Buying or selling real estate involves a large amount of money, can have complex steps, and typically doesn’t happen very often for the average person.  For these reasons, the majority of consumers choose to hire a real estate agent to represent them and guide them through the process. Since we are talking about a large sum of money, a question we are often asked is, “How do real estate agents get paid?”

The short answer is they are most often paid through the proceeds of the transaction, but that requires some explanation. It is important to first understand a bit more about a transaction.

There are two sides to every property sale. There is the listing side where an agent represents the seller and the buying side where an agent represents the buyer.  The listing agent’s brokerage charges a commission to the seller, and from that commission, they agree to pay a portion to the brokerage that successfully brings a buyer.  Often this commission is split 50-50 between the listing agent and the buying agent but this is not always the case.

How is the commission calculated?

The two most common calculation methods are a percentage rate of the final sale price or a fixed rate independent of the final price. For the percentage rate option, many marketplaces do a split percentage of a fixed amount, plus another percentage on the balance of the final sale price (such as x% on the 1st $100,000 and x% on the balance of the final sale price). In Canada, GST is applicable on commissions since it is for providing a service.

How does the money transfer to the real estate agent?

It is only in extremely rare circumstances that a buyer or seller would need to cut a check or pay a brokerage out of their own pocket. Generally, the commissions get paid out of the balance of funds from the transaction.  The exact process involves all of the money from deposits, mortgage funds, and the buyer’s down payment being sent to the seller’s lawyer. This usually forms 100% of the purchase price. At this time, the seller’s lawyer will pay out all the money owing under the contracts and any other obligations required. This includes the lawyer’s fees, any outstanding tax obligations, and paying the commissions owed to the seller’s real estate brokerage. The seller’s real estate brokerage then pays the buyer’s real estate brokerage the shared amount of commissions. Both real estate agents will then get paid by their respective brokerages based on their brokerage agreements.

It is worth noting that commissions are only paid to a brokerage and not directly to real estate agents themselves. The agent will have a contract with the brokerage to determine how much they will be paid. These contracts vary greatly in the industry.

Finally, the next most obvious question is “how much are the commissions?” There is no fixed industry amount and fees will be decided between the client and their real estate agent. This amount varies widely and is most often related to the quantity and quality of services being offered.

We hope this helps answer the question “How do real estate agents get paid?” and we look forward to providing more valuable information about the real estate industry in future