How a Commission Split Works in Real Estate
The majority of home shoppers, about 87 percent, use a real estate agent to complete their home purchase. This number continues to rise, and most homeowners also use an agent to sell their home, rather than selling on their own.
In 2018, The National Association of Realtors said agents make an average of $40,587 annually, although this number depends on a variety of factors. Aside from the number of completed transactions, pay depends on the amount of commission paid to the real estate brokerage and the commission split arrangement with the realtor's sponsoring broker.
The Broker-Agent Relationship and Commission Split Arrangement
Both agents and brokers hold state-issued real estate licenses. Agents must work under a broker, who serves as their sponsor. Agents cannot work independently, and also cannot be paid any fee or commission directly by a buyer or seller.
Brokers, on the other hand, can be involved in the buy or sell transactions, or hire agents to do the work instead. All commissions get paid to the broker, who then splits the money with any involved agents. If the broker works for a brokerage, they must pay a commission split to the brokerage as well.
Commission Fee Structure Mechanics
Though the accepted broker and agent method in a brokerage consists of sharing a transaction commission, it really operates more like a multi-level structure.
In a traditional real estate business, a seller would contract with an agent or broker to have their property listed for a set percentage of the selling price. The agent is sponsored by a broker who works for a listing brokerage, which lists the property in the Multiple Listing Service (MLS). The brokerage offers to share its sales commission with any MLS broker member who 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, any involved agents would also be compensated. Per their written independent contractor agreement, each of the brokers, for the buyer and seller, would then split their portion of the commission with the buyer and seller 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 they charge the customer for the work they do.
Traditional Commission Sharing Model
This article started out with a basic definition of the commission model. The listing client is charged a commission, currently running between around 4 percent and 8 percent on average, with 5 percent to 6 percent 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 really 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 percent 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 giving a rebate to the customer/client for 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.
Part of the reason this method hasn't caught on is that buyers see paying the agent as a negative. They're not really understanding that they are paying anyway, as the seller factors the commission into their selling price. Some agents offer to bill through the process and then rebate to the buyer all money over that received as the commission.