How Do Estate Agents Make Money?

In very simple terms, most estate agents make money by charging a fee, based on a percentage of a property’s final sale price. This type of fee is known as a commission. According to a survey from 2018, the average estate agent commission is 1.42%.

So to look at an example, if a property was sold for £350,000 and the estate agent charged a 1.42% commission, their total fee for the deal would be £4,970. Now of course this is just the average fee. Some estate agents will charge less than this, some will charge more, and some agents are now also offering a fixed selling fee.

You might be looking at those figures and thinking it’s pretty good money. After all, if an agent sold one of those £350,000 properties every 2 weeks, it would equal commission of £129,220! Pretty tidy income for wandering around houses all day and sticking up some signs. 

In today’s article, we’ll explain why it’s not quite as lucrative as it can initially appear on the surface, and provide some more detail on how estate agent businesses, and individual estate agents, make their money.

Estate Agents Commission Explained

The commission that estate agents are paid is based on the final sale price of a property. As mentioned above, the average rate of commission is 1.42%. Whilst this is the average, commission rates can vary from 1% up to 3.5% or sometimes even more. One factor that impacts the rate of commission being paid is the number of agents that have been instructed to try to sell the property.

If you elect to have your property listed with multiple agents, the commission will generally be higher than if you listed with only 1. This is because the risk is higher for the estate agent. If they have sole listing, they can afford to charge a lower rate of say 1-2%, as their time and cost in marketing and showing the property is likely to be rewarded with a sale.

If you have multiple agents trying to sell for you, it means that not all of them will be actually paid for the time they put into the property. For this reason, most agents will charge a higher commission to sell in this way, to compensate for the increased risk.

An important point to keep in mind is that the figures quoted for an estate agent's commission now must include VAT. Prior to October 2016, agents would generally quote their commission figures as ‘plus VAT’ however legislation was introduced to ban this practice.

It’s also important to keep in mind that the commission is charged on the agreed sale price of a property. There are additional costs involved in buying a property, and these can be significant. Additions such as Stamp Duty, legal and conveyancing costs and various mortgage and administration charges can mean the total cost of buying a property is much higher than the final sale price. The fee you pay to sell your property is based purely on the agreed sale price, not the additional lump sum costs that are payable by the buyer.

Are Estate Agents Fees Negotiable?

As a commercial business that is trying to get your listing, estate agents fees are always negotiable. This isn’t to say that you can definitely get a specific agent to reduce their fees, but it is always worth asking the question to see whether there is any room for negotiation.

The likelihood of whether a reduction in commission is possible will depend on a number of different factors. The first will be simply how badly the agent wants the listing. If their listing numbers are getting low, they may be prepared to offer a good deal in order to get more properties on their books. After all, every time they have a new listing it is an opportunity to advertise their business to other people in the property market, so the benefits go beyond your specific property.

It also depends on the property market. In a hot property market where houses and flats are being snapped up quickly, an estate agent may be more likely to discount their fees. If they are confident that they can get a quick sale, they may not have to put too much time, effort and money into marketing the property, which means they can operate on slimmer margins.

How Much Do Individual Estate Agents Make?

At the beginning of this article, we gave some examples of the types of figures that an estate agent business could make from the regular sale of properties. After all, this is their business and given how many estate agents there are around the country, it’s no surprise that there is good money to be made.

With that said, it’s important to make the distinction between how much the estate agent business can make, and how much the individual estate agent themselves can make! The example given at the top of this article showed that an estate agent who sells a £350,000 property every 2 weeks could generate commission of £129,220 in a year. This looks like a pretty incredible income for the individual estate agent, but unfortunately for them, that’s not how it works.

In reality, most estate agents are paid a modest salary of between £10,000 - £15,000 and then receive a percentage of the total commission on each sale. For example, they may receive 10% of the total commission received on their sales.

Using the same figures above, this means our individual estate agent could make a £15,000 base salary, plus 10% of the total commission of £129,220 (£12,922). In total then, their earnings for the year could be £27,922 (£15,000 + £12,922). Every business will pay their staff differently, and there are also often additional bonuses available based on overall sales targets being hit throughout the year.

All of this boils down to an average income in the UK of £46,847 for an estate agent. This obviously includes agents who are earning well into 6 figures, as well as those new to the industry who are earning much less than average. Overall, an estate agent can make good money if they are capable of making regular sales.

How Do Estate Agents Make Money From Rental Properties?

Letting agents get paid in a very similar way to estate agents who sell properties. Effectively, they are paid a percentage based commission to provide ongoing management for the buy to let investment properties.

This commission is taken from the ongoing rent that is being paid, and covers the cost of administration of the property costs, liaising with tenants and dealing with any problems that arise from the property. 

Letting agents also charge extra for letting a property out to a new tenant. They will charge a fee for advertising and showing the property, as well as a fee for conducting reference and credit checks on prospective tenants. 

How Do Fixed Fee Estate Agents Work?

Fixed fee estate agents have become more popular with the introduction of online agents such as Purple Bricks. This fee method is less common, but it can work out cheaper depending on the circumstances.

As the name suggests, fixed fee agents charge a specific fee based on the details of the property, and not a commission on the final sale price. This is often cheaper than a commission based fee, as it will be designed to apply to a wide range of properties. It will also stay the same regardless of whether the property sells for significantly more than expected.

There are a couple of potential downsides to a fixed fee arrangement. Firstly, the fee is generally paid upfront, which means that you need to come up with the cash yourself rather than have the fee come out of the proceeds of your property sale.

Secondly, there is potentially a reduced incentive for the estate agent to sell your property. As they have already been paid, it doesn’t matter whether the property is sold quickly or slowly. With a commission based fee, the estate agent is incentivised to sell the property so that they can get paid as quickly as possible.

Summary

Estate agents generally make money by charging fees based on a percentage of a property sale price, or a percentage of the monthly rent on a property. This type of fee is known as a commission. 

An individual estate agent will generally be paid a nominal salary, and will also receive a portion of this commission on each sale. The vast majority of the commission, however, is paid to the business they work for.