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How Do Real Estate Commissions Work?

Real estate agents typically don’t earn a base salary. Instead, they receive a commission on each sale they broker for a client. This commission is usually a percentage of the sale price of the property.

Since your income is commission based, the more deals you close, the greater your earning potential. In addition, your commission amount will be greater when you help broker the sale of a higher value property than with a lower value property.

If you’re considering a career in real estate, it’s important to understand how commissions work since they will determine your income. The following overview will help you start to grasp this important component of working as a real estate agent.

Understanding the How Commissions Are Divided

Commissions vary, as one of the first things you do in real estate is learn how to negotiate your paycheck. Customarily, the seller pays the commission to both the broker who represents them and the buyer’s broker. However, there are no rules or laws that say a seller is required to pay the buyer agent commission. Everything is negotiable.

In surveys by the National Association of Realtors (NAR), they state that generally, total real estate commissions are between 5-6% when selling a home in 2023, with the average being 5.4%.

If the seller is paying the total commission, it is shared between the seller’s agent and the buyer’s agent. The amount each agent will receive can vary, and the percentage offered to the buyer’s agent is typically spelled out in the MLS listing for the property. Both agents often must give a percentage of their share of the commission to their brokerage based on the deal they’ve worked out when they join the brokerage.

For example, if a house sells for $500,000, the total commission will be $27,000 if the commission is 5.4%. The seller and buyer agents each receive a share of the commission. Sometimes the shares are equal, sometimes not. If we assume equal shares for our example, the seller’s agent and buyer’s agent will each receive $13,500 from that commission. However, the exact amount that they receive out of that $13,500 commission will depend on their agreement with their brokerage. We will cover this in the next section.

Commercial real estate commissions are commonly between 4-8%. For commercial and residential sales of higher priced properties – for example, above $1,000,000 – the sellers and buyers may negotiate a lower percentage, but the dollar amount of the commission is still significant.

Types of Commission Split Plans Offered by Brokerages

real estate brokerage commission split plans Brokerages make money from the commissions earned by their agents. There are several different types of commission split plans offered by brokerages:

Traditional Fixed Commission Split Plan

Brokerages that offer traditional commission splits enter into an agreement with you where they take a fixed percentage of commissions earned on every transaction. For example, the split may range from 50/50 to 80/20 with the agent receiving the larger share. These splits vary greatly from brokerage to brokerage, and there are no standard plans.

In general, the splits offered vary according to your level of production. High producing agents know how to negotiate their paychecks with their clients and their brokerage. When you earn more commissions, it gives you leverage to attain a more favorable plan.

With a traditional commission split model, you typically won’t be charged many additional fees or overhead expenses and, in some instances, you may not have to pay any fees at all. This is the most predictable and risk-free commission split structure, making it an ideal option for a new real estate agent.

High Split or No Split Commission Plan

With a high split or no split commission plan (also referred to as a “desk fee” plan), you’ll receive a larger percentage of the overall commission. These plans typically allow you to earn 80-100% of the commission on each transaction. While this offers you the ability to earn more money on each transaction, this model is often associated with fees that allow the brokerage to receive income.

This type of commission plan is popular with agents who would rather pay a fee for services received from their brokerage than share a percentage of their commissions. For this reason, it is a better option for an established real estate agent who has a more predictable flow of commissions than a new agent trying to get established.

Gradual or Tiered Commission Split Plans

Gradual or tiered commission split plans provide a middle ground between the other two models. These plans typically start with a traditional split such as 50/50, 60/40, or 70/30 at the beginning of the year. Once you reach the sales goals established by the brokerage, your split begins to increase, and you give little or no commissions to the brokerage. This model may be an attractive option for both new and mid-tier producing agents who do not want to be burdened with fees, but are confident that their earned commissions will allow them to qualify for a higher tier.

Negotiating Commission Rates with a Seller

real estate agent negotiating commission rates with a seller When a seller engages you to broker their property, you need to agree on how much you will be paid for your services. From the agent’s perspective, there are several factors determining how much you need to receive as income from a transaction. As with any business, you have expenses to cover. These include:

You also need to know how much you want to receive in compensation for the work you do for the client. The most successful real estate agents know their worth and make sure they are compensated fairly for every deal they broker.

When you meet face to face with a potential seller, you need to know how much it is going to cost you to bring this transaction to a successful conclusion for both the seller and you. If in your evaluation you decide this is not going to be a profitable transaction, you may need to pass on it. This is a decision every agent must make – not every deal is a good one for you.

There are factors you may consider when evaluating if you want to take on a client. Two of the most important are:

A well-maintained property in a great location that is priced right will sell faster, and you will incur fewer expenses to market it. A property with a high market value may enable you to offer a lower commission percentage since you’ll still earn a lucrative pay day on the deal.

You may also want to consider offering a lower commission percentage if the seller wants you to represent them in the purchase of another property. In this situation, you’ll receive two commissions from getting one seller client, so taking a smaller percentage to secure the client’s business will potentially help you earn more money in the long run. This is a common approach taken by seasoned realtors who understand the value of generating two commissions from one client.

Negotiating Commission Rates with a Buyer

You may be thinking “Why am I doing this? Buyers do not pay commissions.” Although it is true that sellers customarily pay the buyer agent’s commission, this is not certain in every transaction, nor is it guaranteed the amount a seller offers will be adequate to pay for your services.

When you take on a buyer client, it is normal for the buyer to secure your services by signing a contract with you. This agreement will specify how much commission or compensation you expect to receive for your services and who will pay for it. If the buyer wants the seller to pay this commission, then the buyer will include this in the criteria of the properties they will consider. Working out these details is a standard part of working with buyers and something that you need to discuss with your client upfront to ensure you’re both aligned on expectations for the process.

Colorado Real Estate School Can Set You Up for Success in Your Career

If you’re a new real estate agent looking to get established in the industry, Colorado Real Estate School can set you up for success. Our online real estate classes provide the critical information you need to pass your real estate exam and build a thriving business.

All our courses are delivered in an online format, allowing you to work at your own pace in a manner that aligns with your learning style. We offer the most comprehensive content available, and it’s developed by local, licensed real estate professionals who can guide you through the ins and outs of the real estate industry. In addition, our VideoConnect Success Learning System™ contains the largest library of instructor-led video content available and provides an authentic classroom experience that will help you get the most out of the course materials.

At Colorado Real Estate School, our real estate courses are backed up with our exclusive TruSupport Pass Guarantee™. If you don’t pass your real estate exam on the first try, we’ll give you extended access to all course materials, and one of our instructors will analyze your results to help you develop a customized study plan focused on the areas where you struggled on your first attempt. This approach streamlines your studying so you can improve your results next time.

Contact us today to learn more about our online real estate courses.

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