Best Real Estate Agent Commission Split
Real estate commission splits are often a contentious issue between agents and brokerages. With a lot of brokerages now offering very low commission splits, here is a breakdown of how these commission split models work, and the expenses agents are often liable for.
Successful brokerages know that how agents are paid can often be more important to them than how much they are paid. Here are some of the most common compensation split plans, and how they affect the parties involved:
Split Compensation Model
The split compensation model is still one of the most common models used in the real estate world. The commission earned by an agent is split between the agent and brokerage. There are three types of splits used: the traditional split model, graduated split model, and split to a cap model.
Traditional split models usually offer a 60/40 split. Here the brokerage provides the agent with leads, and the agent usually doesn’t pay additional costs. This is an ideal split for smaller agencies and it also has less complicated billing. The problem with this split is that it becomes harder to retain agents once they become successful, and they often leave for another firm offering a larger split.
With the graduated split model, agents earn a larger commission as they reach certain predetermined milestones. Often, as the fiscal year starts, the agent will begin with a 70/30 split, which then increases as they reach a certain amount of gross commission earned. This amount is often increased again at the next milestone.
Some brokerages reset the split back to the original amount at the start of the next fiscal year, but always depending on how motivated they want to keep their agents. This is considered an excellent model for retaining and increasing the number of successful agents in a brokerage.
Split to a cap
The split to a cap model is advantageous to agents with high earning potentials. When they start working at a brokerage, the agents begin with lower monthly expenses. But this split also limits what they pay the brokerage when they become successful.
How it works is that the agent pays their percentage of the commission until they reach a predetermined cap. Once that cap is reached, the agent keeps 100% of the commission for that fiscal year. Agencies with low agent counts often struggle to reach profitability with the split to a cap commission model.
Monthly Fee Compensation
This model closely resembles the type of agreement signed between a tenant and a landlord. In exchange for a monthly fee from the agent, the brokerage offers the agent certain services and features, in exchange the agent receives 100% of the commission.
The brokerage provides office space, transaction coordination, and a private office for the agent. This arrangement allows the agent to have predictable monthly expenses with controlled costs.
For the brokerage firm, it means a constant revenue stream, whether the agent makes a sale or not. In a brokerage with more agents, this model ensures a steady and predictable income.
Transaction Fee Model
The transaction fee model is proving very popular over the last few years because of advancements in real estate software and the use of the cloud. Brokerage firms charge agents a low monthly fee and transaction fee for each successful sale. The agent is responsible for all other services, including marketing, insurance for errors and omissions, training, etc.
The monthly fee depends on the services the brokerage offers its agents. This may include CRM, a central office, lead generation websites, etc. Transaction fees also vary but are usually lower than if the agent accepts a split.
This is a model that requires a lot of agents to ensure profitability for the brokerage, and it works especially well when the agents are working remotely.
Which Real Estate Brokerage Implements a Successful Commission Split Model?
Iron Valley Real Estate at the Beach has seen phenomenal growth this past year and this can be attributed to its successful commission split, which is based on the transaction fee model.
The agency succeeded in achieving a position among the top ten real estate agents. Iron Valley Real Estate at the Beach is based in the greater Delmarva area and has grown from zero to 30 agents in just one year. Owner, Jay Lesko, attributes this success to their commission model and his commitment to personalized coaching. The agency also uses its own online sales platform which has been a great success.
How Can Brokerages Increase Revenues?
As with all businesses, scalability is one of the best ways to increase revenues. In the last few decades, real estate brokerages have not raised their brokerage fees because of the competitive nature of the business.
However, to beat inflation, they have had to find ways to generate more revenues. This cannot only be done by increasing agent count but also by adding new services and fees. These include training services and marketing materials. Many agencies also offer services for home showings that include a showing service fee, open house signs, and lockboxes. There are also a variety of added fees like setup fees, desk fees, personal transaction fees, buyer transaction fees, etc.
Choosing the Best Compensation Model
Starting a new brokerage is exciting, but one of the dilemmas for the owner is choosing the right compensation plan for the agents. Looking at the above models, it can be quite difficult to decide. One thing is sure, the new owner must never overestimate the capabilities of the agents.
The best way to build a brokerage is around one type of commission split model, and not to try and accommodate all the individual agents. As the agency grows, the brokerage owner can always add more services as needed.
Every brokerage needs to maintain a level of profitability, this is always important because they need to follow their business plan. Attracting and retaining agents is important if the brokerage is to attain its initial goals and the projected growth.
Agents are also faced with the same predicament when looking for an agency to serve. The best way for them to compare commission splits is to look at their current total expenses and compare them to the projected ones offered by other brokerages. These numbers will determine which is best.
Inevitably, commission splits need to work to the advantage of all the parties involved in the real estate business. Clients are selling and buying one of their most valuable assets, but commission splits don’t affect them. However, brokerage owners and agents all work hard to offer their invaluable services to home buyers and sellers and both deserve to be satisfied with what they earn.