How Agents Get Paid: Breaking Down Commissions (Part 2)

Article from: http://www.stlagent.com

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By: Darin "Sid" Cameron, CRS
Sat, Oct 21st, 2006 1:13 am

Yesterday we established how the MLS plays a role in determining commissions, then we looked at a segment of the industry called "non-traditional" brokerages. Now let’s go back to the traditional residential agent working with traditional full-service listings that are a part of the MLS.

For our example, we will use a $200,000 home sale at 6% commission and assume the split between the buyer’s broker and seller’s broker is 50/50.

For the record, when one party represents both the buyer and the seller, you have what is called “dual agency” and the one broker keeps both "sides" of the commission.

Many agents will offer a discount to the seller if they also procure the buyer as a marketing tool to get more sellers- although in St. Louis the average number of homes that sell with only one agent involved is roughly 5%. So to keep it simple, for our example, we will assume there are two different brokers involved.

Upon closing of the sale, the seller pays the selling BROKER the commission who then pays the buyer’s BROKER the commission split. For our $200,000 home with 6% commission, that’s $12,000 total commission with $6,000 being paid out to the cooperating broker and $6,000 staying with the selling broker.

Please note that the commission is paid to the BROKER, not the SALESPERSON. Only a salesperson's broker can ever pay them a commission for real estate so all transactions including incoming referral fees have to be paid to the broker.

When it comes to paying agents, most brokers will give a percentage of the commission to the agent and keep the rest (i.e. the "traditional" broker model). It is not uncommon for a new agent to start out making 40-50% or less.

Since successful agents are constantly being courted by competing brokerages, the split the agent gets generally goes up the more successful the agent becomes. How much commission the broker ultimately keeps (i.e. where the broker’s split starts and stops) generally has to do with how many services the broker is providing the agent “for free” out of their share of the commission. However it's not uncommon for top agents to keep 80-90% or more of their commission.

It is also not uncommon for agents to start out at traditional brokerages then move to 100% brokerages (i.e. like a RE/MAX) as their career advances. The downside to doing this is that an agent will be on the hook for paying their monthly bills even if nothing sells. Since real estate sales can often be an up and down business, it is up to the agent to decide which business model is best for them.

Lots of Cooks in the Kitchen...

After the commission split with the cooperating broker then the split between the agent and their broker there are also other parties that may get a percentage of the commission as well.

Franchises generally take a percentage of the commission (Prudential, for example, keeps 6% of the total commission).

Referral fees can also occur if the agent found the client through a referral from another agent or broker. These normally are 20-40% of the commission.

Examples of this would include: relocation buyers referred to an agent by a relocation company (which is a broker), a seller referred to an agent by another agent across town who doesn’t want the listing or an internet buyer leads referred to an agent from their own broker’s corporate headquarters.

In most states it is illegal to pay a referral fee to anyone who isn’t a licensed agent (although agents in other states are acceptable). Only the broker, however, can pay or receive the fees.

So, back to our example: Let’s say the agent is fairly successful and has a 70/30 split with the broker (with the agent keeping 70%). That leaves $4,200 for the agent of the $6,000 the broker received. If the franchise takes another 5%, you now have $3,900 (which we’ll round up to $4,000 to keep the math simple).

Where Does that Money Go?

Most people believe that agents "get rich" selling real estate- on even the smallest of properties- because they never calculate the commission past this point. But realize, there is a lot more to understanding total compensation than we have just covered. And tomorrow, we'll cover this!