How Does a Realtor Get Paid, Anyway?

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Ever wonder HOW and HOW MUCH a Realtor gets paid?

Before I bought my first house, I was aware of HOW Realtors got paid. I had the chance to work in the industry earlier in my working career. However, it wasn’t until I started researching how to become a Realtor, and considered becoming a Realtor myself, that I learned more about HOW MUCH a real estate agent gets paid.


I was curious to find out if some of my friends {that had purchased a home} knew how a real estate agent got paid. Or if they knew how much a Realtor makes. So recently I asked some folks if they knew answers to these questions. A small handful knew exactly how and how much. But, most everyone said something like…

"I have no idea!"

"Now that I think about it, I still wonder how much our Realtor got paid."

"That’s a GREAT question. How does a real estate agent get paid?"


So, that boomeranged! The question came right back at me. Huh… Okay… Well, I’d love to answer that question.


Maybe you’ve wondered about this yourself. Maybe you feel uncomfortable asking. Maybe it never crossed your mind to ask. Either way, it’s okay and understandable. Generally speaking, we don’t ask our co-workers or friends what they make at their jobs. So it makes sense that we don’t think about these things. Or if we do, we're uncomfortable.


Asking a real estate agent how they get paid let alone how much money, exactly. Well.... that's awkward!


So, it’s a great question, and absolutely okay to ask!! AND it’s all part of, for most people, the largest transaction you will tackle in your lifetime. And no matter if you’re buying or selling, you are contributing to HOW and HOW MUCH the Realtor makes. I’ll cover this from a VERY high level, bird’s eye view.


Okay, so let’s start with HOW and that will lead us to HOW MUCH…


No Settlement, No Paycheck = 100% Commission


The vast majority of Realtors are only paid if your deal closes. In other words, they get paid via commission from the sale of the house. It’s not about finding a house or putting a sign in your yard, and then agreeing on a final price.


They have to sell a house either for a seller or to a buyer.


They have to get the entire transaction processed and to the “closing table” to complete the sale. And there are many hurdles and hoops to jump over and go through before you get to that closing table, my friend.


A house could not pass inspection... loans fall through... appraisals fall short of the agreed price... or any of the other hiccups that can occur in the process...


Soooooo...no closing table with everyone signed on the dotted line, then no pay day for that realtor. Bummer huh!?


Like the English language, there are exceptions to this general rule of thumb though. For example, depending on the negotiated contract, there still might be a commission due to the Realtor. And there are brokerage companies that pay their realtors on salary, with an extra commision, bonus structure. Like I said...this is a “typically speaking” overview that will not include all the exceptions. Otherwise, we’d be here all day.


Okay, moving on…


Who Pays the Real Estate Commission: Sellers And Buyers And Brokers, Oh My!


Typically speaking (you’re gonna get tired of me saying that!), the seller pays the commission for the Realtor fees. Which are always negotiated between the seller and their listing agent. And then if there is another agent involved in that transaction, then they share the commission with that Realtor. There are exceptions to this typical process. You may think that’s a bummer for sellers. Yet, when you think about it, usually the sales prices takes Realtor commission or the real estate fees into consideration. So the buyer is contributing through their agreement to that sales price.


As I mentioned above, I’m giving a broad overview. For more info on the HOW a Realtor gets paid, check out this article on Realtor.com.


Now this brings us to HOW MUCH…


Slice of the Pie: Negotiable Commission Rate of the Sale


If the sale of the house is the whole pie, then a Realtor gets a thin slice. Across the country and here in Colorado, the average commission rate agreed upon by sellers and listing agents is a variable percentage of the sales price of the house. This varies based on many factors - market area, market conditions, type of property, negotiated elements of the real estate contract, and the list goes on. Realtors cannot price fix! So, the commission percentage is always negotiable. If there is another agent involved in the transaction on the buying side, then it's shared. And even that is up for discussion.


Myth Buster: Not All Realtors Are Rich!


You have to consider that the majority of Realtors are NOT independent brokers. So what does this mean, you ask? Every state is different. In Colorado, real estate agents must work under the umbrella of a licensed broker for at least two years and are called associate brokers. Generally speaking, most remain with a broker rather than go independent or open their own brokerage. This choice affords them support with their marketing, legitimizes their business with clients, and gives them the opportunity to not carry the brokerage liabilities and responsibilities. And that means these real estate agents are splitting their commission with their employing broker.


After these splits of the commission, your average Colorado Realtor makes $51,240*, which is a bit above the national median salary for a Realtor of $44,090*. And that’s all before you take into consideration business expenses, taxes, and other overhead costs.


*Source: U.S. Department of Labor Bureau of Labor Statistics

 

The Nuts and Bolts: A Basic Example


Due to a job change, a seller is moving out of state and needs a buyer for their house. Realtor A meets with them and signs a contract to be their Listing Agent. Due to the marketing required to sell their home, they agree to a reasonable and appropriate commission rate for the sale of the house. Realtor B brings a buyer to the house. They make an offer. Realtor A and B, on behalf of their seller and buyer, agree on a sales price. They go through all the inspection, appraisal, and loan process. So, let’s take a look at how this will all break down once they get to the closing table...


1. Total Commission (a percentage of the Sales Price of the Home) = $10,000
2. Negotiated agreement of Listing and Buyer Brokerages = 50/50 Split
3. Listing Broker = $5000 commission*, pays $3,000 to Listing Agent
(Broker/Listing Agent are sharing the commission 60/40)
4. Buyer Agent’s Broker = $5000 commission, pays $2500 to the Buyer Agent
(Broker/Buyer Agent are splitting the commission 50/50)

*Remember, no commission is paid to a listing or buyer agent directly. It’s paid to the broker, then distributed to the agent(s) based on the split with the brokerage company.


