In real estate, all transactions run through a licensed broker. Since a single broker can only do so much, they typically work with a team of agents. These agents might be employees or independent contractors, and the way they are compensated is negotiated on a case-by-case basis. Agents might earn a salary, commission income, or a combination. The way brokers compensate their agents has a significant effect on their business that goes beyond just the bottom line, so it’s important to figure out the best way (or ways) to pay your agents depending on the size and age of your brokerage, your clientele, and your market.
There are several common ways brokerages decide to pay their agents. While some real estate agents are salaried employees (5% of agents in 2021, according to the NAR), the vast majority are independent contractors (88%) who are paid on a commission basis. Let’s look at the most common types of commissions and how they work.
Fixed commissions are the most common, and the way they are split between brokers and agents can vary widely. As the name would suggest, when commissions are fixed, they remain the same, regardless of how many deals an agent closes or how much revenue they bring in. Typically, depending on the type of brokerage and the market, fixed commission splits fall between 50/50 and 70/30, with the first percentage going to the agent and the second going to the broker. Let’s look at an example:
It’s worth noting that there is no law or rule that dictates what the commission for a real estate transaction must be. For many deals, it’s about 6%, but agents and their brokers can negotiate this amount with every seller that lists with them.
For brokers, fixed commission splits mean you will get the same percentage from every transaction until you decide to renegotiate your relationships with your agents. This results in more predictable income, which you and your agents might come to appreciate. According to the NAR, in 2020, 37% of agents received a fixed commission split.
Fixed commissions can be great for brokerages that provide a full-service model, or for smaller brokerages with fewer agents. Brokerages have significant overhead expenses, especially if they are leasing a nice office and providing agent benefits like a CRM, marketing tools, a website, and passing leads on to agents. Especially with a smaller number of agents, brokerages need cash flow to cover expenses and remain profitable, which is easier with a higher fixed split. Fixed splits also provide benefits from an administrative and accounting standpoint: the agent takes their share, which is the same percentage of every deal, and then the broker keeps theirs. No extra deductions, fees, or sliding scales to account for.
Graduated commissions are similar to fixed commissions but operate along a scale: the more an agent produces, the more their commission percentage increases. For example, you might agree to start your agent at a 50/50 split until they reach $25,000 in commission income. Then, your agent would switch to a 60/40 split for income up to $40,000, and then to an 80/20 split for all commissions after that. According to the NAR, in 2020, 23% of agents received a graduated commission split.
Depending on the market your brokerage serves and the potential for higher commissions, you may be able to recruit and retain high performers more easily when using a graduated commission, since they will be enticed by the prospect of being rewarded for more sales and keeping a greater percentage for themselves.
Graduated commissions have two unique features that fixed commissions do not: rollbacks and caps. A rollback policy states that an agent’s commission split resets to the standard split once per year, usually at the beginning of the calendar year or on the agent’s anniversary date. As a broker, this rollback may incentivize your agents to start producing more at strategic times of the year, which helps cover operating costs and improve month-to-month margins. It also helps motivate agents through slower, low-inventory periods, since they know that once the market picks back up, they’ll go back to keeping more of their commissions.
Brokers might also choose to cap commissions at a certain amount. When commissions are capped, agents pay their graduated split until they reach the cap, then get to keep all their commissions after that. According to the NAR, in 2020, 15% of agents received a capped commission split. This can be very motivating for agents, because they will work hard to reach the point where they can keep the full commission, but once they do, it might affect your cash flow, especially if you have a small team of top producers. This might be offset through transaction fees, which are discussed below.
Brokerages that use a 100 percent commission structure let agents keep the full amount of the commissions they earn and instead generate revenue by charging various fees. In contrast to a full-service model, under which you’re taking a portion of each commission to pay for things to help your team, agents on a 100% commission structure, sometimes called a rent-a-desk arrangement, pay their brokers a variety of flat fees for all the basic brokerage services, plus extra fees depending on what additional services or perks they need.
These fees might include:
Agents pay for what they need when they need it, but brokerages also get a steady and predictable flow of cash from recurring flat monthly fees, the amount of which is determined based on operating expenses and desired margins.
