$300,000 sale with a 6% commission and $400 flat fee, referred to the seller by a corporate relocation program or referral program (HomeLight, sold.com, Dave Ramsey, parts of Zillow, parts of Realtor.com, etc.)
Total payment to the listing agent: $18,000 (+$400 to be included at the end)
after sharing 50% with buyer's broker: $9000
after sharing 30% with referral partner: $6300
after 5% licensing fee to National Brand: $5985
after $185 fee to MLS: $5800
after 50% split with agent: $2900 (plus the $400 "administration fee at this stage, so $3300)
after 25% corporate income taxes: $2475
The listing broker's net revenue is $2475 from this transaction. That's the amount they have to work with before paying rent for their office space, employee salaries, advertising, insurance, legal fees, etc. Every brokerage is different but suffices it to say, that $2475 is certainly not pure profit for the listing broker.
The listing agent's gross revenue from this transaction is $2900. Then, you have to realize they pay for all those marketing materials, photos, videos, etc out of their own pockets. If they spent $500 on photos/videos and another $300 on mail and digital marketing, their income is down to $2100. After paying self-employment and all the other income taxes (varies depending on income, but could be 25% or higher for a full-time successful agent) their income is now $1575. Also don't forget agents have no benefits so they have to pay out of pocket for health insurance, disability insurance, and liability insurance. Not only that, they have to pay yearly fees to the various Realtor associations and licensing fees to the state. Further, some agents pay hefty fees to Zillow and other sites to be featured as "premier agents," sometimes up to $2,000/month.
This is how you can pay $18,400 but your agent nets only $1,575. Oh yeah, and if you refuse to pay that $400 "administration fee," in some cases the agent could be required to pay some or all of it, so they could end up with something more like $1,275.
All that said, what I've illustrated here is a worst-case scenario for the agent. It features a combination of a referral partner, an expensive national brand, a low commission split with the listing broker, and high marketing costs paid out of the agent's pocket.
How much work would you be willing to do for $1,275? That's about the area median income for a full-time week of work. No real estate transaction takes only a week of work though. At best, it's two months. At worst, it could be more than a year. You may be asking yourself why anyone would want to be an agent, now that you know more about how the pay actually works. Indeed, nearly 90% of new agents are out of the business within five years. So...why does anyone stay?
Not every transaction is a worst-case scenario. Let's talk about a best-case scenario from the agent's perspective with the same house:
Total payment to the listing agent $18,000 (+$400)
after sharing 50% with the buyer's broker: $9000
no referral partner
no brand licensing fees
MLS fee paid by the broker
after 85%/15% split with the broker: $7650
after $300 marketing costs: $7350
seller pays the $400 administration fee
after 25% income taxes: $5512.50
As you can see, the best-case scenario is dramatically more profitable for the agent. The agent nets something more like 1.8% of your home's sale price rather than 0.4% in the worst-case scenario.
Low pay can make any worker unmotivated and real estate agents are no exception. Be aware that if you are hiring an agent who is in the "worst-case scenario" I've described above, comparatively little of your money is actually going to them. An agent paying referral partners and large licensing fees could need to sell more than 40 homes each year to make the area median household income. It can be difficult to manage such a high volume of transactions. An agent in the best case scenario needs to sell about 11 homes each year to make the area median income, which is easily possible for an experienced and skilled agent.
Some agents use a "team" model where the leading agent works with several associates to try to handle a large volume of business. Those associate agents are often making less than even the worst-case scenario described above because they also have to pay the leading agent on their team. The team leader often benefits because they can get more reach for their brand and collect fees from their associates. If you hire an agent based on a billboard sign or TV commercial, and you see on Zillow that they do 200+ transactions a year, you're likely going to be working with an associate who is very possibly new to the business and is effectively making less than minimum wage.
Selling Later surveyed agents recently about negotiating their commissions. Of those surveyed, 70% said they would be more willing to negotiate commissions with their client if there was not a referral fee involved. This also applies to UpNest in which they offer you "savings" yet pocket a referral fee. The agent would be more likely to give you more or a "savings" if they didn't have to pay a bigger referral fee to another platform.
When searching for agents, be sure to avoid referral platforms and instead contact agents directly via social media or their personal websites. Not only does this increase your chance to save money, but most referral programs have affiliate programs that they will share your data and could lead to an increase in solicitations from other services.