Real Estate Agent Commissions Structure and Compensation
In this profile of real estate agent commissions, I explained the basic compensation model used for most real estate brokerages, and for most of the history of the business. The basic model hasn't changed in format at all:
- Using an example deal with a home sold for $200,000 and a 5.5% example commission agreed to by seller with the listing broker
- $200,000 X .055 = $11,000 full commission.
- Assuming no referral fee payouts and a 50% split offered in the MLS, the listing broker keeps 50%, or $5500.
- The same situation would mean that the broker on the buyer side would get $5500.
- Splits between brokers and agents vary a lot, but assuming a commonly used 50% number, agents at the two brokerages would get half the commissions, or $2750 each.
The example is the basic and simple approach and still used with varying split percentages by the vast majority of real estate brokerages. The split offered in the MLS, meaning the percentage the listing broker will share with the brokerage bringing the buyer, is pretty uniform at 50%. But, the splits at brokerages between the broker and the agent are highly variable, and can be set up in a number of ways:
- Newer agents might be given smaller percentages to offset greater help they need in getting deals to closing.
- Top producers often can negotiate larger splits for themselves, including splits up to 90% in some cases.
- Especially with the top producers, there may be negotiated higher splits in return for less advertising or fewer support services provided by the brokerage.
- 100% commission models offer the agent all of the commission in exchange for monthly fees for desk space, advertising and other services.
- Tiered split structures offer lower splits until a certain dollar amount in commissions is reached, then the split to the agent increases, sometimes jumping to 100% immediately.
As independent contractors in the commissioned sales business model, the agent handles their own accounting and business, though the brokerage may pay to advertise agent listings or split ad costs depending on the independent contractor agreement with the agent. While this is by far the model most used in the business, it has its critics. Criticism frequently centers around the lack of training and money spent by brokerages for agent development. It's a business model that makes it relatively inexpensive for a brokerage to take on newly licensed agents, letting them make or break in the business with little cost to the broker. Those who criticize this model also state that this lack of financial support and limited expense for training leaves new agents focused heavily on getting a deal and a commission, and less on learning more and serving clients better.
The Internet has opened up the information box for real estate, with plenty of sites where consumers can search for listed properties. The Internet user can also locate discount real estate brokerages offering everything from straight discounts to rebates for sellers and buyers. Of course, this increased competition creates downward pressure on commissions, and some companies have begun to offer salaried positions to agents.
Salaries can be a straight dollar amount, or there can be incentives for customer satisfaction, usually verified by some kind of customer survey after the transaction closes. Other brokerages offer base salaries and a small bonus from each closing. These compensation models tend to help the real estate professional to develop a more consumer-focused service attitude, as there is less pressure to get a deal and commission to keep the home bills paid. Of course, the broker needs deep enough pockets to pay salaries through slower business periods. And, there will be more pressure from the broker to get deals into the pipeline, as money is going out every month for a salary.
There is a "consulting" business model out there, but it has struggled to gain a foothold in the marketplace. One reason is that an agent must have the approval of the broker to engage in services for flat fees or hourly compensation.
It may be against some state rules, but it is more about it being tough for an agent to get a broker to agree to this model unless the agent is already successful. The consulting business model is more prevalent in brokerages with just one owner/practitioner. Or, the owner uses this model, and is willing to take on agents and base the brokerage business on consulting and innovative consumer pricing models.
For the new agent, or someone looking at real estate as a career, it's still pretty much a commission ballgame. Success generally requires some money put aside to pay household bills during the period when the business is being learned and the deals are few and far between.