Real Estate Commissions; A Black Hole For Your Money?

Where is your money going when you pay commissions?

It costs A LOT of money to sell your house with a real estate agent. The big question people should be asking is where does it all go. Your local agent is the first to yell I'M NOT TAKING IT ALL, and they are right.

So where does all that money go? First we need to look at what it costs to use an agent.

Selling price of average house: $400,000
Standard 5% commission: $20,000
HST on the commission: $2,600
Total cost to use a real estate agent: $22,600

OK so the obvious first thing is you are paying 13% HST on top of the real estate commissions. That $2,600 right off the top. That alone would cover your costs to sell your home without an agent. So where does the rest of the money go?

The Buyer's Agent

Your agent typically splits the commissions 50/50 with a buyer agent. That means that $10,000 is associated to the buyer's use of an agent and $10,000 is associated with your agent selling your home.

The Broker's Cut

Agents work for brokerages. The broker is actually who your listing is with and they take a cut of the commissions and then leave the agent with their portion. "Agent Splits" as they are referred to in the industry range between 95/5 and 50/50. Let's assume a 70/30 split because you have an experienced agent that has negotiated a better deal with the brokerage.  This means that your agent has to give $3,000 to the brokerage just for the right to do business through them.

This leaves your agent with $7,000 out of the $22,600 it cost you for them to run their business. Let's say a typical agent does 1 transaction a month. That would give them earnings of $84,000 in a year. Now what are their costs to do business?

Desk Fees, Admin Costs, Signage, Advertising, Lexus

These are all the costs that, as a business, the agent needs to pay for. Here is an infographic showing a breakdown a typical real estate agent in the US pays for. It wouldn't be much different for an agent up here. Let's be generous and say it costs $24,000 a year. That leaves your agent with $60,000 for doing one listing a month.

Conclusion

Your home sale results in paying $10,000 in wages, split between two agents; $4,000 to cover their business expenses, including their nice car; paying $6,000 to two different brokerages to manage the agents and have a nice hot air balloon on their building; and $2,600 to the government in taxes to help watch the industry to make sure they are not screwing you over.

How else could you spend that money? 

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