas smaller states like Maine, Mississippi and Vermont have very low real estate incomes. This affects how much money a real estate agent will make and therefore, choosing the right location to practice as a real estate agent is paramount.
- The size and value of the property that they deal with
The number of properties a real estate agent is dealing with at any given period of time and the value of the property is an important parameter to establish how much a real estate agent will be making. If the value of the property is high, then the number of properties need not be too high. Sometimes an agent can make a big sales commission by just selling one big property.
- Market fluctuations
The US is currently going through a poor demand but the real estate prices have been soaring ever so high. Even with a low demand, the prices of homes and properties have hit a record high in the year of 2023. This denotes that there is a good demand for real estate agents for the small proportion of people who are still investing in this market. When the market is good, real estate agents can capitalize and make the most lucrative pay.
- Number of years of experience that the agents have
Study reveals that those who have only 2 or more years of experience sell 10 percent less in volume than those who had higher experience. and are considered below those agents who have 10+ years of experience. Properties that are listed by experienced agents are sold faster and for better prices. This means that they earn a better income as they grow in the field.
- The package structure and benefits offered by the company/ broker they work for
Another important factor that affects their net income is the package that they are offered in the broker firm they work for. Many agents work under a broker and are employed by a brokerage firm. In such cases they may be offered a base pay, a 401K pension plan, health insurance and many other benefits which can cut into their commission percentage.
- The skills, certificates and other unique talents of the agent
Most clients look for many attributes in their agent and some of the top qualities are honesty, reliability, years of experience, recommendation, testimonials and many other skills and factors which also affect the total earnings pocketed by real estate agents.
These are some of the factors that help in getting a better income for the real estate agents. It is important to note that the market and the value of the property is much higher in cities like New York, Los Angeles, Las Vegas etc whereas smaller tier 3 cities can be quite low which gives for a skewed average value.
Commission structure basics
Real estate agents can have different packages based on how they operate. Independent agents, freelancers, agents who work for brokers, agents who are employed in broker firms etc. Based on the commission structure of a real estate agent, their income may vary.
- Agents under commission only model
Most real estate agents work on a commission only basis. In this case, the agents also have a broker who backs the sale and therefore takes a brokerage fee.
- Agents under a broker
For agents who work under a broker or a brokerage firm, they may have a commission only structure or may be offered a base pay plus a percentage of commission based on the sale volume and numbers.
- Agents with 100% commission
Some agents work under an office model where they take away the entire commission and pay a monthly fee to their broker at a fixed and flat value.
The typical real estate commission in the market as of 2023 is 5.4 percent but this figure varies from city to city. The average commission rates vary from one industry to another and in the US, the rates for real estate commission is between 5 and 6. In 2019, this figure was 5.7 percent and has slowly been fluctuating as the market conditions change.
Gross commission income (GCI)
Gross commission income is similar to gross revenue. It is the total revenue a person makes before taking away costs related to taxes, brokerage fees and other deductions from this commission. This income is generally the product of the total value of the property sold multiplied by the commission percentage. The result of this value is the gross commission value that the agent has pocketed from the transaction.
For example, if you happen to sell a property for 100,000 USD and your commission percentage is at 5.5 percent. Then your gross commission income is 100,000 X 5.5 resulting in 5500 USD. This is the GCI from which other expenses will need to be paid for. This includes:
- Brokerage fee that needs to be paid to the broker
- Tax on income
- Deductions for ad and marketing expenses etc.
When GCI increases, your overall revenue also increases. To increase the net profit, agents must focus on increasing the sale of property value, number of properties sold and the percentage of commission so that the overall GCI value also rises, increasing the net profit.
Brokerage fees and splits
An agent in the US cannot work independently as they do not have the sufficient license to carry out a trade for property between the buyer and the seller. An agent only has a license to represent either a buyer or a seller. To complete a transaction and to close a deal, a license to broker the deal is required which is why every agent needs a broker.
Agents who have a broker to back the deals and are represented using a brokerage firm need to pay a brokerage fee. The percentage of cut for the broker for every sale closed is mutually agreed upon at the time of agent contract or hiring. In the US, this is mostly set to 50 - 50 but it could also be favorable to the agent as they do most of the work.
An example to showcase the split between brokers and agents:
If you are an agent who sold a house for 500,000 USD in NY and your commission is set at 5 percent, then your gross commission income is 25000 USD. If you work for a brokerage firm and are required to split the commission 60 - 40 in favor of the agent, then your net commission would be 25000 X 60% which results in 15,000 USD.
