Learn the in’s and out’s of how real estate commission splits work.
In the real estate industry, most real estate agents are commission-based and paid only once a real estate transaction closes. Although the thought of pursuing a commission-based career may be daunting, it also provides an opportunity to have unlimited earning potential!
How Commission Splits Work
Most brokerages will have a “split” on the gross commission income received on each sale. A brokerage that offers a 50/50 split will take 50% of the gross commission income for the company, and give the other 50% to the real estate agent.
The portion of the commission that goes back to your broker may be used to cover such items as office overhead expenses, franchise fees, and broker/owner profits. Brokers who have an “open books” policy will gladly share with their sales agents where that money is being used, and will show how profitable the office is.
TIP: When interviewing brokers, ask if they have an open books policy with regards to the company income and expenses.
Of the portion of the gross commission income that the agent receives, the agent will need to appropriately budget what percentage of that needs to be applied to business expenses, taxes, and actual take-home pay.
Commission Split Example
To help better understand how a commission split works, use the following example:
Sally Smith works for ABC Realty and has a 70/30 commission split. Sally recently closed a deal where she represented the buyer, and the buyer purchased a home for $250,000. The listing agreement states that the buyer’s broker will receive 3% commission based on the gross purchase price. ABC Realty will receive $7,500 for the sale (3% of $250,000 = $7,500). Of that $7,500, ABC Realty will keep 30% or $2,250, and Sally will receive 70% or $5,250. ABC Realty covers some of Sally’s business expenses, but not all. Of the $5,250 that Sally receives, she will set aside a portion to cover certain business expenses and taxes, and she will take the rest home for personal income.
TIP: Ask your broker if there is any opportunity to increase your commission split in the future.
Does a Commission Split Sound Too Good to be True?
Be cautious if a broker offers a very high commission split, with a majority of the commission going back to the agent. Although the commission split may be higher, it could mean that the agent is responsible for more expenses on their own. Do the math and understand what expenses are covered by the broker and what expenses the agent is responsible for. It is possible that a 90/10 commission split could very well feel more like a 50/50 commission split after business expenses are taken into account.