How Do Agents Get Paid?
Recently I had a new real estate agent ask some very simple questions about how agents are compensated. Although it may seem surprising that someone who has taken the time and expense to get licensed hadn’t done the investigation into how they would get paid once they had their license, my experience has been that it’s actually quite common. With this in mind I thought I would take the next few days to write a three part blog on how the real estate industry works, what your options are as an agent, and how agents get paid.
One of the problems with having this discussion is that no other industry presents you with the wide variety of options, specializations and freedoms that the real estate industry has to offer. As a result, compensation plans vary drastically based on what kind of real estate work you are doing. Compensation plans can also vary from one real estate company (called a brokerage) to another and even between agents within a company doing the same work. To add to this complexity, state and local laws will change how the industry operates within each state and where you live will also impact compensation (i.e. agents in a city often have a very different experience than agents in a small town).
To understand this better, let’s start by explaining the relationship a real estate agent has with their employer.
Understanding Who You “Work” for…
The first piece to understanding real estate compensation is to understand the structure of the real estate industry- which varies slightly from state to state because of variations of state laws. In most states (including Missouri) you have two major parties involved in real estate- Brokers and Agents. What’s the difference? Legally, only a broker can "technically" sell real estate; the agent works under the broker’s umbrella and license. As a result, to be a licensed agent you must have a broker who “holds” your license for you. Without a broker affiliation, an agent selling real estate is doing so illegally (even one with a state license).
Confused? This is literally 2-3 chapters of the real estate certification class and I don’t want to take the time to discuss it all here, so think of it this way- a broker owns and runs the real estate company (brokerage) and the agent is the one who does the daily work with buyers and sellers. With that said, a broker may have thousands of agents in multiple states working under him or her or the broker can be a one person shop (where one person serves as both the broker and the agent).
For the record, becoming a broker really isn’t much more difficult than becoming an agent. In Missouri you first become an agent by taking the agent class and test, then after two years you are eligible to take the broker’s class and test. (The two year wait is new as of 2006). I always joke that the difference between an agent and a broker is about $400! (i.e. the cost of the second class and test...)
But seriously, the real difference between being a broker over an agent is just having more career options. Outside of running your own brokerage, the state requires every real estate branch office to have an office manager who also has to have a broker’s license. So if you aspire to management, the extra step to a broker's license is the first step to get there. Many agents (myself included) will also get a broker’s license just to show they have a higher level of training than the average part-time agent (this is called being a broker-agents). Even if you are a broker, office manager (called a broker-manager), or a broker-agent you are free to sell real estate like an agent.
The final point here is that you should not confuse a broker or brokerage with a franchise. A franchise is simply a national or regional marketing organization that a brokerage may belong to (these are names like Prudential, RE/Max, Coldwell-Banker, Century 21, ERA, Exit Realty, Keller-Williams, Assist-2-Sell, etc). Owning a real estate franchise is no different than owning a McDonald’s or Subway restaurant franchise- although you own and manage your own shop, marketing is regulated at a national level to give the appearance of continuity from town to town.
In larger markets you may also find multiple franchises of the same company. In St Louis, for example, there are over half a dozen RE/Max franchise, and the second and third largest brokerages in town are both Prudential- Prudential Alliance (the broker my team is at) and Prudential Select. Although they both have that Prudential name, they are owned an ran by different people.
Understanding How Agents get Paid…
Since the average first year real estate agent is someone who enters the industry from another career (generally outside of sales), the next piece to understanding compensation is to realize that it will probably be unlike any other job you have ever had. First off, the vast majority of real estate brokerages “hire” agents as independent contractors. (I’ve seen statistics from the National Association of Realtors that shows that number as high as 90%.) Being an independent contractor means you technically aren’t an employee of the brokerage- you are a self-employed person who “contracts” for work with the brokerage.
The distinction between being an independent contractor over being a traditional employee is that your broker doesn’t pay you an hourly wage or salary- you are only paid based on output (i.e. commission on sales). They also do not hold or file federal or state withholding taxes (FICA, Social Security, etc) for you (you need to save up money and send it in each quarter yourself). Your employer is also limited by law from providing you benefits (health insurance, 401K retirement benefits, etc). In return, you have some amazing freedoms. Broker’s have minimal input in how you run your day to day business- you can not be told to work set hours, attend mandatory meetings or trainings, what to wear or even where or what types of clients you can work with (within limits).
So what does this really mean? With this freedom comes the need for amazing self-control. There won’t be anyone standing over you forcing you to go to work every morning, so it is all too easy to put off work and allow yourself to fail (or burn yourself out by working 7 days a week). Even though your broker can’t tell you when to work, they can fire you for not producing sales.
The act of getting licensed also doesn’t train you how to be a sales person or teach you anything substantial about real estate. Since brokers can only encourage you to attend trainings, whether or not you learn anything about real estate is up to you (and is often at your own expense). More important, very few brokers will supply new agents with qualified leads or clients. As a result, you are responsible for finding your own clients and marketing yourself. By and large, you are the sales force, marketing department, bookkeeper and accountant of a one person company who doesn’t get paid a dime unless something sells.
Tomorrow’s Installment
Tomorrow we will explore the various kinds of real estate work that exists for an agent to do, and then follow it up on Wednesday with a discussion on how commissions are paid out and how much money an agent can expect to make.