Commission Split Defined
Definition: Though usually considered the method of broker and agent in a brokerage to share a transaction commission, it is really a multi-level structure.
In a traditional real estate business, a seller would contract to have their property listed for a set percentage of the selling price. The listing brokerage lists the property in the Multiple Listing Service (MLS) and offers to share that commission with any MLS broker member that brings a buyer that completes the purchase. That's split #1.
Unless the broker in each of these companies is personally involved in the transaction, there will also be agents to be compensated. Per their written independent contractor agreement, each of the brokers would then split their portion of the commission with the agents as split #2.
Real Estate Compensation Models
Real estate agents and brokers can do business in pretty much any way they want as long as they follow their state laws for compensation. There is more than one way to get the job done, and they are intertwined with how we charge the customer for what we do..
Traditional Commission Sharing Model:
This article started out with a basic definition of the commission mode. The listing client is charged a commission, currently running between around 4% and 8% on average, with 5%-6% being common. The listing broker member of the MLS has agreed to share that commission, usually at a 50/50 split with any other broker or their agent who brings a buyer and closes. The seller is paying all commissions on the settlement statement. However, buyers should realistically know that it is factored into the price, so they are paying as well.
The broker and their agent then split their split again based on the independent contractor agreement between them. Most agents seem to start out and stay on a 50/50 split, in return for which they get specified broker services and marketing. As they build their business, brokers often raise the commission percentage going to the agent to keep them from leaving for a better deal.
The Office Fee Model: This concept pretty much originated with the Remax franchise. At that time and for years the agent received 100% of the commission amount that came to the broker. The agent was charged an office fee for their space, certain office support functions, equipment, etc. The agent was totally responsible for their own marketing and other costs of operation.
This model changed after a while, with the percentage reduced to the agent, though it's still significantly higher than the traditional model.
The Salaried Agent Model: Redfin, a large and growing regional franchise, pays their agents a salary and provides some benefits normally associated with other salaried careers. This is in conjunction with rebating to the customer/client part of the commissions received by the brokerage.
The Consultant Model: This one has had a tough time catching on, and it isn't allowed in some states. Also, it does create some issues with the independent contractor model, so it seems to work best for single broker business models. Basically, like an attorney or accountant, the real estate professional is paid by the hour for their services. Some also flat rate certain services, charging by the hour for extra services outside the "package" that's priced at the flat rate.
I tried this for a while in my vacation home market in Taos, NM with little result. Part of the problem is that buyers, the bulk of my customers, see paying the agent as a negative. Of course they're not really understanding that they are paying anyway, as the seller factors the commission into their selling price. I was offering to bill through the process and then rebate to the buyer all money over that received as the commission.
I did do a couple of flat rate deals where the seller was a FSBO and they found their own buyer. I would handle both sides of the transaction for a flat rate and they would decide who would pay, they normally split it.