Real estate agents can not be paid directly by a buyer or seller. Therefore they must work under a sponsor, or broker. The broker collects commission from their sales and then distributes it to them. Oftentimes there will be an agent commission split with the broker in place to compensate the broker for the work they do.
There are different types of commission splits, that offer varying percentages and incentives to agents. It is up to the agent to determine what type of commission split is best for their business. Regardless of what they choose though, they will have to share a portion of their commission. It is often a misconception that agents pocket all of the commission from a deal. When in reality that is far from the truth.
Real Estate Agent Commission Splits with Brokers
The vast majority of agents agree to a standard commission split with their brokerage. Typically new real estate agent commission splits with brokers are 50/50, while experienced agents can often receive splits closer to 70/30 favoring the agent. For example, say the gross commission from a deal was $12,000. If an agent was on a 50/50 split contract, then the agent and broker would each receive $6,000.
Agents, especially inexperienced ones, agree to these splits because the brokerage is able to offer them assistance and support they would not receive otherwise. Brokerages directly receiving significant percentages of their agents commissions are providing services to the agent that balance the commission take. These services could include a variety of different business operation needs. Including marketing for the agent, website maintenance, technology training, and more.
In addition to the agreed upon agent commission split with the broker, there are other fees that must be paid out of an agents commission. These fees must be paid regardless of the type of commission split the agent has in place.
A referral fee is an agreed upon price for a company sending a good client to a brokerage. When referral fees are established they are taken out of the commission before the broker and agent split it. The typical referral fee is about 25% of the gross commission.
Percentage Paid to Real Estate Franchise
Major franchises will charge a fee to their franchisees on every transaction they make. This is for being associated with the franchise, and the benefits that comes with that association. So, say the franchise fee was 7%, and the gross commission on a transaction was $12,000. The fee would be taken out first, totaling $840, then the agent and broker would split the remaining $11,160.
100% Commission Split
The 100% commission split is an arrangement where the agent receives all of the commission they earned from a transaction. This does not come without strings attached though. They must pay desk fees to the brokerage they are associated with, as well as any other business operation costs. The desk fee can be anywhere from a few hundred dollars a month, to over one thousand dollars. It all depends on the quality of the space provided.
In addition to this fee, agents receiving 100% of their commission also must pay advertising, marketing, technology, insurance, transaction coordination, and more miscellaneous costs on their own. Whereas a brokerage will often cover a majority of these fees to at least some extent.
Many new agents do not choose to join a brokerage that offers 100% commission splits because of the fixed cost they must pay monthly. New agents have no idea how much they can expect to make monthly, and knowing they have a bulk sum to pay at the end of the month can become very stressful. Experienced agents often enjoy this arrangement though because their costs are relatively capped while their income is not.
Brokerages offering a salary is a rare method of agent compensation. Redfin is a growing regional franchise that has chosen to compensate their agents in this way. The company claims that this method of compensation is more beneficial to clients. This is because agents are not tied to, or incentivized by the commission they can earn off of a transaction.
Redfin provides agents with a salary and some benefits associated with other salaried careers. At Redfin, agents can earn bonuses in addition to their salary, but do not get paid any commission. Other brokerages that choose this method of compensation do have the option to offer some commission in addition to the salary they provide to agents. This amount would be minuscule though compared to what agents are receiving from traditional commission splits.