With reality shows glamorizing the real estate brokerage industry, it would be fair to think real estate agents make tons of money. After all, there are juicy commissions available on countless properties across New York City. Just knock out a few seven or eight figure deals and you’re set! But how much do they actually make? And how does their compensation structure work? Unfortunately for the industry at large, most agents’ lives are not reality TV worthy.
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Many people are not aware that almost all real estate agents work as independent contractors for their brokerages and earn income only on a commission basis. A real estate commission is a fee a brokerage collects for helping a buyer purchase a property or a seller list and sell a property. All transactions run through the brokerage, and a real estate agent will collect a portion of this overall commission depending on their agreement with the brokerage. The portion of the commission that goes to the real estate agent is often called the agent’s “split.” As agents become more experienced and have more past clients, they become more valuable to the brokerage and their splits usually increase. There is no good data on splits but Yoreevo believes the average split in NYC to be about 70%.
Who pays a real estate agent's commission is where things get a little tricky. Technically, the seller pays the listing broker who pays the listing agent and as well as the buyer’s broker who then pays the buyer’s agent.
If it sounds complicated, it is!
Usually, this structure results in sellers just asking, “How much am I paying?” and buyer confirming they don’t pay for their agent. At Yoreevo, we like to say the buyer is actually paying everyone. They’re the one writing the big check - that’s where all the money comes from!
Commissions are agreed upon in the listing agreement, entered into by the seller and the listing broker - the listing agent. In the listing agreement, the two parties agree upon a commission.
The listing broker also agrees that if a buyer has an agent, the listing broker will split the commission with that agent’s broker. This is also called a “co-broke”.
Commissions are almost always a percentage of the purchase price. In NYC, under the REBNY Co-Brokerage Agreement unless the seller says otherwise, all member firms automatically offer to split the total commission 50/50 with any other member firm.
Certainly, some agents make much more than this and others earn nothing. It’s important to keep in mind the average real estate agent in NYC only does 2-3 deals per year. This foots with the data above. With 2.5 deals/year, a 70% split and $50,000 average commission, an agent would make about $87,000.
Some agents are making way more than this. Even on properties listed for eight or even nine figures, commissions are still 2.5% or 3% per side meaning there are individual commission checks getting written for well over $1 million!
Obviously, there’s a lot of money at stake and every dollar a real estate agent makes comes out of the pockets of home buyers and home sellers so what can you do to minimize commissions?