So you’re thinking about becoming a real estate agent and don’t know the first thing about the business. Perhaps you’re already a real estate agent and want to delve deeper into what you can do to make more money.
Maybe you’ve seen the ads online about how agent X made 7-figures in real estate and didn’t have to lift a finger. Or perhaps you think that being a real estate agent will be an easy path to riches and fortune.
Well, it can become a lucrative business if you know how to set it up and help it grow.
Whether you’re starting out or are looking for tips to be successful in real estate, there are a few things you need to understand.
First, you have to pass your state exam. Then you need to join a brokerage after negotiating your commission split. Next, pay your dues and fees to your local MLS board and start marketing your services.
What Is A Commission Split?
A commission split is the agreed split in earnings from a transaction after fees and other expenses are considered.
A commission split, in other words, is how much money you’ll end up making after your deals close and everyone else is paid out.
For example, if you’re starting, you probably don’t know the breakdown of how much you’ll pay out before you see a dime. There are transaction fees, title fees, and the largest percentage, the broker split.
Your commission split will be higher or lower depending on a few factors. In general, the longer you’re in the business and the more closed deals you produce, the higher you can negotiate your commission split with your broker.
Starting out, it’s not uncommon for new agents to have a 50/50 or 60/40 split. A 50/50 split means that out of the gross income, your broker will get 50% of all income before you pay out expenses that come from your end.
In the case of a 60/40 split, you’ll pay the broker 40% of all proceeds while you receive 60%, which is a better deal than 50/50, obviously, but in those cases, newer agents may be paying for desk fees and other broker-assigned fees.
If you’re working as part of a team, you’ll have another split included in the gross income before you see any money.
The benefit of working with a team rather than as a solo agent is that you will have a built-in mentor to help teach you strategies to build your business. In addition, you’ll be able to combine your marketing with the rest of the team, increasing your brand exposure and lead generation as well.
Another benefit to working with teams is that when your side of the business is slow and other agents close transactions, you’ll still get a small percentage–their agreed commission split with you as a team member.
One downside of working on a team is that if you’re always busy and the rest of the team is slow, you’ll pay out team members without receiving anything in return.
In teams, benefits from your commission splits may help pay for lead generation, support staff like a transaction coordinator, and increase brand recognition, and improve brand recognition within your market–further leading to more lead generation.
So, when negotiating your commission splits, do a cost analysis of whether a broker is offering you a good deal and what services you get from joining that brokerage.
Next, decide whether you should be a team member or wish to work solo.
Starting, it may be nice to work with experienced team members and take a little less in general commissions per sale with the hope of gaining invaluable experience and more sales from joining a team.
Why Split Commissions?
As a real estate agent, whether you’re a solo agent or a team member, you take on certain levels of liability and risk in every transaction.
A broker takes on more liability than an agent. For every deal, a broker must be included in the transaction. It’s the law.
Brokers can be agents, but not every agent can be a broker. In addition, being a broker requires additional classes and education, higher fees to the state regulatory board, higher standards of operation, and more rigorous testing.
Basically, a broker is the one conducting the transaction with the other broker. The agents represent their clients and the broker they “work” under. The brokers are basically guaranteeing that you are proficient and capable and will work ethically in all deals.
In every deal then, there are two agents working to represent their clients, but there are also two brokers that the agents represent as well.
The broker’s split typically covers overhead and expenses such as rental agreements and other office expenses, marketing costs, liability protections such as legal representation, and insurance.
Types Of Commission Splits
Commission splits can look like anything that agents and brokers can agree upon. As a result, it’s not uncommon for new agents to have higher splits and then negotiate to lower splits as they gain experience and close more deals.
In general, there are three types of commission splits. First, there’s the traditional model, known as a fixed commission; the second type is a tiered or graduated split, with the final split being the high-split or no-commission split.
Each of these commission splits proved different advantages for new and experienced agents, and you should examine which split is the best deal for you.
Traditional Fixed Commission
A fixed split is the most common commission agreement that is in the real estate business. It can provide more predictable income rates with lower risk but also puts a cap on overall earning potential.
A 60/40 agreement is an example of a fixed commission split. It won’t matter how many transactions and deals you close; you’ll only receive 60% of the gross earnings until you negotiate with your broker.
For higher producers, a fixed split may seem like a burden. It lowers your overall earnings and usually gets renegotiated, or the agent is recruited to another brokerage offering a higher commission split.
Usually, a fixed commission split will be more attractive to newer agents with a brokerage that is willing to reinvest the broker’s side of the split into something the agents benefit from, such as education or marketing.
Fixed splits are the highest percentage of commission splits in the business.
Tiered (Graduated) Commission Splits
Tiered splits operate on a graduated scale meaning the more deals you close, the higher the earnings you retain.
In this commission split, you start at an agreed amount, such as 60/40. Then, as you close more deals, that may increase to 70/30 and 80/20. The benefit of a tiered scale is that you can keep more of the commissions you’ve earned for higher-producing agents.
