Understanding Commission Splits for Real Estate Agents

The vast majority of real estate agents are compensated by a broker. They often split the gross commission that the broker collects. While it is possible to collect a 100% commission as a real estate agent, it's not as popular anymore. Either way, it's important to understand how commission splits work, as well as fees, so that you can determine the best way to run your real estate business.

Splitting Commission With a Broker

When the commission is split with a broker, the real estate agent takes a percentage of the total.

Let's say a house is sold and the gross commission on the property is $12,000. If the broker and agent agreed to a 50% and 50% split, they'd each get $6,000.

The percentage split is an amount agreed to by the broker and the agent and usually reflects a number of services and the support the broker provides. It can also reflect the volume of business the agent brings in. It is a negotiated split, and it'll depend on the broker. High-performers will often bring in a ton of business, and so the brokerage may pay them a higher commission.

The highest split shouldn't be the criteria for choosing a brokerage, as there are balancing factors. If you need the services and training the brokerage supplies, then it's worth giving up some of the split, as they're paying for it.

Some brokerages, especially in hot tourist areas, get major walk-in business. An agent can sacrifice a little split when they can sit back and just let the business come to them. This can also be a high-dollar business. Condos and homes in ski areas and beach destinations are often expensive.

100% Commission for the Real Estate Agent

In this compensation model, the agent gets the entire commission. This model can pay 100% 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.

Using the example from earlier, with this model, all $12,000 of the gross commission would go to the real estate agent. However, they may have an office fee of $1,000 per month that they need to pay, so they could end up profiting nothing instead from that one sale by the end of the year since the office fee cancels out the commission.

Referral Fees

Referral fees 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.

Let's say brokerage A refers a buyer to brokerage B in another state. Using the $12,000 gross commission example from above, an agreed referral fee of 25% would mean $3,000 goes to brokerage A, and brokerage B's agent and broker would split the remaining $9,000.

This can also be a referral fee paid after the split. The agent gets the referral, takes their 50% split, then pays the 25% referral fee from that amount:

$12,000 x 50% = $6,000 split

$6,000 x 25% = $1,500 for the referral free

$6,000 - $1,500 = $4,500 for the agent to keep as profit

Franchise Fees

Some of the major franchises charge a percentage fee "off the top" of each commission to their franchisees. This fee would come off the top of whatever amount the broker receives before splitting with the agent. Let's use a 7% franchise fee as an example.

If $12,000 was the gross commission, and there was a 7% franchise fee, $840 would go to the franchise and $11,160 would be split between the agent and the broker.

If there was both a referral fee and a franchisee fee the franchise fee would come off after the referral fee. So if $3,000 was paid to the broker for the referral, and the broker and agent split the remaining $9,000, the franchise fee would be 7% of the $9,000, or $630. That would leave $8,370 for the agent and broker to split 50% and 50% ($4,185 each).

Other Compensation Models

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.

For a new agent, the split negotiated with the broker should be carefully considered based on the services and anticipated prospect leads that will be received. Sometimes a 45% agent share can be better than a 60% share with little business coming from the broker.

Some of today's brokerages are providing more web and technology-related services, even shrinking their office space with cloud brokerage. They spend less money on maintaining an office for every agent, and the agents are more mobile. Customer service can be better and documents and communications are handled digitally. Everyone's costs can be lowered and both the brokerage and agent make more money, even with increased commission splits.

Frequently Asked Questions (FAQs)