How Do Real Estate Commissions Work?
Real estate agents are pretty much salespeople and are authorized to work as long as they do so with a broker. Real estate agents cannot operate on their own, and are prohibited from accepting commissions from clients.
On the other hand, brokers can work independently, and they are the ones who hire real estate agents as their employees. As such, the agents are the ones doing the manual labor, while the brokers are providing the connections the agents need to carry out their jobs. These can be connecting the agents to buyers who are looking for a house, as well as sellers who are looking to part with theirs.
With agents now knowing what houses are on sale, and who wants to buy, they can then connect the buyers and sellers, acting as middle men.
Sometimes buyers and sellers will have different agents, who are communicating with each other about their clients’ needs. Naturally, these agents will get paid for their role as an intermediary.
The commission they receive is a pre-decided percentage of the total sale price of the property itself. For example, an agency may decide on a 5% commission, where they will take 5% of the money that was paid when buying the property.
How do Real Estate Agents and Brokers Split the Commission?
Now we know what commission is, let’s find the answer to our initial question. How do the brokers and real estate agents split it between themselves?
In most situations, the commission split is negotiated beforehand, when the agent first comes to work with the broker. At this point, the numbers are decided and most often, will become the routine – that is, all the transactions that take place will have the same split.
However, some of them also choose to make negotiations before the property transaction is completed. This may be due to the nature of the property – for example, in case the property in question is very valuable, or if there is a high amount of risk involved.
Most commission splits are usually 50/50, with 50% of the commission going to the real estate agent, and the other 50% going to the broker. However, sometimes the split is uneven too, suppose 60/40 or even 70/30. In this case, the larger sum of money will go to the real estate agent. This is because for one thing, the agent is doing all the heavy work for making the transaction take place, and for another, the broker will usually be managing multiple agents and so, gets a share in the commission earnings of many transactions.
Sometimes, however, a real estate agent may also pay the broker a fee in return for keeping a majority, and sometimes even the entirety, of the commission earnings. Most often, though, there is a split.
Based on what commission percentage was communicated to clients, this amount gets removed from the total earnings. The price of the property is usually set keeping the commission amount in mind. So, for example, if a house is sold for $500,000 at a 5% commission, the commission earnings would be $25,000. This amount is then first divided equally between the buyer and seller agencies, and becomes $12,500 each.
It is at this point, that the broker and agents do the split between themselves. Depending on the decided split, that $12,500 could go 50/50 or perhaps 60/40, whatever the two have decided on. The real estate agent may even take the entire sum, but pay the broker monthly to make up for it.
Income Models in Real Estate
To get a better idea of how the commission split works, let’s consider the following income models:
This is the model where a 50/50 split is the norm. The broker and the real estate agent split the commission evenly and call it a day. Most often, this kind of split is decided on when the broker is providing some extra benefits to the realtor as well. These could be office spaces, resources for marketing themselves and even helping them find new opportunities through client leads. In such cases, since the broker has a major role to play in the agent’s work progress, they decide on an even split.
On the flip side, the salaried model works the way it does in most companies. Since the broker technically ‘hires’ the realtor, they pay a salary to the agents, hoping to make profits by earning commissions from clients by helping them buy and sell their properties. This model is very uncommon for real estate agents, though.
The Consultant Model
This is another model where instead of a realtor and a brokerage firm, the split happens between a brokerage firm and another brokerage firm. Suppose a client approaches a broker with property they want to purchase, but this broker does not have any leads. They may refer the client to another broker who does have these leads instead.
Since the second broker is the one that does all the heavy work for the client, they would receive the larger sum of the commission. However, as a thank you to the first firm for the referral, the second one gives them a smaller percentage of the commission earnings.
Office Fee Model
The office fee model is the one we mentioned earlier, where the agent keeps 100% of the commission earnings. The broker doesn’t receive anything, but the realtors pay the brokers a monthly fee to make up for this.
What Happens When a Transaction Doesn’t Close?
Commissions will usually only get paid after the transaction over a property is closed, but if one party backs out for any reason, what happens?
There may be some instances where the property seller still has to pay the broker a commission, such as if they change their mind or if they cannot deliver their property within the decided time.
In other circumstances, neither the broker nor the realtor will make any earnings.
While the typical commission percentage varies by state, it commonly stays somewhere between 5-6% of the property’s closing price. The most commonly used model is the traditional one, but others are not unheard of.