How Do Commission Structures Work for REALTORS®?

BECOMING a real estate agent is an exciting professional challenge, providing the opportunity for unlimited income and growth potential.

Most real estate agents are self employed and work within a brokerage as an independent contractor, so it is vitally important for a prospective agent to understand how they get remunerated for their efforts.

While exact details will vary among different brokerages, by far the most common method of earning is the commission model, which has been pretty consistent in the real estate industry for decades.

Under the commission model, a real estate agent earns a percentage of the final sale price of a property. These percentages are partly negotiable between the agent and the property seller, but the brokerage will have guidelines for minimum levels to ensure the deal covers costs of business and is profitable to the firm.

So, as an example, assume a house sells for $250,000 and there is an agreed 5 percent commission between the seller and the broker listing the property. This generates a headline commission of $12,500.

But there may be some costs to be covered from this, such as referral fees if any were agreed to secure the listing initially.

And the real estate agent representing the buyer of the property also is entitled to a share of the commission pie – while percentages can vary, it is fairly standard at 50 percent, meaning $6,250 to both the listing broker and the buyer’s broker.

Then there is the commission split between the brokerage and the agent themselves. This split is highly variable across brokerages and the industry and reflects the sales model in place at each individual brokerage.

For example, some brokerage firms may give newer agents a smaller percentage as a trade off against training and development costs the firm incurs as they help the agent get established and skilled.

And in other agencies, top agents that successfully close high volumes of business are often able to negotiate higher splits for themselves.

It is also common for commission splits to be on a tiered model, with lower splits until a certain commission total is hit, with rising levels for the agent as thresholds are met, providing an incentive to grow your business. These splits can end up as high as 100 percent.

Yet other firms – such as Key Realty offer their agents the full commission from the very first sale - 100 percent of what is earned by the brokerage is paid to the agent.

So a new prospective agent looking for a brokerage to work with should ask not just about the split but what services and costs are covered or not by the broker. For example, as a general rule, the more generous the split to the agent, the fewer business functions are provided by the brokerage such as advertising, marketing and administrative support.

The 100 percent commission model may be offset by the brokerage having monthly fees charged to the agent for these services, such as desk space and advertising. Again, a new agent should examine the packages on offer by different brokerages and ask if the fees are one-size-fits-all or a la carte, allowing the agent to buy into some services but not others as they decide for their own business needs.

Finally, some brokerages use a salaried model for agents, often with small bonuses for successful sales or proven customer satisfaction, though the agent will have expected targets to meet and will feel a greater pressure from the brokerage than the self-employed model.