Finally, We Talk about Commissions!

To keep this simple, we're only going to be talking about a typical full-time residential real estate salesperson who works for a traditional brokerage.

When an agent meets with a seller to list a home for sale, the agent and the seller will determine a commission structure in advance to the home being listed.

Legally, this is always negotiable but it can be a flat-fee or a percentage of the home’s sale. There can also be agent bonuses or other incentives for a quick sale. Generally, the broker (see Part 1) sets guidelines as to how their agents should structure commission as a part of their overall business plan- however if the broker is a member of a multiple listing system (MLS) then there may be additional requirements as to how the commission has to be structured.

Enter the MLS...

To understand how commissions are paid to an agent, you first have to understand the concept of the MLS.

A Multiple Listing Service, or MLS, is where a selling broker agrees to payout a percentage (or split) of the sales commission to any other member of the system who brings in a buyer for the property (called a cooperating broker).

Even though the exact split is unique to every listing (and determined by the seller), the system allows agents who represent buyers to avoid having to negotiate commission with the selling agent on every single deal.

Generally, there will be one MLS where you live which is often managed or affiliated by the local Association of REALTORS.  However it is not uncommon for larger cities to have multiple services based on geography or for a city located in two states to have one for each state. So depending on where you live you might need to be a member of multiple services.  The MLS will also have basic regulations as to how member agents can market their listings as well as how buyer’s agents can show them (to create standards and keep everything fair for all parties).

Why all of this is important is because if your broker is a member of the Association and MLS (and most larger brokers are), using the MLS isn't an option.  A salesperson will be required by their broker to submit all of their listings to the MLS, specify the commission split with other brokers up-front, and post the listing in the MLS database for all other agents to see and sell (there are exceptions to this but they are unique to each MLS so I won’t be discussing them here).

A typical cooperative broker commission split is usually somewhere around 50/50 or 60/40 (with the selling side keeping more to pay for marketing). For example, if your seller agrees to a commission of 6%, you will probably agree to pay the cooperating broker 2.5% to 3% with your broker keeping the rest.

So get out your score cards because we've actually started breaking down where the commissions go, and the first 40-50% goes to the cooperative broker.

Note: Although a significant percentage of agents and brokers are members of an MLS, not everyone joins. If you join a broker who is not a member, you might be expected to not only list homes but bring in a buyer for every listing as well (or negotiate a commission split up front with a buyer’s agent before they can show the home).

Although there are legitimate reasons to not join your local Association/MLS, a significant percentage of home sellers like the benefit of having exposure to all of the potential buyer’s agents (so unless you have a specialization that is unique, you might find it difficult to get clients without the MLS membership).

Non-Traditional Brokerages

Most brokers, when a commission is earned, will pay their agents a percentage of the commission and keep the rest for themselves.  These are called "Traditional Brokerages."

A non-traditional brokerage is simply a broker with a different compensation structure.

The most popular of these models are the 100% commission brokerages that pay an agent most, if not all, of the commission earned then charge the agent for office rent, membership to the brokerage and other services rendered. Whereas a traditional brokerage may provide services to an agent "for free" out of the commission they keep, a traditional brokerage tends to charge a fee for everything.  Most RE/MAX offices are an example of this model.

Non-traditional brokerages also include discount or flat fee brokerages.  Despite the marketing hype that they're new and changing things, discount and flat fee brokerages have been around for a very long time.

However the rise of the internet has reduced the start-up costs and created quite a few “internet” based brokerage (although state licensing laws still apply).

As the purpose of this article is to discuss how an agent gets paid, I would like to avoid the debate over which business model is better and stick to compensation.

But understand, in most commission-based residential real estate transactions the seller generally pays commission only when a property sells (which means an agent or broker might incur marketing expenses they will never recoup if the property doesn’t sell or they get fired by the seller). That may not be the case in a flat-fee or discount scenario.

Flat-fee brokerages may take payment or credit card payments up front at the time a seller places a listing. If the brokerage is a member of the MLS, they may also require the seller to pay a commission percentage to a buyer’s broker on top of the flat fee (once it sells).

A $2,500 flat fee paid up front to the selling broker with another 2.7% paid to the buyer’s broker (cooperating broker) would be a fairly average transaction from what I’ve seen.

Over the past year, the state of Missouri has passed regulation to specify the minimum effort a brokerage must provide a seller (receiving offers and submitting counter offers). This is due to internet brokerages that were basically taking their fees up front and then doing nothing for the client (not even putting them into an MLS).

Many of the really low cost flat-fee brokerages (those that charge under $1,000) are often one person shops (because there really isn’t a place for sub-agents in their business model).

Of the larger flat-fee brokerages that do have agents, an agent might get a percentage of the fee, or might get paid for “add-on” sales- such as selling the buyer a real estate lawn sign for their yard, or selling the buyer add space in the broker’s newspaper ad. In these cases, the brokerage will establish a “menu” of marketing solutions for an agent to sell to a seller.

Although discount brokerages get lumped into the same category as flat-fee brokerages by most agents, the truth is it’s a different business model. If you join a discount broker, you are basically getting paid the same way as the traditional “full-service” agent would get paid (commission after the sale)- only you are agreeing to provide your service for less commission (and will generally provide less marketing to compensate).

In many cases, a discount broker’s only marketing might be to put the listing into the MLS for buyer’s agents to see. As an agent at a discount brokerage, you are generally expected to make your money one of three ways- make up your discount by selling in volume, live off of a lesser commission, or use the listings as a tool to make contacts with buyers (and make your money off of the buyers).

Understanding Commissions…  In tomorrow's post.

Now that we've discussed the exceptions to the rule, it's time to look at Traditional Brokerages in tomorrow's post.