How do real estate agents get paid?
Real Estate Agents, Brokers and the National Association of REALTORS® have been in the headlines a lot lately and there is a lot of confusion around how agents are paid. I'm going to focus on how it works in Minnesota as it's only one of thirteen states that currently require buyer representation contracts.
Let's start with some basics.
Most residential real estate agents in Minnesota are independent contractors. They are self-employed. Employees in Minnesota are entitled to various protections, including minimum wage, overtime pay, workers' compensation, and unemployment benefits. Independent contractors are generally not eligible for these benefits. Independent contractors are generally paid a fixed amount for specific services, regardless of the amount of time taken to complete the related tasks. In addition, they furnish their own materials, subscriptions/tools and equipment usually with significant investments in those items used to provide the services. Withholding for taxes and providing fringe benefits such as PTO and medical insurance are considered typical of an employer-employee relationship. Independent contractors have no negotiated benefits and pay their own expenses, including health insurance premiums.
What's the relationship between the real estate agent and the real estate broker? In Minnesota, if you want to be a real estate agent, you pay to take the Real Estate Salesperson courses and pass the state tests. After you complete the courses and pass the tests, you choose a broker to work with and they will help you apply for your real estate salesperson license. The real estate broker holds your license and is responsible for general oversight as you perform your duties. Once the brokerage relationship is formed with the agent, every listing agreement with a seller or representation agreement with the buyer that an agent signs is on behalf of the brokerage and therefore the agent must include their brokerage affiliation on all of their advertisements.
So...how do agents get paid?
Agents, as independent contractors, make an agreement with the broker on how commissions will be split for every transaction. They also have agreements on other fees charged to the agent to cover the costs to hold the agent's license and provide administrative services. Brokers consider their operational overhead and agents consider their independent contractor expenses when negotiating these agreements.
In MN, buyer and seller representation agreements include how the broker will be compensated for the buying or selling services provided to the client. Most brokers have company policies regarding what their agents are expected to charge buyers and sellers for services provided. Buyers and sellers can shop to find the brokers and agents that provide the most comprehensive services, experience and representation for a negotiated fee.
While it's been a common practice for seller's agents to utilize a portion of the commission they collect from the seller (with the seller's permission) to cover the compensation the buyer owes their broker, recent lawsuits insist this practice should change. The proposed settlement mostly revolves around how agents work with buyers and how agents are compensated. For now, we can only speculate how these changes may or may not financially affect buyers and sellers if and when a settlement is approved by the courts.
Change is inevitable and welcomed! The most educated, professional and competent agents will be able to advise their clients about these changes and articulate viable options. The most valuable agents (and brokers) are experts in their respective markets. They have voluminous industry knowledge, are
adaptable and well-networked, and most importantly, set realistic expectations and are committed to helping you reach your individual goals. By working with the most highly trained, ethical and competent agents, you ultimately will end up saving money, time and headaches. Great agents are naturally great advisors. They take emotion out of the transaction when things get heated, help you understand your options when complications arise, and negotiate terms of the contract in your best interests, including price.