In theory, there is no incorrect way to pay your agents. That said, different brokerage sizes, markets, business goals, and agent profiles might dictate what type of commission structure (or structures) you choose to implement. Let’s look at a few of these factors:
One of the biggest challenges all businesses, brokerages included, face is recruiting the right kind of talent. Without new agents, your brokerage will have trouble growing; without a cohort of seasoned agents, your brokerage may have trouble surviving.
New agents who are recently licensed likely just spent a lot of money getting set up. In many cases, they would prefer a brokerage with fewer out of pocket fees that provides leads and mentorship opportunities, even if it initially meant lower commission income. On the other hand, seasoned agents who need less mentoring and already have a steady stream of leads want to maximize their income and minimize their costs. They would therefore be less likely to accept a 50/50 split than a new agent. Different commission splits appeal to different kinds of agents, and therefore the commission structure your brokerage uses will have a major effect on recruitment.
The market for agents is fierce, and retaining agents can be hard because their needs change as their careers mature. According to the NAR, in 2021, the median tenure for agents with 15 years or less of experience was only three years. That means a lot of turnover and a lot of costs associated with onboarding and training.
Newer agents need training and leads, while top sellers want minimum fees. So, the commission structure that got an agent through your door might no longer satisfy them when they are farther along in their career. With a few years of experience under their belts, they may begin looking for a brokerage that offers a graduated split, so they can keep more of what they’re bringing in. It is important for brokers to consider these realities as they grow their teams, given how competitive the market for top agents is.
Brokerages have substantial overhead. Leasing an office, hiring administrative staff, providing leads to agents, mentoring them, and presenting a consistent brand all cost money. If you don’t generate enough revenue and maintain certain margins, you won’t be able to stay in business.
If you have a 100% commission model, you will need to develop a fee structure that can keep your doors open and the lights on. The upside is that this kind of arrangement can attract agents that bring in a high sales volume. In contrast, with a 50/50 or 60/40 split, you’ll likely have the budget to provide tools like a CRM, a website, business cards, online marketing, a transaction management system, and more. These kinds of front and back office tools help your agents work smarter instead of harder. And if you operate with a graduated commission model, you might consider a combination of a split commission plus fees so that, even after an agent is keeping more or all of their commissions, you’re still earning a fee on every transaction you help facilitate.
Many franchises charge a franchise fee (also called a royalty fee) that’s taken off the top of every commission in exchange for the advantages and privileges of working under that franchise’s banner. This fee comes out of the commission before the broker splits it with an agent and usually ranges between 5% and 8%. This is yet another expense that needs to be factored in when figuring out the best way to split commissions at your brokerage.
Referrals between brokerages can be a major source of revenue, yet they can also have a major effect on your commission structure. Referral fees are a pre-negotiated percentage of the sale price that comes out of the commission before splitting it. With referrals, if a broker can’t capture both sides of a transaction directly, they can at least earn something by referring a lead to another broker they trust. Referral fees can be high, sometimes 35% or more, which for major sales can mean a significant amount of money being sent to a referring broker (and less for you and your agent).
As a business owner and employer, you might be tempted to try to come up with a single compensation structure that pleases every agent at any stage in their career.
Be warned: this is next to impossible.
As mentioned previously, agents have different needs and wants at different stages in their careers. If you are a newly established brokerage, your most urgent need is cash flow, so using a 100% commission model and charging agents fees likely isn’t feasible, since it might not generate enough income. If you’re an established brokerage, you may have more leeway, but might also be worried about retention and recruitment at the same time. Throw on top of that the fact that every market is different, with different average sales prices, costs of living, taxes, and more. If you can keep the doors open by selling a single $100 million home per year, your needs and commission structure will be vastly different than a broker in a market where the average listing price is $200,000.
You might therefore decide to offer a combination of fixed and graduated splits, as well as fees, to accommodate different types of agents and your own business needs.
No matter what your commission structure, your brokerage will benefit from the ease and peace of mind of using robust real estate commission software like Constellation1 Commissions. Ditch your Excel spreadsheets and rely on a program that does all the heavy lifting for you:
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