A real estate commission split is an agreement between a broker and their agent to divide the sales commission of a property based on a percentage. Determining the type of real estate commission split that works best for your brokerage, clientele, and market will allow your business to grow and ensure your agents are happy. Negotiating compensation is not a one-size-fits-all process. Typically, a managing broker has to decide the best commission split case by case.
Continue reading to gain insight into the types of commission splits you can consider and how this will help your real estate business grow.
Types of real estate commissions
There are many different ways a brokerage can decide to pay its agents. Some real estate agents work on a salary. However, the more common way is as independent contractors. In fact, a study done by the NAR found that 87% of real estate agents are independent contractors.
Let’s discuss the most common types of real estate commission splits and how they work.
Fixed commissions
The most common way a real estate agent is paid is with fixed commissions. However, the way a fixed commission is split can vary. When a commission is fixed, it stays the same no matter how many deals an agent closes or how much money they bring to the brokerage. Although each type of brokerage and market may differ, we usually see a fixed commission rate that stands at either 50/50 or 70/30, meaning the agent gets the first percentage and the broker gets the second half.
It’s important to understand that the right commission rate for a real estate transaction is determined by the seller. Typically, deals fall at about 6%, but agents and brokers often negotiate this amount with every seller they work with on a listing.
Fixed commission splits mean that a broker will continue to receive the same percentage for every transaction until they decide to renegotiate with their agents. Brokerages tend to like this model because it creates a more predictable income for both parties. A study by the NAR notes that in 2023, 35% of realtors worked on a fixed commission split model.
Brokerages that offer full-service models or smaller brokerages with fewer agents tend to profit the most from fixed commissions. Brokerage expenses include leasing an office, investing in a CRM tool, providing marketing tools and a website, and passing leads to agents must be considered when negotiating a split. In order to remain profitable, brokerages need consistent cash flow to cover these expenses, which is easier with a higher fixed split. This type of commission also benefits administrative and accounting duties. Without extra fees, deductions or sliding scales to account for, the brokerage can enjoy a steady expectation for budgets and profits.
Graduated commissions
Similar to fixed commissions, graduated commissions include an agreement on the percentage split between an agent and a broker, but they work on a scale. Let’s take a look at an example of how a graduated commission works.
- First, an agent and a broker agree to start their split at 50/50 until they reach $25,000 in commission income
- Once that income is reached, the split agreement moves to 60/40 for income up to $40,000
- After exceeding a $40,000 income, the agreement moves to an 80/20 split for all income above $40,000
A study done by the NAR in 2023 shows that 20% of agents work on a graduated commission split model. Graduated commissions often attract high-performing agents, enticing them to close higher-paying deals so they can move up the scale.
Unique characteristics of graduated commission
Two unique characteristics of graduated commissions include rollbacks and caps, neither of which are found in fixed commission splits.
A rollback policy resets an agent’s commission split standard once per year. This reset typically takes place at the beginning of a new calendar year or when the agent's anniversary comes around. Brokers benefit from a rollback because it may entice their agents to produce at more strategic times throughout the year. This will help cover operating costs and improve month-to-month margins. A rollback may also motivate agents during slow, low inventory periods because they know they’ll be keeping more of their compensation when the market starts to pick back up.
Cap commissions require agents to pay their graduated split until they reach the cap set by the managing broker. After an agent has reached the cap, they can keep 100% of their commissions. A 2022 study by the NAR shows that 20% of agents receive a capped commission split. A capped commission can be tricky. Although it motivates agents to work hard to meet the cap set for them, it can affect the brokerage's cash flow after the agent starts keeping all of their commission. This can be offset by transaction fees, which we will discuss below.
100% Commissions
When a brokerage operates with 100% commissions, it charges various fees to make a profit. Often called a pay-per-desk arrangement, agents keep their full commission but pay flat fees that go towards the basic brokerage services and extra fees based on any additional services or perks they need.
Some of these flat fees may be:
- Desk fee: A monthly fee for the office space at the brokerage's location
- Equipment fee: A monthly flat fee for internet, phones, copier, etc.
- Administrative fee: A one-time or flat fee for getting set up in a brokerage system plus recurring costs like transaction record management, etc.
- Transaction fee: A fee added when closing a deal
- Insurance fee: A monthly fee towards errors and omission insurance or other professional liability insurance costs
- Support fee: A fee to pay for support or training from the broker or trainers hired by the brokerage
While agents pay for what they need when they need it, brokerages have some security with a steady cash flow from the monthly fees. Each brokerage sets different monthly fees depending on their operating expenses and desired margins.
