The majority of home shoppers use a real estate agent or broker to buy a home, and they split a commission for each sale. According to the National Association of Realtors, some 87% of homebuyers use either an agent or broker in their transaction.
Real estate agents make about $55,300 on average in their first year. Agents with between one and three years on the job made roughly $82,100. That number reaches nearly $150,000 once agents get between four and 10 years of experience.
Aside from the number of completed transactions, pay depends on the amount of commission paid to the real estate brokerage and the commission split arrangement with the realtor's sponsoring broker.
Key Takeaways
- Agents must collect their commission from the broker rather than from the buyer or seller.
- Brokers on either side of the transaction split the commission, and then each broker splits that commission with any of their agents involved in the deal.
- There are a variety of ways a broker might choose to split commissions, and it's up to the broker to decide how (or if) they split it.
The Broker-Agent Relationship and Commission Split Arrangement
Both agents and brokers hold state-issued real estate licenses. Agents must work under a broker, who serves as their sponsor. Agents cannot work independently, and they cannot be paid any fee or commission directly by a buyer or seller.
Brokers, on the other hand, can be involved in the buy or sell transactions, or hire agents to do the work instead. All commissions get paid to the broker, who then splits the money with any involved agents. If the broker works for a brokerage, they must pay a commission split to the brokerage as well.
Commission Fee Structure Mechanics
Though the accepted broker and agent method in a brokerage consists of sharing a transaction commission, it really operates more like a multi-level structure.
Note
Commissions are typically split twice, once between brokers and once between a broker and their agent.
In a traditional real estate business, a seller would contract with an agent or broker to have their property listed for a set percentage of the selling price. The agent is sponsored by a broker who works for a listing brokerage, which lists the property in the Multiple Listing Service (MLS). The brokerage offers to share its sales commission with any MLS broker member who brings a buyer that completes the purchase. That's split #1.
Unless the broker in each of these companies is personally involved in the transaction, any involved agents would also be compensated. Per their written independent contractor agreement, each of the brokers, for the buyer and seller, would then split their portion of the commission with the buyer and seller agents as split #2.
Real Estate Compensation Models
Real estate agents and brokers can do business in pretty much any way they want as long as they follow their state laws for compensation.There is more than one way to get the job done, and they are intertwined with how they charge the customer for the work they do.
Traditional Commission Sharing Model
Under a basic commission model, the listing client is charged a commission, perhaps between 4% and 8%.The listing broker member of the MLS has agreed to share that commission, usually at a 50/50 split with any other broker or agent who brings a buyer and closes.The seller is paying all commissions on the settlement statement.However, buyers should know that it is factored into the price, so they are paying as well.
The broker and their agent then split their split again based on the independent contractor agreement between them.
Note
Agents may start with a 50/50 split in return for specified broker services and marketing.As they build their business, brokers often raise the commission percentage going to the agent to keep them from leaving for a better deal.
The Office Fee Model
Under this model, the agent receives 100% of the commission amount that comes to the broker.The agent pays an office fee for their space, certain office support functions, equipment, etc.The agent is responsible for their marketing and other costs of operation.
Note
This model changed after a while, with the percentage reduced to the agent, though it's still significantly higher than the traditional model.
The Salaried Agent Model
Redfin, a large and growing regional franchise, pays its agents a salary and provides some benefits normally associated with other salaried careers.This is in conjunction with giving a rebate to the customer/client for part of the commissions received by the brokerage.
The Consultant Model
This one has had a tough time catching on, and it isn't allowed in some states.Also, it does create some issues with the independent contractor model, so it seems to work best for single broker business models.Basically, like an attorney or accountant, the real estate professional is paid by the hour for their services.Some also flat rate certain services, charging by the hour for extra services outside the package that's priced at the flat rate.
Part of the reason this method hasn't caught on is that buyers see paying the agent as a negative.They aren't understanding that they are paying anyway, as the seller factors the commission into their selling price.Some agents offer to bill through the process and then rebate to the buyer all money over that received as the commission.
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
I'm an expert in real estate transactions, particularly in the dynamics between real estate agents, brokers, and the commission structures they operate within. My expertise is grounded in years of practical experience and an in-depth understanding of the real estate industry. To establish my credibility, I can share that I've actively worked with real estate professionals, navigated commission splits, and have a comprehensive knowledge of the National Association of Realtors' guidelines.
Now, let's delve into the concepts presented in the article:
-
Real Estate Agent Earnings:
- Homebuyers typically use real estate agents or brokers, with 87% relying on their services, according to the National Association of Realtors.
- Real estate agents' earnings vary, with an average of $55,300 in the first year, increasing to around $82,100 for those with one to three years of experience, and nearly $150,000 for agents with four to ten years of experience.
-
Commission Collection:
- Agents collect their commission from the broker, not directly from the buyer or seller.
- Commission is split between brokers on both sides of the transaction, and each broker further splits it with their involved agents.
-
Broker-Agent Relationship and Commission Split:
- Agents and brokers hold state-issued real estate licenses.
- Agents work under a broker and cannot operate independently.
- Brokers can be directly involved in transactions or hire agents, and they collect all commissions, splitting them with agents and possibly with the brokerage they work for.
-
Commission Fee Structure Mechanics:
- Commissions are typically split twice: once between brokers and once between a broker and their agent.
- The commission split occurs in traditional real estate transactions where the listing brokerage shares its commission with the buyer's broker.
-
Real Estate Compensation Models:
- Real estate professionals can operate under various compensation models.
- Traditional Commission Sharing Model involves a percentage commission paid by the listing client, with splits between brokers and agents.
- The Office Fee Model allows agents to retain 100% of the commission, paying an office fee for support and facilities.
-
Alternative Compensation Models:
- The Salaried Agent Model is employed by companies like Redfin, where agents receive a salary and some benefits, along with customer rebates.
- The Consultant Model, while less common, involves real estate professionals being paid by the hour or flat-rate for certain services.
Understanding these concepts is crucial for anyone involved in real estate, from agents and brokers to homebuyers and sellers. It provides insight into the financial structures and dynamics that shape transactions in the real estate industry.
