6 Financial Facts You May Not Know About Realtors

I find more often than not that the general public has no idea about the financial lives of real estate agents. Even the most experienced buyers and sellers may be surprised by what follows. Real estate agents are usually independent contractors and not employees of the brokerage firms they work with. It is common knowledge that we are not on salary and earn our compensation strictly by commission. Did you know?…

1. We Pay All Of Our FICA Tax

If you are an employee and look at your pay stub, you will see that your company pays a portion of your federal tax for social security and medicare. An agent pays the full amount in what is called Self Employment Tax.

By law, businesses of a certain size must provide health insurance for full-time employees. The employee may have to contribute to their premium, but a large portion is covered by the employer. This is not so for Realtors. I personally pay $8800 annually for insurance and have no chronic medical conditions.

3. We Fund Our Own Retirement

There are no 401K benefits in the real estate industry. No one matches our retirement contributions. As self-employed individuals, we must discipline ourselves to contribute consistently to our Simplified Employee Pension Plans (SEP). This is not always easy, especially if we are having a bad year. The national average earnings of an agent as of January 2019 was $41,289. In Hawaii, depending on your market and experience, the average gross earnings range from $40,000-150,000.

4. General Excise Tax

In Hawaii, service providers like real estate agents, accountants, and lawyers pay a general excise tax of approximately 4.2% on their earnings in addition to state income tax. Most providers pass this tax on to the paying customers, just like a retail store or hotel would do.  About half of the listings I see in my market do not include GET, leaving that burden on the agents and brokerage firms.

5. Business Costs

The cost of doing business also includes liability insurance, also known as Errors and Omissions Insurance. This covers the agent and brokerage firm and both share the charge. Litigation over real estate disputes can be financially and emotionally taxing.

Continuing education required to maintain licensure is paid for by the individual agent. The necessary license fees, association membership fees, and MLS membership fees add up to several thousand dollars a year.

Tools for contact management, secure email, document filing, and storage are paid for by the agent. This is not usually provided free of charge.

6. Commission Breakdown

People who have bought and sold real estate know that agents are compensated at the time of closing the transaction. Traditionally the seller pays the listing brokerage a negotiated percentage of the sales price for the service of getting the property sold. If another brokerage brings the buyer, that cooperating brokerage usually receives half the total commission paid by the seller. The listing and selling agents are contracted to a split of the brokerage’s commission of anywhere from 50 – 80%. For example: if a home sells for $500,000 with a 6% real estate commission, seller pays $30,000 in compensation. If the buyers and sellers agents are each on a 70% split with their brokers, each agent will receive $10,500, and each brokerage firm keeps $4,500. All taxes, expenses, and marketing costs are paid by the agents individually.

For every completed sale, an agent works hundreds of hours on tasks that do not directly produce revenue but are necessary nonetheless. Time spent showing the property to people who don’t end up buying. Listing and marketing homes that don’t sell for reasons beyond the control of the agent. These are things that happen to the best of Realtors. A real estate agent invests time and money on marketing that will hopefully bring a return on that investment.

This is not an easy or glamorous business. About 1 in 3 new agents will quit within three years. When you come across an agent who is making their business thrive, understand that they work hard for that success. If you have questions about the real estate industry in general or specifically about Hawaiian real estate, please feel free to contact me.

A hui hou