Last Updated on February 25, 2022 by Mark Ferguson
It may seem ridicculous that real estate agents make so much money on the sale of a house. Selling a house is expensive and much of the cost is a real estate agent’s commission. Real estate commissions are usually paid entirely by the seller and are significant. I am a real estate agent in Colorado and even though agents are expensive they are still well worth it. Real estate agents do not charge as much as they do because of the time it takes to actually sell a house. They charge a lot because it takes work and money to market, it is hard to get licensed and become a real estate agent, they have to pay for dues and insurance and real estate agents usually have to split their commissions with their broker.
The biggest reason real estate agents make so much money is they are worth it! A real estate agent will usually sell your house for much more money than if you sold it yourself.
Why are real estate agents worth the commissions they charge?
A real estate agent’s main value is knowing the market value on a home. If a home is priced too low or too high, it can cost the seller thousands of dollars. Price a home too high and it will stigmatize the home. Buyers start to wonder what is wrong with the home if it sits on the market even if the price has been reduced. Price a home too low and you could be leaving thousands of dollars on the table.
I hear stories about people who say they saved thousands of dollars when they sold their house by not using an agent; they sold the house in one day with multiple offers! If you received multiple offers on the first day, there is a great chance you underpriced the home and left money on the table. Most likely more money than the real estate agent would have cost. A real estate agent is an expert at pricing homes and a website like Zillow cannot be used as a substitute. I wrote an article about how accurate Zillow is, and it shows you need a local expert to price your house correctly.
How do real estate agents make money?
In most situations, a real estate agent represents the buyer and seller of a home and both commissions are paid by the seller. This may not seem fair, but there is a very good reason the system works this way. Having the seller pay both agents’ commissions allows there to be a larger buyer pool and higher house prices.
Why does the seller pay for the buyer’s real estate agent?
Buying a house is expensive and most buyers need all the cash they have to pay for the closing costs and down payments. If a buyer had to pay for their real estate agent as well, there would be much fewer buyers who could buy a home. With a bigger buyer pool, more houses sell and sellers can charge more for their homes. Even though the seller pays for the buyer’s agent, the seller makes more money in our current real estate system due to the higher house prices caused by more buyers.
How much is the real estate commission on a house?
This is a tricky question for me to answer because I am a real estate agent. There are no typical or set commissions; they are all negotiable. As a real estate agent, I legally can’t say the typical commission is such and such. Instead, I will link you to this article that explains commissions and tell you HUD pays a 6 percent commission to sell houses; 3 percent to the buyer’s agent and 3 percent to the seller’s agent. I have seen commissions on real estate both higher and lower, but remember there is no typical or set commission rate. Using HUD’s structure the seller would pay $12,000 to the real estate agents if their house sold for $200,000
Why do real estate agents make so much money on one sale?
On the surface, it may look like an agent makes a killing by making $6,000 on each side of the sale of one home. A real estate agent may work 10 hours or less on the listing side, which would equal $600 an hour for listing and selling a home. That is a lot of money, but a real estate agent does much more than work directly on the listing of a home. Most likely the listing agent has to pay part of that commission to their broker which may cut in half what they actually take home equaling $3,000.
There are many more reasons why that $6,000 is not as much as it may seem on the surface. A real estate agent must get licensed, must take continuing education, must pay for MLS, must pay for board dues, must pay for insurance and must market themselves. There is a lot of overhead involved in being an agent and a real estate agent is not just charging for the time it takes to list a home. The real estate agent is charging for their experience and market knowledge that allows a seller to make the most money selling their house.
Most real estate agents do not sell many houses
The truth is the average income for a real estate agent is only $39,000 a year, which I discuss much more here. The reason most agents don’t make much money is they have to pay a broker, many work part-time and many do not sell a lot of houses. The average real estate agent sold 12 houses in 2012, which would equal only $36,000 a year if an agent was making $3,000 per sale like in our example. If you want to be a real estate agent, don’t be discouraged.
Selling a house is not easy and real estate agents know how to do it best
Not only is it hard to determine the value of a house, but it also is not easy to complete the transaction. Many transactions are not completed even with the help of real estate agents. The state contract in Colorado is 17 pages long and there are at least five more disclosures that must be used. Most transactions involve financing which takes a knowledgeable lender and title company. A real estate agent can help a seller and buyer choose the best people to make sure everything goes smoothly and everyone does their job.
It is expensive to use a real estate agent, but well worth it. Real estate agents go through a lot to become licensed, pay a lot of fees, must work under a broker and bring specialized knowledge that helps sellers get the most for their home. If you are an investor and sell a lot of homes, it may be worth it to become an agent yourself. Otherwise, it will save you money to use a real estate agent.