Understanding Real Estate Agent Commissions and Their Value

Recent changes in the real estate industry, particularly the NAR settlement, which we talked about in our last post, have prompted a closer look at real estate agent’s commissions. As it sparked curiosity about how agents earn their income and the value they bring to each transaction, we believe it’s also an excellent opportunity for agents to both educate clients and highlight the tremendous effort and expertise that go into every real estate deal.

Real Estate Commissions: The Basics

A common misconception is that real estate agents earn a substantial and consistent salary. In reality, the income varies dramatically. The average agent might make between $50,000 and $70,000 annually, but this figure doesn't reflect the wide range of earnings. Many agents sell fewer than 10 homes per year, and some don’t sell any at all.

Here’s a quick breakdown of sales numbers from the first seven months of the year. Statistically–

• 74% of agents sold zero homes
• 14% of agents sold between 1 and 4 homes
• 6% sold between 5 and 10 homes
• Fewer than 3% sold more than 10 homes

For most agents, expenses such as taxes, marketing, licensing, and operational costs eat into their earnings significantly. Agents often invest 30-50% of their income into these areas, so while the headline number might seem high, the take-home is often much lower than expected.

Breaking Down Commission Percentages

In most cases, real estate commissions range between 5-6% of the sale price of a home. This amount is usually split between the buyer’s agent and the listing agent. For example, if a house sells for $400,000, the total commission might be $20,000, with each agent earning $10,000.

However, agents don’t keep all of that money. Out of their commission, they must cover various expenses such as marketing for the property, transaction fees, and operational costs like maintaining licenses and continuing education. These costs are an important part of running a professional real estate business.

The Value of an Agent's Expertise

One of the most important roles a real estate agent plays is in negotiating on behalf of their clients. A skilled agent can often secure a better price for the seller or ensure the buyer doesn’t overpay. In many cases, the amount of money an agent helps save or earn for their client far exceeds the commission they charge.

Agents also help clients avoid costly mistakes. Pricing a home correctly, handling and helping clients understand and manage all the paperwork, as well as understanding local market trends are all services that agents provide to ensure a smooth and successful transaction.

Discussing Commissions: Tip 1 – Be Transparent and Informative

When talking about your commission, transparency is key. Make sure your clients understand exactly what they’re paying for and why it’s worth it. Break down the services you offer and how they benefit the client. By educating your clients on how commission rates work, you can help them feel more at ease with the costs involved.

To really make this effective, try writing down everything you do for your clients. Whether it's offering moving assistance, home staging, or access to discounted services through partnerships, show clients the full scope of what you provide. The more value you can demonstrate, the easier it will be to justify your commission.

Discussing Commissions: Tip 2 – Bring It Up Naturally

With the introduction of new NAR rules, agents must now have a written contract in place before showing a home to a buyer or representing a seller. While this may seem like an added formality, it’s actually a great opportunity to introduce the topic of commission in a natural way.

For example, when presenting the contract, you can explain that this is where your commission is outlined, and it’s simply part of how you operate as a professional. You could use a conversational approach like, "I charge a fee for my services, just like any professional would. But my goal is to ensure that you come out far ahead by the end of this transaction."

Discussing Commissions: Tip 3 – Share Client Success Stories

One of the most effective ways to demonstrate your value is by sharing success stories. If you’ve helped a client sell their home quickly or secured a great deal for a buyer, use these examples to illustrate your expertise. These real-life examples give your clients a tangible reason to trust your judgment and justify your commission.

Fully Understanding the Commission Structure

Before you can explain commission rates to your clients, it’s important to have a solid understanding of your own income structure. Many agents fall into the trap of treating their business like a paycheck-based job rather than a business with fluctuating expenses and earnings.

Remember, the money you earn doesn’t all go into your pocket – a large portion of it goes toward taxes, marketing, operational costs, and continued professional development. Explaining this to clients in a clear and understandable way will help them see the full picture and recognize the value in what you offer.

The Bigger Picture: It’s About More Than the Money

At the end of the day, being a successful real estate agent isn’t just about earning a commission – it’s about the value you provide to your clients. Whether you’re negotiating on their behalf, helping them avoid pitfalls, or guiding them through a stressful process, your expertise is what makes the transaction successful.

Agents who can clearly articulate this value will find it easier to justify their commission, build trust with clients, and ultimately grow their business.

Let's schedule a time to discuss where you currently are in the buying process and map out the smartest way to move forward. Book a call with us today.