Methods of Compensating Real Estate Agents - Commissions and Splits
The Broker/Agent Traditional Commission Split Model:
The vast majority of real estate agents are compensated by a broker via sharing the gross commission amount that the broker collects. Here's an example:
1. Gross commission amount of a transaction = $12,000.
2. Broker/Agent split of 50% broker/50% agent = $6000 to the agent.
3. The percentage split is an amount agreed to by the broker and the agent and usually reflects a number of services and the support the broker provides.
It can also reflect the volume of business the agent brings in. It is a negotiated split, with high performing agents often able to get splits as high as 90%.
In recent years splits have increased. Some top producers are even getting up to 90%, but they aren't using much support from the brokerage. They bring in a ton of business, and the brokerage simply gives them a home to bring it to.
The highest split shouldn't be the criteria for choosing a brokerage, as there are balancing factors. If you need the services and training the brokerage supplies, then it's worth giving up some of the split, as they're paying for it. Some brokerages, especially in hot tourist areas, get major walk-in business. An agent can sacrifice a little split when they can sit back and just let the business come to them. This can also be high dollar business. Condos and homes in ski areas and beach destinations are often expensive.
The 100% Commission Model:
In this compensation model, the agent gets the entire commission. This model can pay 100% to the agent because the agent is paying a "desk fee" or monthly office fee. This can be a significant amount/month, but experienced producers prefer it because their costs are capped while their income is not.
Example from above would be $12,000 to the agent, but the office fee could be $1000/month or more.
New agents generally are not interested in this model because of the fixed cost they must pay monthly.
As of 2013, this model has almost disappeared, with even REMAX taking on new agents with less than a 100% commission.
Referral Fees from One Brokerage to Another and Agent Split:
Referrals come "off the top" before the commission is split. The referral is a negotiated percentage paid to another company for sending a client, either as a seller or a buyer. Here's an example of a typical buyer referral:
1. Brokerage A refers a buyer to Brokerage B in another state.
2. Using the $12,000 gross commission from above, and an agreed referral fee of 25% would give Co. A $3000, and Co. B agent and broker would split the remaining $9000.
This can also be a referral fee paid after the split. The agent gets the referral, takes their 50% split, then pays the 25% referral fee from that amount. $12,000 * 50% = $6,000 * 25% = $1,500 referral fee.
Percentage Paid to Franchise for Business:
Some of the major franchises charge a percentage fee "off the top" of each commission to their franchisees. This fee would come off the top of whatever amount the Broker receives before splitting with the agent.
Using a 7% franchise fee as an example:
1. $12,000 gross commission from the deal would pay franchise $840, while broker and agent would split the remaining $11,160.
2. On the referral deal from above, the franchise percentage would come off of the $9000. Agent and broker split $8370.
Other Compensation Models:
With differing models appearing regularly for how brokerages charge their listing and buyer clients, there are many other ways an agent might be compensated....even by a salary.
For a new agent, the split negotiated with the broker should be carefully considered based on the services and anticipated prospect leads that will be received. Sometimes a 45% agent share can be better than a 60% share with little business coming from the broker.
Some of today's brokerages are providing more Web and technology related services, even shrinking their office space with cloud brokerage.
They spend less on maintaining an office space for every agent, and the agents are more mobile. Customer service can be better and documents and communications are over the Web or through smart phones. Everyone's costs can be lowered and both brokerage and agents make more money, even with increased agent splits.