Operating expenses
Beyond brokerage fees, the agent would also need to incur some expenses in connection with marketing of the property as well as to promote himself/ herself in the market.
The more the agent puts themselves out in the market, creates social connections, builds a network and engages with the market, the more they are remembered by the clients when it's time to sell or buy. There is a cost associated with doing so and some of the most common expenses that agents will incur are:
- Ads for the property listing
- Sign up for Multiple listing services for better visibility
- Office expenses for maintaining staff
- Licensing fee to keep the license active
- NAR fee - a fee for being part of any association such as National Association of Realtors
Taxes and withholdings
Every person who has an income needs to pay taxes in the US - a real estate agent can either be a self employed person or fall under a salaried person category based on how he or she operates.
If you are part of a brokerage firm and have a fixed salary and benefits package, then you will pay taxes on your salary as well as your commission computed annually. If you work independently and fall under the self employment category, then you need to pay taxes only on your gross commission income.
As a real estate agent under the self employment category, you are expected to pay 15.3 percent tax above your regular income tax which is based on your overall revenue. As a self employed agent, you can deduct many expenses and cut down on your taxes. Here is a list of payments that are exempt from taxes:
- Commissions that you pay
- Office maintenance expenses
- Advertisement expenses
- Commute costs/ travel expenses
- Insurance premiums
- Legal expenses
- Bank fees and loans
- Office supplies and utilities
Many experts agree that there are ways to cut down on the taxes and protect yourself from the tax hike. Make use of the services of the PATH and other tax relief services such as pension plans and retirement plans to decrease your taxes and improve your earnings.
Net income and take-home pay
Net income for real estate agents post all deductions including taxes, expenses and brokerage fee is the final take home pay for the real estate agents. To calculate this, let us take an example:
If an agent makes a sale of a home for 100,000 and his commission on the same is 5 percent. Then the gross commission income is 100,000 X 5 = 5000 USD.
Let us assume the following deductions:
- Brokerage fee of 40 percent = 2000 USD
- Expenses for ads and marketing 200 USD
- Taxes and other legal expenses at 300 USD
Total expenses = 2500 USD
Net income = Gross commission income - All Expenses (5000 - 2500 USD) = 2500 USD.
Applying the formula and after calculations, it can be ascertained that the net income in this scenario is approximately 2500 USD post deductions as take home pay. To increase the net income, the agent must focus on improving the gross income and reducing the expenses.
Realistic expectations for new agents
Real estate agents are in high demand today in the US with a 5.8 percent growth index. But as a new and upcoming real estate agent, you must understand the need to invest in yourself and in your business before you can reap the benefits in terms of commissions and revenue.
Most real estate agents who have made a mark in the industry will agree to the fact that the economic changes are dynamic and therefore agents need to be fully prepared to help clients through hikes and dips in the market as and when they come by.
There are many methods to earn well and to avoid unnecessary expenses in the real estate market. Some of the best tips from the industry leaders are:
- Creating a good clientele and having a solid presence in the market with networking skills, marketing skills etc
- Take up certification courses to improve your skill set such as leadership courses, time management courses, industry related skill sets etc
- Utilizing market knowledge to your advantage and helping clients find the right solutions
- Being honest, transparent, reliable and keeping all processes legally aligned.
- To improve your income, you must advance to a broker and hire more agents under you to expand your income horizons and to make the most of your career.
There is a good prospect and scope for employment as a real estate agent in the USA. The labor bureau reports a hike in real estate opportunities of 3 percent from 2022 to 2023.
Given that there is a good scope of employment and for earning a lucrative pay, aspiring agents can look up courses to complete agent training and pass the agent exam to get their license.
Once you have marked a name for yourself in the industry as an agent, you can hope to create your own brokerage firm and hire some of the best talents in the market. This can help in making a brand for yourself and attracting agents who will help advance your career as a broker.
Conclusion
Now that you are equipped with everything you need to understand about how much real estate agents make, it is safe to assume that this is indeed a lucrative opportunity for aspiring candidates.
A position in real estate and an opportunity to work with one of the best brokers in the city can help propel the career of a young and aspiring real estate agent.
By choosing the right income model and by improving the gross commission income, agents can easily higher their net income and create a reputable career in the industry.
