How Do Commissions Work in Real Estate?

Alright, let’s dive into one of the most important questions every new real estate agent has: How do commissions actually work? I know, when you’re first starting out, this whole commission thing can feel like a mystery wrapped in a paycheck. And you’re probably wondering how much of that fat commission check you actually get to take home. Spoiler alert: it’s not as much as you think. But let’s break it all down.

1. The Basics: What’s a Commission?

A commission is how real estate agents get paid. There’s no salary, no hourly wage—just commission. Typically, when a home is sold, the seller agrees to pay a percentage of the sale price as a commission. This commission is usually split between the buyer’s agent and the seller’s agent.

The standard commission in most markets hovers around 5% to 6% of the sale price. So if a home sells for $500,000, a 6% commission would be $30,000. Sounds awesome, right? But hold on, that money doesn’t all go to you. Let’s talk about how it gets sliced up.

2. The Split: Who Gets What?

Here’s the breakdown:

• Listing agent’s brokerage: The seller’s agent (also known as the listing agent) doesn’t pocket that entire commission. First, their brokerage takes a cut.

• Buyer’s agent’s brokerage: The buyer’s agent, just like the listing agent, also has to share their piece of the commission pie with their brokerage.

So in a typical deal, the 6% commission is split in half: 3% to the listing side, and 3% to the buyer’s side. Let’s go back to our $500,000 home example. That $30,000 commission is now split into $15,000 for the buyer’s agent and $15,000 for the listing agent.

3. Your Brokerage Takes a Cut

But wait, there’s more! That $15,000 still isn’t all yours. Your brokerage is going to take a chunk of it. The split depends on your arrangement with your brokerage. It could be a 50/50 split, a 70/30 split, or even a 90/10 split in your favor, depending on your experience and deal with the brokerage.

So, let’s say you have a 70/30 split with your brokerage. That means 70% of the commission goes to you, and 30% goes to your broker. On that $15,000 commission, you’re taking home $10,500, and your broker gets $4,500.

4. What About Expenses?

Before you start planning your next vacation with that $10,500, there’s more to factor in. You’ve got expenses. Things like marketing, photography, gas, MLS fees, licensing, continuing education—these costs add up. Plus, since you’re self-employed, don’t forget about taxes.

So while $10,500 is what you’re taking home from the sale, your actual net profit after expenses and taxes will be less. This is why it’s so important to budget and reinvest wisely into your business.

5. Are Commissions Negotiable?

Yes! Commissions are negotiable, but there are some rules of the game here. Sometimes clients will ask for a lower commission rate, especially in a hot market where homes are selling fast, or if the seller is trying to save some cash. As an agent, you can decide if you want to lower your commission to secure the listing.

But keep in mind: your brokerage might have minimum commission requirements. And while you want to stay competitive, don’t undersell yourself. You’re providing value, and your commission should reflect that.

6. When Do You Get Paid?

The sweet moment you’ve been waiting for: payday. Here’s how it works—you get paid when the deal closes. Not before. So all those months of work with a client? That time and energy only pays off when the sale actually goes through, and the keys are handed over. This is why it’s so crucial to have multiple deals in the pipeline—because some might fall through, and you don’t want to rely on just one.

Once the sale closes, the title company or attorney handling the transaction will disburse the funds, which includes the commission payment to your brokerage. Your brokerage then cuts you your portion of the commission.

7. What If There’s a Referral?

Another thing to keep in mind is referral fees. If an agent refers a client to you (maybe it’s a buyer moving from out of state), they’re usually entitled to a referral commission, typically 25% of your commission. So that’s yet another cut.

Let’s say you closed that $500,000 deal, and the referring agent gets 25% of your $15,000 commission. That’s $3,750 off the top, leaving you with $11,250 before your brokerage split.

8. Can You Get Paid Hourly?

Short answer: Nope. Real estate agents don’t get paid for time, only for results. If a deal falls through, or if a client decides not to buy or sell, you get nothing. That’s why staying organized and keeping multiple clients moving forward at once is crucial. It’s all about the long game.

9. What’s the Deal with Commission Caps?

Some brokerages have commission caps, meaning once you’ve paid a certain amount to the brokerage in a year, you get to keep 100% of your commissions for the rest of that year. For example, if your brokerage cap is $20,000, once you’ve paid your brokerage that amount in commissions, everything else you earn is yours (minus expenses and taxes, of course).

Final Thoughts: Commissions Are Your Lifeline

Real estate commissions are both the beauty and the beast of this business. On one hand, they’re uncapped—your potential earnings are limitless. On the other hand, they’re unpredictable—your income can vary month to month depending on how many deals you close. The key is to keep a steady pipeline, budget your expenses, and understand that while that big commission check might look huge, there are plenty of hands dipping into it along the way.

At the end of the day, commissions are your lifeline in real estate, and understanding how they work is key to building a successful career. So now when someone says, “How do commissions work?” you’ll be able to give them the lowdown like a pro.

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