A real estate agent’s compensation is often misunderstood because their payment structure differs significantly from a conventional salary. Agents operate on a commission-only basis, meaning their income is entirely contingent upon the successful completion of a property transaction. This system creates a distinction between when a commission is legally earned and when the payment is actually received. A realtor does not see their pay until the transaction formally concludes and the property deed is transferred at the closing table.
Understanding Real Estate Commission Structure
The compensation model is structured as a percentage of the property’s final sale price. The total commission is negotiated between the seller and the listing brokerage when the listing agreement is signed. The seller pays the entire commission amount, which is then split between the brokerage representing the seller and the brokerage representing the buyer.
While the total rate varies, it commonly ranges between 5% and 6% of the home’s price. For instance, a 6% commission is often split 3% to the listing brokerage and 3% to the buyer’s brokerage. This payment comes directly from the sale proceeds.
The Legal Trigger: When Commission is Earned
The legal right to a commission is established before the closing date, when the agent fulfills their contractual obligation. According to most listing agreements, commission is legally earned when the agent procures a “ready, willing, and able” buyer. This trigger is met when a buyer is prepared, legally capable, and financially qualified to purchase the property on the seller’s terms, usually evidenced by a signed purchase agreement.
A buyer is deemed “ready, willing, and able” when they have the financial ability, such as verified loan pre-approval and funds for the down payment. Earning the commission at this stage provides the brokerage with a legal claim to the funds, even though payment is delayed until the transaction is finalized.
The Payment Event: Commission at Closing
The actual payment of the commission occurs during the closing or settlement process. Closing is the formal event where the deed is transferred and all financial obligations are settled. This process is managed by a neutral third party, such as a title company or escrow agent, who acts as the disbursing entity.
The commission amount is itemized as a debit on the seller’s settlement statement and deducted directly from the seller’s proceeds. The disbursing agent uses a Commission Disbursement Authorization (CDA) to allocate the funds. The neutral third party sends the respective shares of the commission directly to the two brokerages involved. This disbursement happens simultaneously with the transfer of the deed and the final distribution of net proceeds to the seller.
The agent does not receive a check directly; payment is made exclusively to the brokerage firm with whom the agent is licensed. The settlement statement, often called a Closing Disclosure, itemizes the commission alongside other closing costs and fees. Since the commission is paid from the seller’s funds, the entire process must be finalized and funded before any money is released. If the deal fails to close, the commission is never paid, even if it was legally earned earlier.
How Agents Receive Their Paycheck
Once the commission is deposited into the brokerage’s account, the final payment process for the individual agent begins. Real estate agents are classified as independent contractors (1099 employees), not salaried employees. This means the brokerage receives the full commission first, and the agent’s payment is subject to the terms of their independent contractor agreement.
The agent’s cut is determined by a commission split agreement with their brokerage, reflecting the agent’s experience and the firm’s support level. Common models include a fixed percentage split, such as 50/50 or 70/30 in the agent’s favor. Other models include a graduated split, where the agent’s percentage increases with production, or a “cap system.” Under a cap system, the agent pays a high percentage until their annual contribution reaches a maximum amount, after which they keep 100% of the commission.
After receiving the funds, the brokerage calculates the agent’s net pay and deducts applicable fees. Brokerages may subtract desk fees, franchise fees, technology fees, or insurance costs. This internal processing creates an administrative lag, meaning the agent usually receives their commission check days or weeks after the closing date.
Scenarios That Prevent or Delay Payment
Several scenarios can prevent or delay the ultimate payment, even if the commission was technically earned upon signing a contract. If a deal falls through before closing due to a failed contingency, such as a negative home inspection or the buyer’s inability to secure financing, the transaction terminates, and no commission is paid. The purchase agreement usually makes commission payment conditional upon the closing of the sale.
Contractual disputes also complicate payment, especially if the seller refuses to close despite the buyer’s readiness, or if there is a breach of the listing agreement. In these cases, the agent may have a legal claim against the seller for the earned commission, but payment is not automatic and may require litigation. Agent misconduct, such as misrepresenting property conditions, can also lead to lawsuits and potential forfeiture of commission.
In non-standard transactions, like rental agreements or commercial leases, the timing of payment differs from a residential sale. For rental properties, the commission is often paid upon the signing of the lease agreement rather than a formal closing. The precise timing of payment is always governed by the specific terms outlined in the agent’s contractual agreement with their client and the brokerage.