For some time now I’ve been hearing misconceptions from clients and customers regarding how I get paid as a real estate agent, so the time is now to blow the lid off this little secret – actually, it’s not a secret at all, and I’m glad to share. I’d love to be able to say that that $10000 commission check I just received at the closing table is all mine, but alas it’s not. Grab some popcorn, settle in, let’s do some math, shall we? Also, I want to give a quick advice, when you hire a realtor just check his profile to make sure he won’t play you, the Henderson realtors are one of the best ones.
How Do I Get Paid?
When a home is listed on the MLS, a seller’s agent has already determined with the Seller what fee they will pay to the agent who brings a buyer. This fee has been set, and is listed as a co-broke fee on your MLS sheet. The standard fee is 3%, although many agents will negotiate a lower rate in order to get a listing – that’s a soapbox for another day. Let’s assume 3% for our purposes, however. When I sell a home for $300000 and a 3% co-broke fee, here’s how it breaks down:
- Sales price $300000
- Co-broke 3% or $9000
- Taxes 40% or $5400
Simple math, righ
t? WRONG! One would think that if I brought home a $9000 paycheck that I should be grateful, and I am, but I’m not going to see that $9000 for much longer. All of a sudden, hands start jumping at me. There’s a fee to Coldwell Banker. There’s rent on my office at Townside. There’s E&O insurance … and gas … and advertising costs … a cell phone … medical insurance! Notice I paid taxes up front – I’m an independent contractor, a small business owner in the Town of Blacksburg, and so I’m responsible for taxes at an almost 40% tax rate (yes that’s higher than most but I set aside more just to make sure in the end I have enough), so it’s good to set that aside from the start. Suddenly, after all of those cuts, that $9000 has just been whacked down to a much smaller number.
Please don’t misunderstand, this is a great business to be in if you want to make your own schedule and assist people with one of the most important investments of their lives. I absolutely love what I do – I love having the opportunity to meet people from all walks of life, work on their behalf and watch their smiles when we’ve met their goal of buying or selling real estate here in the New River Valley. My wife and I had dinner last night with friends who were, at one time, clients, and have become great friends of ours during their time here in Blacksburg. I wouldn’t trade that for anything. It sounds like a cliche, but it’s really the best job in the world.
It’s just not quite as glamorous as one might think.
Tony, thanks for this comment. My goal was to simply paint a broad brush stroke over the payment discussion. You’re right – there is an ever-changing set of activities that are necessary to be done in order to get a property sold, or a buyer that perfect house. Sometimes, it’s the first house they see, and other times it’s the 50th. You keep going until you get it right, so without tracking all of that time over an extended period of time, with multiple data sets, it’d be really difficult to dig that deep. But for someone who’s up for an experiment, I’d think that’d be pretty cool!
Tony, thanks for this comment. My goal was to simply paint a broad brush stroke over the payment discussion. You’re right – there is an ever-changing set of activities that are necessary to be done in order to get a property sold, or a buyer that perfect house. Sometimes, it’s the first house they see, and other times it’s the 50th. You keep going until you get it right, so without tracking all of that time over an extended period of time, with multiple data sets, it’d be really difficult to dig that deep. But for someone who’s up for an experiment, I’d think that’d be pretty cool!
I enjoy your blog and appreciate all of the information you share. Anything you can share to help educate folks on how the real estate business, and specifically commissions, works is beneficial for customers out there who may only need/use the services of real estate professionals like yourself a handful of times during their adult lives.
However I think only talking about the commission amount, tax amounts, etc is only part of the larger story of the services real estate professionals provide and the compensation they receive in return. I am not in the real estate business so am not claiming to be an expert, but I would imagine that in each scenario (ie representing a seller, and also being a buyer’s agent) there are different activities and amounts of time, expenses, etc that you would perform on behalf of your clients. Overall market conditions would also be a factor in the amount of time/expense required to sell a home and therefore how much “profit” a real estate agent might make on an individual transaction, or “x” number of transactions during the course of a year.
I agree with some of the other comments in terms of all businesses pay taxes, have some form of cost structure that needs to be taken into account, etc.
As a customer I know it can sometimes be difficult to understand where the 5-6% of the selling price of the home goes, and what services the customer is receiving in exchange for that 5-6%. So to that extent I think these kinds of articles and discussions are good to help increase overall understanding of how the real estate business operates.
I enjoy your blog and appreciate all of the information you share. Anything you can share to help educate folks on how the real estate business, and specifically commissions, works is beneficial for customers out there who may only need/use the services of real estate professionals like yourself a handful of times during their adult lives.
However I think only talking about the commission amount, tax amounts, etc is only part of the larger story of the services real estate professionals provide and the compensation they receive in return. I am not in the real estate business so am not claiming to be an expert, but I would imagine that in each scenario (ie representing a seller, and also being a buyer’s agent) there are different activities and amounts of time, expenses, etc that you would perform on behalf of your clients. Overall market conditions would also be a factor in the amount of time/expense required to sell a home and therefore how much “profit” a real estate agent might make on an individual transaction, or “x” number of transactions during the course of a year.
