Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
NYC real estate agents seem to have extraordinary lives. They choose their hours and which days they want to work. They make all sorts of money on big home sales. Most people don’t realize that brokerages rarely hire NYC real estate agents as employees. This means they have no salary or stable income. We will discuss the real estate brokerage fee business and how real estate brokerage firm structure it. This explains the growth of online or virtual real estate brokerages.
Instead, they are independent contractors that work with an agency or a brokerage, rather than necessarily for them. And all of their earnings are commission-based. There are a few different reasons why this is the case. But it’s beneficial to both parties involved, the real estate brokerage and the real estate agent themselves. In this guide, we’ll explain how this metric works. Why the brokerages prefer it this way, and why many agents don’t want to be employees. So if you’re considering becoming an agent yourself or you’re just interested in the process, this article is for you. So let’s dive right in and learn all about the real estate brokerage-agent relationship.
For those of you who don’t know the difference between an employee and an independent contractor, you might scratch your head. How are real estate agents getting paid if they don’t work for anybody as an employee? Well, that’s the thing with independent contractors. They more or less work for themselves. As the name implies, they are primarily independent of an employer or agency, able to do their own thing. But when it comes to real estate agents, they are still overseen by their overarching real estate brokerage. The brokerage still has to supervise the real estate agent since the deals run through the brokerage. They also negotiate real estate brokerage fees and split.
Therefore, the agent splits their commission with the brokerage. Or we guess you could say that the other way around. The brokerage or agency splits their commission with the agent that brokered the deal. The IRS provides a better term for the type of workers that real estate agents are: statutory non-employees. Not actual employees of the brokerage, but also not fully independent contractors. This enables the brokerages and the real estate agents to skirt some labor laws and tax laws. This framework benefits everyone involved.
Regardless of everything else, brokerages prefer the real estate agents not to work as regular employees. It is significantly more challenging to do than bring on an independent contractor. The process of setting up a W-2 employee is far more time-consuming. It requires far more paperwork than an independent contractor (or “statutory non-employee”). There’s also more risk involved in paying a salary, as not all agents will close deals and earn the brokerage money.
According to this whitepaper by the NAR, twenty-two state statutes permit real estate brokers to treat their real estate salespeople as contractors. The broker simultaneously exercises its mandatory supervisory duties under the law.
Firstly, regular employees need to have unemployment protections provided by their employers. This requires the employer (in this case, the real estate brokerage) to pay additional taxes. These taxes then go towards funding unemployment benefits. If they bring on non-employees instead, they don’t have to pay these other taxes.
Secondly, W-2 employees must run through the payroll service that the brokerage uses. This isn’t nearly as bad if the brokerage already has a payroll processing company set up and ready to go. But if they don’t and they were to start hiring employees, they’d need to go through the process of doing so. Instead, bringing on some independent contractors allows the brokerages to circumvent this.
Lastly, companies and businesses also need to provide workers’ compensation benefits to their employees. The Affordable Care Act exempts real estate brokers from having to offer health care coverage to their agents. Authorities designed this insurance protection to provide benefits and medical care to employees who are hurt or become ill due to the job itself. Real estate agents constantly travel all over the place and walk through properties. They could end up getting hurt from time to time. Having to provide workers’ compensation for everyone would cost the brokerage even more. But with non-employees, they don’t have to.
The only thing that matters ar the real estate brokerage fee. Even if real estate brokerages decided that they did want to hire real estate agents as salary employees, there would be an absolute uproar. That’s because real estate agents would much rather work on commission than getting paid a salary like a W-2 employee. After all, good real estate agents don’t want to have a consistent paycheck. They want to count on themselves to sell some significant properties and cash in on that commission. Just think about it. Let’s say a real estate agent could get a solid $100,000 salary. Sounds pretty good, right? That’s a great living. But what if, during that year, the real estate agent sold $10 million worth of property?
If they’re only collecting on one side of the deal, making 3% on each sale, that would be $300,000 in commission. This is before any split with the brokerage. And top agents will routinely get 75-25 splits or even higher. There are even plenty of 90-100% split firms in NYC that only charge small monthly and real estate brokerage fees. So why would they prefer to have a salary that limits their potential versus betting on themselves to outperform that fixed salary? They can make significantly more in commission!
If real estate agents were salaried, it would lead to two different outcomes: bad for the industry. First, great real estate agents would have their productivity drop. If their pay isn’t a function of how much they sell in property value, why would they continue to work that hard? Second, lazy real estate agents would be even lazier. Because they can receive a salary regardless of how many sales they made.
Real estate agents join the industry to earn commission on million-dollar listings, not to make a salary. The best salespeople will always want to work for commission. They maximize the real estate brokerage fee.
Again, both of these outcomes would be bad for the real estate industry. And these are the big reasons why real estate agents prefer to work on commission rather than for a salary. Earning potential is just about unlimited when working on commission. The better you do, the more you make. A salary limits their ability to earn money and leads to laziness and lower productivity in the long run.