How to Calculate Real Estate Commission in 4 Easy Steps
Collecting a commission check is often the final step in the real estate transaction management process. It begins days or weeks before the closing date for top real estate companies.
Generating commission figures in advance helps forecast revenue and understand real-time agent production. But many real estate companies calculate commission figures just before closing.
This often means that they struggle to keep production data organized consistently.
Haphazard commission calculations and reporting often stems from underestimating the process or not knowing how to accurately calculate splits, fees, royalties and taxes.
Whether you have just started your brokerage or you’re looking to improve the way your office generates and manages real estate commissions, this article is for you.
We cover some real estate agent commission calculation best practices that will help keep the business growing and your agents happy.
What is a real estate agent commission model?
Many real estate agents and brokers are independent contractors who earn a living based only on the commission that they generate from a final sale price.
For your real estate agents, earning higher commissions is a powerful incentive to encourage them to do their best work.
The commission model helps real estate agents:
- Cultivate a pipeline of prospective buyers and sellers
- Determine how to best position real estate to increase value
- Decide how to take other actions that can improve their earnings and increase brokerage revenues
Commission-based compensation also encourages entrepreneurial-minded real estate agents to do their best work because they know they will reap the dividends.
However, a commission percentage model can seem difficult to manage compared to regular salaries.
This is because you have to learn how to calculate commission based on the transaction value of every sale instead of paying your staff a fixed amount each pay period.
If you think of commission as a piece of the pie, then that slice often must be carved up into additional smaller slices that reflect the fees, taxes, credits, and other amounts owed to various stakeholders.
Frequently changing commission calculations can make determining final net payables even more complicated, and can often lead to a frustrating process that slows down company growth.
Before You Begin: Define Your Commission Plans
Just like traditional employers negotiate salary before finalizing an employment agreement with a new hire, you will need to agree to a commission plan and split with any new real estate agent you recruit.
The commission split refers to how you divide the commission earned by your brokerage on a real estate transaction with your real estate agents.
The entire commission plan will likely describe more than just one set split.
This means you will have to understand different commission tiers and lead sources. You’ll also have to consider in which situations you want to offer your agents a higher or lower cut.
It’s also important to think about the other fees that are included, such as E&O, B&O, or transaction management fees.
This split ratio would be applied to any sale agents working for the real estate broker.
The share of the commission reflects both the value your firm provides to your real estate agent (in the form of office space and supplies, transaction support, and more), as well as the agent’s work and value in driving your business.
Agents who have reliable track records of sales and high-value client pipelines are typically able to negotiate better splits than those who are just starting.
Not all real estate compensation models are based on a single defined split.
For example, some agents keep 100% of the commission earned on a gross sales price and pay the brokerage a set ongoing fee, similar to paying rent.
This would cover the real estate agent’s share of the brokerage costs.
Although it may seem challenging, the real estate commission calculation process can be simple, accurate and helpful.
All you need to do is follow these four steps to learn how to calculate every sales commission with ease (note: this article encompasses sales in which there is a commission split).
1. Calculate the Total Commission on a Sale
The first step to calculating the final net payables for each real estate agent is to determine the total commission to be shared.
Typically, realtors make 6% of the total selling price and this money is deducted from the funds received by the seller.
Unless your brokerage represents both the buyer and seller, the gross commission is split between brokerages.
Often, if the commission is 6% of the sale, the buying and selling agents would each get 3%. As commissions are negotiable, this rate may vary.
For example, if your brokerage represents the buyer and seller the total commission is often lower, as one brokerage will receive the full fee.
There may be other situations where a seller’s agent negotiates a lower fee.
Here’s an example of a 3% real estate commission earned on a sale price of $799,950:
2. Account for Off-the-Top Fees
There may be other stakeholders with a claim to some of the monies earned as part of the commission and listing agreement.
For example, you may have to pay franchise fees or royalty fees if your brokerage is part of a larger entity, or if referral fees to another brokerage are necessary.
To accurately calculate everyone’s share, it’s necessary to account for these fees that come off the top of the total commission, as it will affect the remaining share.
For example, on our $23,998.50 gross commission, we need to account for a 7% franchise fee.
The amount of commission left to be split between the brokerage and the listing agent would be $22,318.60.
3. Calculate the Commission Split with Your Real Estate Agent
Once you have identified the commission plan and the total gross commission for a transaction, you can easily calculate the gross commission for the real estate agent and the brokerage.
For example, on our distributable commission of $22,318.60 and an 80/20 commission split, the brokerage will keep $4,463.27 and the agent would earn $17,854.88.
4. Don’t Forget about Other Fees
The final step is to account for other fees that should be charged to the agent and collected by the brokerage.
This can include errors and omissions, transaction management fees or marketing fees.
In some cases there may be fees charged to the agent and paid to other entities, such as professional photography, independent transaction coordinators, or the client.
You may also account for funds collected from the buyer or seller and paid to the brokerage or agent.
Be wary of any client fees. They can cause calculation and reporting errors if handled incorrectly.
For example, your agent may owe a transaction fee of $99, an E&O fee of $50, and a marketing fee of $195—all paid to the brokerage.
Use Tools to Automate Calculations, Forecast Commissions, and Track Production
Manually calculating commissions is a recipe for error. Luckily, there are tools to simplify this work.
For example, an end-to-end transaction management system can keep track of every individual agent’s specific split, and apply the right percentage automatically to their transactions.
Paperless Pipeline allows brokers, admins, and transaction coordinators to accurately calculate commission splits and any other agent fees at the click of a button.
Our real estate commission calculator is an easy-to-use shortcut that helps you work out split, tiered and flat fee commission structures.
Paperless Pipeline also allows you to easily generate income reports and forecasts.
This helps everyone on the team track how they are progressing towards their income goals, which is an essential way of keeping agents motivated.
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