There is no right way to pay your agents. However, many factors help determine the type of commission split that will work best for your brokerage:
- Brokerage size
- Markets
- Business goals
- Agent profiles
Keep reading to learn how these factors will affect your commission split decision.
Recruit real estate agents to grow your business
One of the main challenges in running a business is recruiting the right people. New agents allow a brokerage to grow, while seasoned agents help the brokerage survive.
New agents who have recently gotten their licenses have most likely just spent a lot of money to get them set up. Usually, they prefer a brokerage with less out-of-pocket fees that provides training opportunities, even if it means getting a lower commission rate.
Seasoned agents who may not need as much training and already have a steady number of leads will want to maximize their income and minimize their costs. They will be less likely to accept a 50/50 commission split than a new agent. The recruitment process is heavily affected by the commission split. Different agents prioritize different things when it comes to making money and having access to training.
Retain real estate agents to save money
In a competitive market, retaining agents can be difficult. Their needs change as they continue to grow in their career. A study by the NAR stated that in 2024, the median tenure for an agent with up to 15 years of experience was only 5 years long. This created a lot of turnover and continuous onboarding costs for brokerages.
While new agents need training and leads, top sellers are looking for minimum fees. The commission split you offered to get an agent in the door may no longer appeal to them as they continue to advance their career. Now having some experience, they might start looking for a brokerage that provides a graduated split so they can start keeping more of their commission. It’s essential for brokers to consider these factors as they hire new team members, especially given how competitive the market currently is for top agents.
Making a profit
As we mentioned above, brokerages have many costs to cover, from leasing an office to consistently presenting their brand. If a brokerage does not generate enough revenue to maintain its margins, the business will fail. Each commission type can work as long as you consider the areas that may require fees or a commission reset.
A 100% commission split will only support your business if you implement a fee structure. This type of commission will attract agents that bring in a high sales volume.
A fixed commission split will allow you to have a consistent budget to offer tools like a CRM, website, marketing collateral, etc. These will benefit both the brokerage and the agents.
A graduated commission split may require the brokerage to integrate a combination of a split commission with some fees so that even if the agent keeps more or all of their commission, the brokerage still earns a fee on the transaction it helps facilitate.
Typical franchise fees
It’s common for franchises to charge a fee, also known as a royalty fee, that is taken off of every commission in exchange for the advantages and privileges of working under the franchise.
These fees will allow the franchisee to:
- Use the franchise’s business model
- Utilize the franchise’s system
- Use the franchise’s trademark
This 5% to 8% fee is taken off of the commission before the broker and agent split it. This is an additional factor to consider when deciding which commission split model is going to work best for your business.
Real estate referral fees
Although referrals between brokerages can generate some great revenue, they can also affect your commission split structure. A referral fee is a pre-negotiated percentage of the sale price that comes out of the commission before the broker and agent split it.
A referral allows a broker to still make a profit even if they can’t capture both sides of a transaction while referring a lead to a broker they trust. Referral fees can reach up to 35% or more, and for big sales, this can mean a large amount of the commission is being sent to the referring broker. This means there will be less for you and your agent to split.
Commission management
As a business owner and employer, we understand that you want to find the “perfect” commission split structure, but take it from us, this is probably not possible. Not every agent will be pleased with the structure you choose at every stage of their career, and that’s okay.
As we said before, agents have different needs and wants depending on where they are in their careers. The commission structure is dependent on the brokerage's most pressing needs. With many factors to consider and the ever-changing market, it will be beneficial to find a combination of the different commission split structures that best suit your business needs.
Simplify your commission management with intuitive real estate commission software
No matter what type of commission structure you choose, your brokerage will thrive with real estate commission software like Constellation1 Commissions. Say goodbye to your Excel spreadsheets and enjoy a program that does all the hard work for you:
- Commission management: Enjoy automatic commission payouts with the flexibility to make one-off changes and exceptions for unique transactions
- Sync with QuickBooks: Easily pay your agents the correct commission or advance amounts on time
- Fees: Create automatic and customized pre and post-split deductions for every commission plan
- Track referrals: Handle referrals, negotiate percentages and payments to third parties all in one spot
- Reporting: Make informed business decisions and leverage real-time production
Effectively track and manage all of your commissions and payments with the industry’s top commission software. Combine it with Constellation 1’s front and back office suit, or integrate it with your existing tech stack.
Want to learn how Constellation1 can simplify your commissions and allow you to focus on managing your business? Contact us to schedule a demo today.
