Real Estate Commission Splits 101
Whether you’re just starting your brokerage or are a seasoned pro, this refresher will help you ensure that you’re compensating your team fairly while also turning a profit.
Image via Unsplash.com/Kelly Sikkema
You’re in a unique position as a real estate broker. You’ve earned the education and accolades to become an expert in your field, and you likely have several agents working for you. In fact, real estate “teams” are becoming more and more popular these days, according to the National Association of Realtors (NAR) 2018 survey. Most brokers are finding themselves working with more than one agent at a time, often with varying levels of expertise. This means that more brokers like you are having to navigate the complex tasks of divvying up responsibilities, overseeing employees, making sure your business remains profitable, and keeping everyone happy in the process.
How Do Real Estate Teams Split Commission?
Determining how to split commission between yourself and your agents can be one of the trickiest decisions you’ll make as a broker. How do you keep the top performers from leaving your team? How do you pay your lower performers a fair wage and still turn a generous profit for yourself? There’s no set formula to follow — and keep in mind that you can always tweak your method as you grow and learn — but here are the most basic commission split blueprints.
Option #1: Fixed Commission Split
According to the 2018 NAR survey, fixed commission splits are the most common type, with 38 percent of real estate brokerages using them. Under this arrangement, a percentage split is decided between you and your agent and remains fixed (i.e., does not change) based on production or sales. There’s a lot of variety here, but a typical commission split might be something like 50⁄50 or 60⁄40, with higher-performing agents often receiving higher percentages in the range of 70⁄30 or 80⁄20.
Brian Ma, owner of Flushing Realty Group, describes how fixed commission splits work at his firm and why they’re his preferred method for compensating his agents.
“At our brokerage outfit, we do not alter the commission percentage as a function of how many homes you sell or purchase for clients or the dollar amount you bring into our company,” Ma says.
He does a split agreement of 70⁄30 with his agents, which is above the industry average in his area. But Ma says he feels this generosity attracts high performers who may normally dislike a fixed commission.
Option #2: Graduated Commission Split
Twenty-two percent of brokers employ a graduated commission split, the NAR survey found. As the name suggests, graduated commission splits change over time, usually based on how productive an agent is. For example, you may choose to start an agent at a 50⁄50 split but change it to 60⁄40 once they reach a particular production goal. These types of commission splits encourage agents to work harder, with the incentive of higher profit margins the more deals they close.
Alex Romanov, a real estate investor in Seattle, offers his perspective on the benefits of graduated commission splits.
“I’ve learned that common industry practice is for brokers to take a 40 to 50 percent commission split until a cap of $20,000 to $30,000 is reached, after which the agent takes home 100 percent of the commission,” he says. “This seems to be a fairly common industry practice and keeps the agents who I work with satisfied.”
Option #3: 100 Percent Commission Split
Often referred to as the “rent-a-desk” split, in this scenario, brokers collect monthly fees from agents for space rental, as well as other services your company might offer, such as administrative services, marketing and advertising services, professional liability insurance, or use of computers, phones, and copiers. After paying this monthly retainer fee, the agents keep 100 percent of their commission.
This is the least popular type of split, with only 13 percent of NAR respondents utilizing it — but that doesn’t mean you should discount this kind of commission split completely. If you’re a well-established broker in your field, a 100 percent commission split might work best for you. Working with a split like this comes with fewer risks to you, as you have a monthly fixed income. If you offer your agents superior services that entice them to pay a higher monthly retainer fee, it can be a cost-efficient arrangement for both of you.
How To Calculate Real Estate Commission Splits
When you’re trying to decide which kind of commission split to choose for your team, it’s important to keep the big picture in mind. Consider what your gross commission will be, what your overall income goals are, what the current market trends point to, and what production goals you can realistically see your team meeting.
Here’s how the most popular commission split — the fixed commission split — might look in real terms:
- Your team sold a home! The gross commission amount for the sale is $20,000.
- You and your agent have agreed on a commission split of 50⁄50, so $10,000 of the commission goes to you, and $10,000 goes to your agent.
- How did you come to this percentage in the first place? Your percentage split may depend on:
- Your agent’s typical production rate. The higher the agent’s production rate, the higher percentage commission they usually receive. More seasoned agents usually negotiate higher splits.
- The services you provide to the agent. If you provide more services to your agents, such as listing leads, training, and mentoring, you may be able to negotiate a split that’s more favorable to you because your services are of higher value to your agents.
How Do I Make Sure I’m Keeping My Top-Performing Agents Happy?
How can you make your commission splits favorable for you but also retain your top-performing agents? After all, as agents become more experienced, they need to feel their worth is increasing. You want to hold onto these players for as long as possible, but at the same time, you also don’t want to lose money just to keep them.
Dan Lesniak is the co-founder of the Keri Shull Team in Arlington, Virginia. As a team leader and one of the top-performing agents in the country, these are just some of the ways Lesniak says he retains talent:
- Lower-performing agents get training, support, and leads.
- Higher performers get showing agents who are hired and trained to add more volume to the agent’s business.
- Lower-performing agents are motivated to close more deals, so they can be afforded these benefits down the road.
- In Lesniak’s commission split model, profit margin is weighed with the value provided: “If you can generate leads, give support, and have [received] training, you can provide a lot more value.”
- Lesniak’s agents earn less commission than average in the industry, but their total pay ends up being much higher than average because of the services and value the brokerage firm adds. “Our average experienced agent makes over $252,000, which is something [that] less than one percent of all agents achieve,” he says.
Putting It All Together
There’s no perfect way to calculate commission splits, and there’s so much variation in the industry. The way you calculate your split might change from year to year or from agent to agent.
While the goal is to calculate commission splits that are fair to your agents and as profitable for you as possible, it may not be helpful to get too hung up on the numbers. Your goal is to create a business that has an overall end-of-year income that is steady and growing — and, most of all, a business model that can endure and that adds value to every team member.
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