Methods of Compensating Real Estate Agents
Real Estate Agent Compensation Explained
In these Step-by-Step Tutorials, you'll learn some of the different methods used to compensate real estate agents. When choosing a broker to hold your license, the commission arrangement may not be the most important factor.
Weigh the services that your broker provides to agents, as well as the expected number of prospect leads and their quality. If you're receiving a large number of quality leads, then a smaller commission split percentage will still lead to more income for you.
The Traditional Broker/Agent Commission Split
The vast majority of real estate agents are compensated by a broker via sharing the gross commission amount that the broker collects. We're not discussing percentages charged to the client here, only the way the agent is compensated. Here's an example:
1. Gross commission amount of a transaction = $12,000.
2. Broker/Agent split of 50 percent broker/50 percent agent = $6,000 to the broker and the same to the agent.
3. The percentage split is an amount agreed to by the broker and the agent and usually reflects the level of services and support the broker provides. It can also reflect the volume of business the agent brings in. Highly productive agents can negotiate better splits.
4. If you're in the process of choosing a broker to hold your license, the split is important, but should be balanced with the services and leads provided by the broker.
The 100 Percent Commission Split Model
In this compensation model, the agent gets the entire commission. This model can pay 100 percent to the agent because the agent is paying a "desk fee" or monthly office fee. This can be a significant amount per month, but experienced producers prefer it because their costs are capped while their income is not.
1. The example from above would pay the full $12,000 to the agent.
2. In this model, the agent might be paying anywhere from a few hundred dollars to more than a thousand dollars per month for a desk fee. This fee is frequently based on the type and size of the office space the agent is given. Another method is for the agent to pay a set fee per transaction to the broker.
3. New agents generally are not interested in this model because of the fixed cost they must pay monthly. Not having any idea at the beginning of their commission income, new agents would find this method stressful. Also, few brokerages using this model want to take a new agent for these reasons.
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 has a client selling their home and leaving the area. They refer the buyer client to Brokerage B in another state with a written referral agreement at a certain percentage of the final commission earned by Brokerage B.
2. Using the $12,000 gross commission from above, and an agreed referral fee of 25 percent would give Brokerage A $3,000 for the referral, and Brokerage B's agent and broker would split the remaining $9,000.
3. Using the 50/50 split from the first example would yield $4,500 for the agent in Brokerage B.
Percentage Paid to Real Estate Franchise for Business
Some of the major franchises charge a percentage fee "off the top" of each commission to their franchisee brokerages. This fee would come off the commission before the broker receives it and splits with the agent. Using a 7 percent franchise fee as an example:
1. The $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 referral fee would normally come off first and the franchise percentage would come off of the $9,000. The agent and broker would then split $8,370.
3. Many consumers have the mistaken impression that their agent is pocketing the entire commission that they see on their settlement papers. It never hurts for them to be educated to these facts and understand the net commission actually received by the agent.
Other Less Traditional Real Estate Compensation Methods
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.
Some of the newer fixed-fee and fee-for-service listing brokerages are paying their agents a salary, rather than a commission.
Some brokerages pay their agents a base salary and a lesser commission percentage for each transaction.