Real estate commissions are the way that most real estate agents get paid. This means that an agent will be paid an amount of money relative to the price of the home sold.
For some people, this is extremely exciting. Alarms might be going off in their head because they know that there is no limit to how much money they can earn. Nobody dictates how much money a real estate agent can earn in a year.
For others, it might be terrifying knowing that they won't have a yearly salary. Although, there are some brokerages that will pay you a yearly salary.
In this article, I will explain to you how the real estate commission works and whether or not it's actually a lucrative deal.
How Do Real Estate Agents Get Paid?
Real estate agents are paid on commission. A commission is a small percentage of the earnings made from selling a home. The average income real estate agents in California is $95,624.
A real estate agent’s yearly earnings will depend on several factors, including the overall number of sales they complete, commissions on those sales, and the percentage of that commission that they pay their broker.
How Much is the Real Estate Agent’s Commission?
The commission earned is determined by the following factors:
- How much the home sold for
- Agreed commission rate between the agent and client
- The split between agent and broker
As example, the buyer's agent could have agreed with their client on a 2% commission rate on a house. That means, the buyer's agent will receive 2% of what the home sold for. If the home sold for $700,000, the buyer will pay their agent $14,000.
Use our real estate agent commission calculator below to see how much money you could make.
Who Pays a Real Estate Agent’s Commission?
In 2024, there were changes to how commissions are regulated. The agent's commission is financed by their client. This means the buyer's agent is paid by the buyer and the listing agent is paid by the owner of the property.
However, when the party's agree to it, the listing agent can finance the buyer's agent. This is more similar to how commission have historically worked.
What this means is that each party's agent must negotiate with their client on the commission rate. There is no set or "standardized" commission rate.
Is there a Limit to a Real Estate Agent’s Commission?
There is no cap on how much a real estate agent can make. So long as the agent represents clients through the deal, they will earn a commission. The only limits is how much the agent is willing (or capable of) to sell in year.
This is what attracts a lot of people to the industry. They are able to have complete control over their own working schedule and their yearly earnings is determined by how much they sold. Total work freedom.
How Does the Real Estate Commission Get Split?
The real estate agent's commission will get split between the agent and their brokerage. This is referred to as the commission split or "split." Typically, the split for a new agent with no experience will be 60/40, favoring the new agent. However, for more experienced agents who bring in a lot of money, they could be looking at an 85/15 or even 90/10.
Let's calculate how much a real estate agent will get paid on a $1M deal where they agreed to 3% commission:
- 3% earned from what the home sold for ($30,000)
- 60/40 split between agent and broker ($12,000)
So, the agent will walk away with $12,000 on their deal. Most escrows last 30 days, which means that agent made $12,000 in one month.
How Commissions Get Split Between Real Estate Agents
Sometimes a real estate agent can get paid by the other agent. This is similar to how commission were traditionally earned. A small percentage of the listing price would be given to the listing agent, who would then split it with the buyer's agent.
In these situations, the listing agent would negotiate the commission rate with the buyer agent. So, when agents find themselves in deals where the other agent is paying them, make sure you are being fairly compensated.
How Commission Gets Split with the Broker
The typical commission split between a new agent and broker is 60/40 in the agent’s favor. This ratio could increase in the agent's favor with experience over time. But a new agent with little to no experience could expect to receive 60% of commissions earned.
Of course, this isn't a hard set rule. You can be a new agent with a higher split, so long as you are able to make a compelling case for yourself.
Can Real Estate Agents Negotiate a Higher Commission Split?
An agent can negotiate a higher commission split with a brokerage the same way they would ask for a raise in a more traditional job. Performance, experience, productivity, and even better offers from other firms are solid arguments for negotiating a higher commission split.
What is the Average Real Estate Agent Commission in California?
California is unique because the price of land is higher than most of the country. This will mean that agents are expected to earn more money than they can in other states. A fluctuating commission rate will also be a factor in the average real estate agent commission in California. But, let's just assume the agent earns 3%.
The average salary of a California real estate agent is around $99,575. However, there is a wide gap in the salary range, with the lowest earners making $24,970 and the highest earners topping out at $123,700 per year.
Can a Real Estate Agent Split their Commission with a Buyer or Seller?
California, and at least 39 other states, allows agents to share their commission with buyers and sellers. It may act as an incentive for the client to work with the agent. Another motivation may include lowering your commission rate. Since there are no set commission rates, agents can negotiate their fees.
How this works is as follows:
- Client pays agent
- Agent splits payment with brokerage
- Agent then splits again with their client
The money moves through a few parties before coming back to the client.
This is advised against, though. Ultimately, the agent will be lowering the amount they get paid and therefore this deal won't be a priority for them compared to other, most lucrative deals. Therefore, agents should always stick to their gut and use this in specific situations.
Final Thoughts on a Real Estate Commission Works
While being a real estate agent does require hard work, the payoffs can be phenomenal. Since agents work on commission, there is no limit to how much they can make in the industry. Agents set their own hours, work at their own pace, and ultimately control their own commission rates.
An agent gains will experience and be more successful over time, thus allowing them to negotiate lower brokerage fees and higher commission rates. So, their potential for a higher salary increases over time.
For agents working in California real estate, the sky truly is the limit.
