Understanding Real Estate Commission Splits
Today, I'm breaking down the different types of real estate commission splits you can expect to see, and which ones are right for you.
Diving into a career as a real estate agent means learning all about the different facets and terms associated with the job. In addition to getting your license, marketing campaign, and websites established, you’ll need to learn about certain parts of the job so you enter agreements from a well-informed standpoint. Real estate commission splits are something that many people don’t know too much about before starting their career but they make a significant difference in how much you make as an agent. Let’s dive into all things commission so you know what to expect from your brokerage and help you decide which agency is the best fit for you.
Marketing, selling yourself, and establishing yourself as a local expert in all things real estate are only the first part of the sales funnel. Once you get down to business with selling properties, you’ll get to use all your real estate skills to satisfy your clients. However, many real estate agents who are just getting started on their careers don’t necessarily know the ins and outs of how commission works. Knowing how you get paid after making a sale is an important thing to know. It will also help you in narrowing down your search for a brokerage that is the best fit for you.
A commission split determines the amount of money the agents working on a sale can expect to earn from the sale of a home. The commission is often split between the individual companies and agents working on the sale together. There are quite a few different ways these percentages are worked out. We’ll dive into the different types of commission splits to help you understand how you will get your money after landing a sale.
Nice-sized commissions help real estate agents make a lot of money quickly. Knowing how commission works is a big part of this. So what exactly is a commission? A commission is a previously agreed-upon amount that is paid to the agents involved after a home is sold. The percentage of the sale will be established well before the final forms are signed.
A real estate commission can vary based on the broker you work with, and the location you’re selling in, but generally, you can expect the commission to be 5%-6%. That doesn’t mean you’ll make that percentage on a sale. That amount is split between the brokerages and a percentage of those amounts will go to the buyer and seller agents. This is where knowledge about commission splits comes into play.
A common commission split is a 60/40 split. Here is an example of a traditional 60/40 commission split:
While the 60/40 commission split is the most traditional type, there are other types as well that you may encounter in your time as a real estate agent. You’ll notice some of these work out better for you and others benefit the brokerage you work with. Let’s dive into some of the different types of real estate commission splits you may encounter in your career. This is especially helpful for those just starting so they know what to expect in terms of payment after a home is sold depending on the type of split your brokerage uses.
Check out this video for a quick guide to different types of real estate commission splits, then read on below for a more in depth description.
When you first start as a real estate agent, chances are you will encounter many brokerages that utilize the fixed commission type of payment. In this type of commission, the percentage of the commission is decided upon before any dealings are made and remains fixed. The percentages and divvying up of the commission become part of the contract and are well established before the sale and final forms are signed.
This is a common, popular option for commission splits and guarantees all parties involved will know before they get started what their revenue will be. Chances are when you are searching through potential brokerages to work with, you will encounter this type. Most commonly, this type of split will be 60/40. These types of splits are often done by companies that prioritize training for their agents. The large amount of money collected by the agency usually goes into training tools, lead generation, and marketing. If you are just starting out and in a position where the training tools, lead generation, and marketing can benefit you, this is a very enticing commission deal.
Graduated splits, also known as tiered splits, allow agents to earn an increased commission based on the volume of their sales. When you are first starting your career, this may not be as guaranteed or sizable as fixed commission splits but can be very lucrative once you have a few years of experience under your belt. Once you gain traction as an expert in your area, the tiered commission style can be very beneficial.
Graduated splits can vary significantly based on the company, so make sure you understand the brokerage’s rules before agreeing to work with them moving forward. For example, your brokerage may roll back your commission amount every calendar year. That means you may have worked up to an 80/20 split in December, but you’ll be back to your starting split of 50/50 in January. These are all very important details as you don’t want your hard work to be unfairly compensated.
Some brokerages may also offer a commission cap. A commission cap is a limit that grants the agent 100% of the commission once it is met. These caps may come with a transaction fee so be sure to understand the rules of your brokerage carefully. As these commission splits are performance-based, high-achieving agents may be able to profit from this type of split. However, less experienced agents may struggle to keep up. As you narrow down your search of real estate brokerages, make sure to check all the details of the commission to splits to make sure it is something you can handle and compensate fairly.
One of the most alluring types of commission is a high split or no commission. These types of models offer the greatest incentive to agents to make sales and cash big commission checks. It is important to note that these commission splits can come with significant risks for the unprepared agent. High split commissions may offer an agent an 80/20 or 85/15 split, while no split commissions will offer 100% of the earnings to the agent. These models often also have relatively low annual caps, making it easy to start earning more money quickly.
You may be asking “How does the brokerage make its money?”. Most commission splits are designed to portion out a piece to brokerage to make them money while also providing services like training and lead generation as well as marketing. Brokerages that offer high split or no split commission still make money. They just do it through administrative fees. Several types of fees can be incurred as part of this type of commission including:
Mentorship from the brokerage and additional support may also come with additional fees. The brokerages that often offer these types of commissions are meant for experienced agents. Chances are if you are just starting as a real estate agent these are not the best options for you. They usually don’t offer support or training for new agents which is integral during the beginning parts of your career in real estate. This type of deal has the potential to be very profitable. However, it can also be very confusing, especially for inexperienced agents. Non-fluctuating commission agreements and high earning potential right out of the gate make this an appealing plan for some agents. If you feel you have the skillset, experience, and knowledge to comprehend the terms and conditions of this type of commission split, it can be a great way to make money fast. However, if you are unsure how you would perform in this type of environment, it may be best to look towards a fixed commission brokerage.
This is one of the less common models out there. You likely won’t encounter this often or even at all unless you find a brokerage that works with this commission split type. Under this model, companies will pay their agents a flat salary rather than having them work off commission. Many times, these agents will be offered bonuses or additional commissions for the sales they make. These companies can also offer benefits like insurance and paid time off. They also usually offer incentives for making more sales. This allows them to also have fairly extensive training and mentorship programs.
A salaried model can be a great solution for a new agent who isn’t too sure of themselves, or someone looking for a more traditional employment model. This way you can hone in and develop your marketing and real estate skills while having the assurance of a steady paycheck. Once you grow a bit as a real estate agent you may want to find a different brokerage that offers a more lucrative commission-based pay.
Many people find themselves drawn towards real estate by the potential for large commission checks. Chances are you’ve been drawn towards higher-income neighborhoods and communities just for the opportunity to make some serious cash on individual sales. However, if you aren’t working with a brokerage that offers a commission split type that works well for you, you may be left with slim checks when pay time comes around. It is integral to assess how commission works at every brokerage you look towards for leads and work.
When it comes to commission splits, every brokerage is going to do it differently. Before you agree to work with a company, find out how you’ll be getting paid, what percentage of the total commission will go to you, and what extra benefits or fees you can expect to incur. This will save you frustration in the long run while also preventing you from being caught off guard. Now that you’ve gained some knowledge about many of the commission splits out there, you’ll be able to make an educated decision before you start working with a specific brokerage.
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