Before you rush to your broker and negotiate a tiered commission split, understand the requirements and rules before you sign an agreement with your broker. Often, there are commission caps or annual rollbacks included in the language of the agreements.
Commission Caps: Brokers are in the business to make money. They’re not going to give away the store simply because you are producing a ton of deals. So when a broker agrees to a tiered split, they may include a commission cap.
Sometimes, when an agent achieves the agreed amount, the broker will lift all commission restrictions, meaning that the agent will receive 100% of the commission from a deal. However, even though a cap is lifted, the broker may include fees and other dues in the language of the split agreement.
Annual Rollbacks: Another added feature to tiered commission agreements is an annual rollback, meaning at the start of the year, an agent starts over again at a lower commission split.
Brokers benefit from rollbacks because agents now payout higher percentages to the broker and the rollback operates as an incentivized program for the agent to be more productive.
Even with caps and rollbacks, tiered (or graduated) agreements offer agents the best opportunity to earn the most commissions. This is because the more transactions the agent closes, the higher percentage they make over the course of the year.
High or No Commission Split
In some cases, brokers offer a high commission or no commission split. While fixed and tiered split agreements are the most common, high-commission splits are becoming increasingly popular, especially with virtual brokers like eXp.
The benefit to a high-commission split is that agents keep more of what they make but also have some dues and fees they must pay out upfront instead of a commission split. However, since brokers aren’t making money from commissions in these types of agreements, they need to cover their costs in alternative ways, often by including fees to join the virtual broker.
Some typical fees in high-commission splits include:
- Sign-up fees
- Administrative fees
- Support fees
- Transaction fees and costs
- Risk reduction fees
The primary attraction for no-cost or high-commission agreements will be better suited for experienced agents and teams, often providing very little to member agents, whether marketing or training.
Finally, there is one last type, and it’s the rarest of commission split agreements in the business. The type of commission split is known as the salaried model.
Salaried Model
The most predictable form of income in real estate is the salaried model. Instead of commissions and earnings that come from closing a deal, an agent that has a salaried model knows that they will receive a set amount every month regardless of how many transactions they close.
In addition to a regular paycheck, benefits for a salaried model include:
- Standard work-hours
- Extensive training and mentorship
- Paid time off, sick pay, and vacation pay
- Incentives to sell more with a salary+commission
When you take into consideration that one of the biggest reasons that new agents have a difficult time is a lack of education, training, marketing, and support, joining a brokerage that provides all those services may be a good suggestion when starting out.
An example of a brokerage that provides the salary model is Redfin. In their model, agents are employees, they’re given a salary and have an opportunity to earn more on top, have a set schedule, and are given leads from the brokerage.
The downside to salaried model splits is that the split does limit and cap what an agent can earn. For high-producing agents, putting a limit on how much you can earn might not make much sense. Additionally, as an employee, an agent loses some tax breaks and deductions that otherwise solo agents have when it comes time to file their taxes.
How To Negotiate Your Commission Split
When you look at all that you can make as an agent, analyze what type of commission split makes the most sense.
Treat your commission split like any other expense, how much are you willing to pay, and what are you getting in return for that amount of money?
If you have a 50/50 split but also have large office fees and monthly dues, then you may want to re-negotiate for better terms or to find a different brokerage to work under.
When it comes time to negotiate your commission split, take into consideration what you’re bringing to the table; are you a new agent but great at social media, or an experienced agent who has a large sphere of influence? Either of those are skills that you can use in your negotiations.
Track Your Progress
To be considered an equal to your broker, you need to be able to prove to them your value. That means understanding your influence and what you bring to the table. Identifying your progress as an agent, from where you started to where you are currently, as well as how you plan to grow your business will arm you with a lot of data points you can utilize in our negotiations.
Additionally, by analyzing and charting your progress, you have the hard numbers to present to your broker to show them the value you bring them. In order for your broker to reconsider your agreement, they need to know it's valuable for them.
Negotiate On Specific Transactions
Just because you have one commission split in an agreement doesn’t mean you can’t negotiate one ala carte. For example, if you are closing transactions at the average of your local market and then get a luxury home and are able to represent both the seller and the buyers, you don’t want to sit at a 50/50 split.
Instead, you would want to negotiate with your broker a specific change in this specific transaction, but one that earns both you and your broker more money.
Analyze Your Goals And Objectives
Take a serious look at your goals and your objectives for your business. Being knowledgeable is good, but being passionate puts your business on a whole other level.
Some things you want to identify include;
- Current sales and income
- Future and potential income
- Calculate how many transactions you need to achieve your goals
- Create a marketing and business plan that you can present to your broker
Having a plan and being able to show your broker what you will do in the next year is part of your negotiations. The more proof you have about why you deserve a better commission split, the greater your chances.
Real estate is a great way to make some lucrative money. Understanding the market and your commission split is critical in understanding what it will take to achieve your goals.