And don’t forget! This is all before expenses, marketing, taxes, and other costs to run an independent business are taken into consideration.


Sooooo...


I hope this brief overview has helped answers those questions. Bottom line, a Realtor is working for you! Until you get your house purchased or sold, they don’t see a paycheck. If you’d like to understand more or have further questions, . Part of my job is to answer these and any other question you have about real estate. Looking forward to hearing from you.


And remember a Realtor can be a Real Estate Agent, but a Real Estate Agent can’t always be a Realtor. And an Associate Broker can be a…. Well, keep your eye on our real estate blog for that upcoming answer… :)

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Will property taxes go up in 2017? Better yet, just how are property taxes calculated? Here, in Colorado Springs, the El Paso County Assessor re-evaluates the value of homes every two years. He starts with the current market value of the home. Market Value is based on the most recent comparable sales in the area.

Once market value is determined, he multiplies the current market value by 7.96%, which is the current assessment rate for all residential properties.   MARKET VALUE times 7.96% = ASSESSED VALUE.

Once the assessed value is determined, he multiplies that by the current mill levy for the area. And that result is your annual property tax.

The mill levy for your area is dependent on many factors including but not limited to the school district, fire district, water district, library district, your county, and city. These various taxing entities comprise the total mill levy for an area. Taxing entities in one area may be higher than another. For example, the taxes for School District 20 are higher than those of School District 11. Although, the school district is not the only taxing entity in an area, the example gives you some information regarding the various mill levies for El Paso County

You can appeal the assessed value of your Colorado Springs home, thereby possibly lowering your property taxes. If you choose to do so, remember the El Paso County Assessor will only consider comparable sales for a specific period. That period must fall within the Assessor’s specific collection dates. For this task, I recommend calling your Realtor. As a part of our ongoing service and commitment to you, we can easily provide those comps to help you through the process, just give me a call.

 

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Have you, or someone you know, been considering purchasing a home but the associated worries seem to be too overwhelming? Here are a few thoughts that should hopefully help alleviate those concerns.

b2ap3 large one Worried about the associated costs required to purchase a home? Worried that you will not be able to take vacations or go out to dinner or plan for retirement because all of your current savings will be drained? DON'T BE. In this day and age, it is relatively inexpensive to purchase a home. VA loans require no down payment, and FHA loans require only a 3.5% down payment, and there are programs out there now that offer either down payment assistance or even down payment grants! Concerned about your closings costs? DON'T BE! Most savvy real estate professionals can get the Seller to pay your closing costs for you during the negotiation process!

b2ap3 icon twoWorried you might not ever find a home you really like? First and foremost....don't settle, on a mediocre home, or on a mediocre real estate professional. If you work with the right real estate broker, they will take as long as you need until you find the home that is perfect for you. If you are feeling rushed or pressured by a real estate professional to hurry up and buy something, find another real estate professional! You deserve the time, patience, and respect that is needed to help you with perhaps the biggest purchase of your life!

b2ap3 icon threeWorried about buying a home that will have tons of repairs that are found only after you purchase it? Completely legitimate concern, but it can be alleviated two fold. A. Hire a professional home inspector to inspect your home prior to closing. A home inspector's job is to make sure you know every possible thing, both good and bad, about the home. A home inspector can also give you an idea of how much certain bigger repair items might cost so that you can go back to the Seller and ask them to correct the issue(s) before closing. B. Purchase a home warranty that can potentially cover costly home repairs and replacements due to normal wear and tear after you have closed on your new home. (A home warranty is a separate contract that covers repairs and replacements on systems in your home and coverage typically lasts for a one year period).

b2ap3 icon fourWorried that it is cheaper to rent than own? In most areas of the United States, it currently is not, and for Colorado Springs specifically, it definitely is not. If you are fairly certain that you will be in one place for at least three years, it just makes sense to purchase versus rent. Think about it this way: Rent money literally disappears, and you are not able to build ANY equity like you would with owning a home. Rent money pays your landlord's mortgage not your own. Rent money does not allow you vital federal tax deductions that come with owning a home. If in true doubt, use a rent vs. buy calculator to crunch the numbers or contact a local real estate professional for more insight.

Fear of the unknown causes quite a few of us to not make potentially good decisions. It is okay to be afraid, and it is definitely okay to ask questions...a lot of them! I am always here to answer your questions and even the ones that you may not even know that you have...I am ready when YOU are ready!

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Right now I'm working with a cash buyer, meaning they do not have to get a loan to purchase a home.  Often times cash buyers ask "can I negotiate more since I'm paying cash?"  Here is what I tell them: 

Advice for Cash Buyers

Being a cash buyer is great because you don't have to wait the usual time for a mortgage loan. You can usually close within 2-3 weeks instead of the typical 45 days which loans take to accomplish. So your "power" or leverage is that you can close quicker than most.

But being a cash buyer DOES NOT make you more valuable from a money standpoint. At closing the seller gets paid no matter what, whether you are financing your purchase or bringing cash to the table. They do not get paid more if you pay cash.

Why I Like Working with Cash Buyers

From my perspective a cash buyer is sweet. They can close quickly. There are less hassles without a mortgage involved. And they can choose whether or not to even have an appraisal done. For me, simple real estate transactions are great. 

While sellers may appreciate your ability to close fast, they won't stand to make any more money with you. And...be sure you can verify your funds. Sellers will need to see an account statement or some proof that you really do have the dough!

If you have more questions about buying homes with cash versus taking out a mortgage, feel free to give me a call.

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