I agree with some of the other comments in terms of all businesses pay taxes, have some form of cost structure that needs to be taken into account, etc.
As a customer I know it can sometimes be difficult to understand where the 5-6% of the selling price of the home goes, and what services the customer is receiving in exchange for that 5-6%. So to that extent I think these kinds of articles and discussions are good to help increase overall understanding of how the real estate business operates.
Taxes often get overlooked, Tom, and so I included it. And you’re right – if I’m paying 40% I need a new accountant. Thankfully I’m not paying 40%, but it’s my safety net because I’ve been burned before. I’d rather save it up front than try and juggle things here and there when filing. Just my own system, I guess.
But thank you for the new blog post idea … you and Anne are on the same page.
Taxes often get overlooked, Tom, and so I included it. And you’re right – if I’m paying 40% I need a new accountant. Thankfully I’m not paying 40%, but it’s my safety net because I’ve been burned before. I’d rather save it up front than try and juggle things here and there when filing. Just my own system, I guess.
But thank you for the new blog post idea … you and Anne are on the same page.
Well said, Jeremy. A little bit of transparency never hurt anyone. It’s important to explain how exactly Realtors get paid … and that we actually pay taxes directly rather than via “withholding” – which makes stroking that check much more painful.
“Paying taxes” takes on a whole new meaning when it comes directly from your pocket.
Additionally, dispelling the myth/rumor that Realtors make “6% on every transaction” is important.
Well said, Jeremy. A little bit of transparency never hurt anyone. It’s important to explain how exactly Realtors get paid … and that we actually pay taxes directly rather than via “withholding” – which makes stroking that check much more painful.
“Paying taxes” takes on a whole new meaning when it comes directly from your pocket.
Additionally, dispelling the myth/rumor that Realtors make “6% on every transaction” is important.
Interesting post, but I don’t think taxes are relevant. All businesses pay taxes, yet I understand how you typically see clients who don’t remember that aspect.
(BTW, if you’re actually paying a 40% tax rate as a small business owner, you need a better tax accountant!)
What I think is more relevant is explaining the relationship between the agent and the broker and how much the of cut they take.
Interesting post, but I don’t think taxes are relevant. All businesses pay taxes, yet I understand how you typically see clients who don’t remember that aspect.
(BTW, if you’re actually paying a 40% tax rate as a small business owner, you need a better tax accountant!)
What I think is more relevant is explaining the relationship between the agent and the broker and how much the of cut they take.
I just wanted to make sure I told my side, Anne. My industry has been over-glamourized and sold itself time and again, and while I’m sure Joe Public realizes not everything’s as it seems on TV, I thought it would be a good jumping off point to explain exactly how I get paid.
Which might be another good blog post, now that I think about it.
I just wanted to make sure I told my side, Anne. My industry has been over-glamourized and sold itself time and again, and while I’m sure Joe Public realizes not everything’s as it seems on TV, I thought it would be a good jumping off point to explain exactly how I get paid.
Which might be another good blog post, now that I think about it.
Kelly, I did not stay in a Holiday Inn Express last night, nor am I a tax accountant (or wish to play one on TV), but my experience in my businesses is that yes, 20-40% is a good rule of thumb. I set aside 40% so that I am sure to have enough to pay the Tax Man, but I know other small business owners who set aside far less. It takes trial and error, for sure, to see what works for you and your business.
Disclosure: I am not a tax accountant or attorney, please don’t take my advice as anything more than drivel on a simple real estate blog. To determine implications for your business, please contact your favorite tax professional. If you would like a few names, I’ll be glad to provide you some. 🙂
Kelly, I did not stay in a Holiday Inn Express last night, nor am I a tax accountant (or wish to play one on TV), but my experience in my businesses is that yes, 20-40% is a good rule of thumb. I set aside 40% so that I am sure to have enough to pay the Tax Man, but I know other small business owners who set aside far less. It takes trial and error, for sure, to see what works for you and your business.
Disclosure: I am not a tax accountant or attorney, please don’t take my advice as anything more than drivel on a simple real estate blog. To determine implications for your business, please contact your favorite tax professional. If you would like a few names, I’ll be glad to provide you some. 🙂
Money is a tough subject, one that requires courage to discuss, but one by which we are empowered by frank information. Thank you for modeling transparency and giving me, as always, food for thought.
Money is a tough subject, one that requires courage to discuss, but one by which we are empowered by frank information. Thank you for modeling transparency and giving me, as always, food for thought.
So, Jeremy,
Would you say that any independent contractor is likely to pay 20-40% of what they earn in taxes and expenses regardless of the type of business? Thanks for doing the math!
-Kelly
So, Jeremy,
Would you say that any independent contractor is likely to pay 20-40% of what they earn in taxes and expenses regardless of the type of business? Thanks for doing the math!
-Kelly