One of the problems with having this discussion, however, is that no other industry presents you with the wide variety of options, specializations and freedoms that the real estate industry has to offer.

As a result, compensation plans vary drastically based on what kind of real estate work you are doing. Compensation plans can also vary from one real estate company (called a brokerage) to another and even between agents within a company doing the same work. To add to this complexity, state and local laws will change how the industry operates within each state and where you live will also impact compensation (i.e. agents in a city often have a very different experience than agents in a small town).

To understand this better, let’s start by explaining the relationship a real estate agent has with their employer.

Understanding Who You “Work” for…

The first piece to understanding real estate compensation is to understand the structure of the real estate industry- which varies slightly from state to state because of variations of state laws. In most states (including Missouri) you have two major parties involved in real estate sales- Brokers and Agents (technically Missouri calls them a Salesperson).

What’s the difference?

Legally, only a person with a broker's license can sell real estate and be paid a commission; the agent (i.e. salesperson) works under the broker’s umbrella and license.

As a result, to be a licensed salesperson you must have a broker who “holds” your license for you. Without a broker affiliation, a salesperson selling real estate is doing so illegally (even one with a state license).

Confused? This is literally 2-3 chapters of the real estate certification class and I don’t want to take the time to discuss it all here, so think of it this way- a broker owns and runs the real estate company (brokerage) and the agent is the one who does the daily work with buyers and sellers.

With that said, a broker may have thousands of agents working under him or her or the broker can be a one person shop (where one person serves as both the broker and the agent).  And a person with a broker's license doesn't have to run their own shop.  They can work under another broker just like a salesperson does- and when they do they're called a Broker-Salesperson.

And for the record, becoming a broker really isn’t much more difficult than becoming an agent. In Missouri you first become an agent by taking the agent class and then passing the state certification test.  Tthen after two years you are eligible to take the broker’s class and test.  The two year wait is new as of 2006, prior to this you could take the classes back to back.

As someone with a broker's license I always joke that the difference between an agent and a broker is about $400! (i.e. the cost of the second class and test...)

But seriously, the real difference between being a broker over an agent is just having more career options. Outside of running your own brokerage, the state requires every real estate branch office to have an office manager who also has to have a broker’s license. So if you aspire to management, the extra step to a broker's license is the first step to get there.

Many agents (myself included) will also get a broker’s license just to show they have a higher level of training than the average part-time agent. Even if you are a broker-owner, office manager (called a broker-manager), or a broker-salesperson you are free to sell real estate like a typical run of the mill agent.

The final point here is that you should not confuse a broker or brokerage with a franchise. A franchise is simply a national or regional marketing organization that a brokerage may belong to (these are names like Prudential, RE/MAX, Coldwell-Banker, Century 21, ERA, Exit Realty, Keller-Williams, Assist-2-Sell, etc).

Owning a real estate franchise is no different than owning a McDonald’s or Subway restaurant franchise- although you own and manage your own shop, marketing is regulated at a national level to give the appearance of continuity from town to town.

In larger markets you may also find multiple franchises of the same company. In St Louis, for example, there are over half a dozen RE/MAX franchise, and the second and third largest brokerages in town are both Prudential- Prudential Alliance and Prudential Select. Although they both have that Prudential name, they are owned by completely different people.

Tomorrow I'll begin to answer the question of how agents get paid...