Wednesday, June 23, 2021 / by Jay Lesko
For home buyers and sellers, using a real estate agent is vital because of the invaluable services they offer. How much a real estate agent makes in commission after each deal is completed depends on several factors. The money an agent takes home depends on the commission paid to the real estate brokerage, and on the prearranged commission split between the broker and the real estate agent.
Are there any differences between an agent and a broker?
Yes, the two are different. Agents and brokers are both people licensed by the state to work as real estate agents. However, the difference between the two is that an agent cannot work independently. Agents are sponsored by the broker whom they work under. Therefore, an agent cannot directly receive a commission for the sale of a property, neither from the buyer or the seller.
Brokers are fully licensed to complete real estate transactions for which they can receive the commission. A broker can hire agents to do the work for him, and he pays them a pre-negotiated split of the commission with the agents involved. The broker also pays a commission split if he works for a brokerage.
Commission fees and their multi-leveled structure
When a home is listed, its owners usually list it with a broker. The broker and seller negotiate a set percentage of the selling price as the commission. Once the home is sold, the commission from the buyer and seller needs to be split, and this commission is likely to be shared by many. Here is how it works:
The first split occurs if the listing has also been placed on a Multiple Listing Service (MLS). The brokerage pays a share of the commission to the MLS broker that completed the sale.
Split number two occurs if any of the two brokers were not personally involved in the process and had agents working for them. These agents are each compensated with their share of the commission for the property’s sale.
What types of commission splits are there?
There are various ways that the commission is split between the brokers and agents in real estate sales, but they generally fit into these two categories: fixed commission splits and graduated commission splits.
Understanding fixed commission splits
Typically, a fixed commission split is set at 60/40, but what characterizes it is that it remains fixed and is not linked to production goals or sales. This split is also not dependent on the number of sales or purchases the agent brings in, nor the amount of money.
There are both advantages and disadvantages to fixed commission splits. One of the advantages is that the agent knows that their split is predictable, offering them a lower risk. However, many agents feel this arrangement offers them inadequate compensation, especially if they are very productive or make sales that involve large amounts.
Understanding graduated commission splits
Graduated commission splits usually start an agent at a lower commission split and they work towards certain goals which allow them to increase in commission split. Graduated commission splits often start at 50/50, reach 60/40 after a certain target, and in some cases could shoot up to 90/10. Of course, some agencies have a limit to how much revenue an agent can collect from commission splits. These agencies usually place a cap on how much the amount can reach.
Graduated commission splits offer an incentive for agents to close deals, and agents with potential get to keep more of their earnings. Most real estate brokers charge the agent a transaction fee for administration costs once the cap is reached.
In some agencies, a rollback policy for graduated commission splits has become the norm. This means that at the beginning of each year, the graduated commission split rolls back to the standard level until the agents start producing again. Rollbacks allow agencies to recoup operational costs and increase their profits a bit in what is normally a quieter season at the beginning of the year. Agents also know that peak season is on its way when they can produce higher sales volumes.
Can there be no commission split?
There are some real estate brokerages where the agent receives 100% of the commission that comes to the broker. However, in these cases, the agent is usually charged an office fee to cover the space they use. These agents are also usually charged for other services offered by the realtor brokerage.
Agents are often called to pay fees to support other office expenses like equipment, administrative fees, support fees for mentorship, and transaction fees. They may have to pay for their own marketing. Sometimes they are also asked to cover risk reduction fees that help protect brokerages from any errors.
Pros and Cons of no commission split
One of the pros of having no real estate commission split is that the agent can earn more money, especially agents working in areas where homes move quickly and those agents that push hard to ensure high sales volumes.
However, there are some cons to not having a larger support network, especially for agents that don’t have the software technology and equipment to support their work. Many agents working with no commission are also missing out on mentorship opportunities.
There are pros and cons to all the types of commission splits for agents. It costs money to become an agent, what with the books for the course, licensing fees, and getting started. Therefore, getting a head start as quickly as possible is essential to recoup these costs. The better the commission split, the more limited the fees. Additionally, mentorship is vital for success in the industry.
Finding the best commission split
Interest in homes in the Delmarva Peninsula - which embraces part of Delaware, Maryland, and Virginia - has continued to rise. This has led to a thriving real estate market in the area, something expected to continue for at least another couple of years.
This area is not only attracting families but has become increasingly popular with retirees who want to live near the larger metropolitan areas in the country. Popular beach cities of the area where buyers are showing the most interest include Bethany Beach, Rehoboth Beach, Lewes, Delaware, and Ocean City, Maryland.
Iron Valley Real Estate at the Beach is one example of a real estate business that continues to keep the low commission splits, in what is proving as one of the most successful commission split models for realtors. The agency has managed to grow from zero to 30 agents in the past year, placing it in the top ten real estate agencies in the area, according to its sales volumes and agent satisfaction.
Low commission splits mean that Iron Valley Real Estate at the Beach is committed to the success of its agents. The agency invests in them by ensuring they have the best administrative and technological support. Success requires the right tools, and the agency concentrates on offering personalized coaching. Jay Lesko, the owner of the agency is a risk management professional with years of experience in the financial industry and has created a unique online sales platform that assists his winning real estate team.
The best commission splits make for happier real estate agents and successful brokerages. This is a model that continues to prove effective at the most successful real estate brokers right now.
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