Real Estate Agent Commission Structures and Compensation
Real estate agents are typically paid on a commission basis, and the basic compensation model for real estate agent commissions has remained fairly consistent for decades. The commission is based on a percentage of the home sales price. Using an example sale:
- A home sells for $200,000 with a 5.5% commission in place, as agreed between the seller and listing broker.
- $200,000 with a 5.5% commission equals $11,000 in total commission.
- Assuming no referral fee payouts and a 50% split offered in the multiple listing service (MLS), the listing broker keeps 50%, or $5,500.
- The same situation would mean that the broker on the buyer side would get $5,500.
- Splits between brokers and agents vary a lot but assuming a commonly used 50% number, each agent from each brokerage would get half the commissions, or $2,750 each.
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 internal brokerage splits are highly variable and can be set up in several ways:
- Newer agents might be given smaller percentages to offset greater guidance or assistance in getting deals to closing.
- Top producers often negotiate larger splits for themselves.
- Negotiated higher splits generally reflect less advertising support or fewer support services provided by the brokerage.
- 100% commission models offer an agent all commission from sales 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, agents handle their own accounting and business, though the brokerage may pay to advertise agent listings or split advertising costs depending on the independent contractor agreement with the agent. 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.
Issues With the Commission Model
While this is by far the model most used in the business, it has its critics. The criticism frequently centers around issues such as lack of training and money spent by brokerages for agent development. The most vocal critics of this model point out that the lack of financial support and limited funds for training leaves new agents focused heavily on getting a deal and a commission, often at the expense of learning more so they can better serve clients.
The internet has increased the availability of real estate information, with plenty of sites where consumers can search for listed properties of virtually any type. Users can 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 offering salaried positions to agents.
The Salary Model
Salaries can be a straight dollar amount, or there can be incentives for customer satisfaction, usually verified by a 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.
For the new agent, or someone looking at real estate as a career, it's still a widely commission-driven field. Success generally requires having some money set aside to pay household bills during the period when the business is being learned and the deals are few and far between.