How To Calculate Commission In Real Estate: 4 Easy Steps To Get It Right
Real estate agents typically earn about 6% sales commission, which can be substantial depending on the property’s selling price. The average home price in the U.S. is $434,050, meaning a 6% commission would be $26,043.
Your agents must receive the correct commission fee from your brokerage, especially since research indicates that 44% of employees would consider leaving a company due to incorrect payment.
Haphazard commission calculations and reporting often result from underestimating the process or not accurately calculating splits, fees, royalties, and taxes.
Understanding how to calculate real estate commissions accurately is crucial for keeping your agents happy and motivated.
In this article, we’ll cover some best practices for calculating broker and real estate agent commissions that will help keep your business growing and your agents happy.
| Key Terms You Need to Know To help you understand this article better, here are some of the key terms we will be using: Selling price: This is the final amount a property sells for, which could differ from the listing price. Commission percentage: This is the percentage of the selling price that goes to the buyer’s agent and the seller’s agent, typically a 50/50 split. Agent commission rate: This is the percentage of the real estate commission that your agents receive. Agent fees: These are fees that real estate agents may be required to pay your brokerage to cover various costs. Gross margin: The difference between the revenue you’ve earned from commission-based transactions and the direct costs associated with generating that revenue. |
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 they generate from a final sale price.
For your real estate agents, the prospect of earning higher commissions is a powerful incentive to encourage them to deliver their best work. The commission model helps real estate agents to:
- Cultivate a pipeline of prospective buyers and sellers.
- Determine how to position real estate to increase value.
- Determine other actions to improve their earnings and increase your brokerage’s gross revenue.
A commission-based compensation plan motivates entrepreneurial-minded real estate agents to put their all into each deal, knowing their hard work will directly result in higher earnings.
However, a commission percentage model can be challenging to manage because you have to learn how to calculate commission based on the transaction value of every sale instead of paying your staff a fixed salary for each commission period.
You can think of commission as a piece of the selling price pie. This portion must be carved into additional smaller slices that reflect the fees, taxes, credits, and other amounts owed to various stakeholders.
4 Steps to Calculate Real Estate Commission
Now that you know what a commission model is, you can follow the below steps to calculate it:
1. Calculate the total sales commission
The first step in calculating the final net payables for each real estate agent is to determine the total commission to be shared.
Unless your brokerage represents both the buyer and seller, the gross commission is split between brokerages. Typically, commission is split 50/50 between the buyer agents and the seller agents.
Often, if the commission is 6% of the sale, the buying and selling agents would each get 3%, but because 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. A seller’s agent may also negotiate a lower fee in other situations.
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, if your brokerage is part of a larger organization, you might need to pay franchise or royalty fees, and you may also have to cover referral fees to another brokerage when necessary.
To accurately calculate everyone’s share, it’s necessary to account for these fees that are added to the total commission, as they 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 your 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 will earn $17,854.88:
4. Don’t forget about other fees
The final step is to account for other fees the brokerage should charge the agent and collect. These include errors and omissions insurance (E&O), transaction management fees, or marketing fees.
Sometimes, the agent may charge fees to the client and pay them to other entities, such as professional photographers, independent transaction coordinators, or clients. You may also need to account for funds collected from the buyer or seller and paid to the brokerage or agent.
Additionally, you should be wary of any client fees, as handling them incorrectly can cause calculation and reporting errors.
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:
Defining Your Commission Plans
Just like traditional employers negotiate salaries before finalizing an employment agreement with a new hire, you’ll need to establish and agree upon a commission structure 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 agents.
This means you will have to understand different commission tiers and lead sources and consider which situations you would offer your agents a higher or lower cut.
It’s also important to consider the other fees included, such as E&O or transaction management fees. This split ratio would apply to any sales agents working for the real estate broker.
The share of the commission reflects both the value your firm provides to your real estate agent, including office space, supplies, and transaction support, as well as the agent’s contribution and value in driving your business forward.
However, 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 flat fee, similar to paying rent. This would cover the real estate agent’s share of the brokerage costs.
3 Common Types of Commission Structures to Consider
As mentioned above, having a clear commission structure in place for your brokerage is essential. Here are three common models you can use within your business:
Tiered commission structure
In this structure, an agent receives a varying percentage of the total commission, which is determined by their earnings within a specific period. This may motivate agents to close more deals, as they’ll receive more commission when they do.
It’s worth noting that calculating tiered commission can become complex because the amount of commission your company pays to agents may change over time.
A flat-fee model
Under this commission model, your agents earn the full commission from a sale and subsequently pay a monthly fee to your brokerage that remains consistent regardless of how many deals they close.
Team split commission
In this model, the real estate commission is split between everyone who has worked on closing the deal rather than the full amount going to the agent.
Although this split would initially result in agents taking home less commission, it allows the team to close more deals together.
Mistakes to Avoid When Calculating Real Estate Commission
Now that you know how to calculate real estate commission, let’s look at some mistakes to avoid when doing so:
Using cumbersome spreadsheets
Spreadsheets are a helpful tool if you’re running a small brokerage with a limited number of agents. However, your spreadsheet system can quickly become overly complex and cumbersome as your team grows.
Relying on spreadsheets to handle extensive commission-related data can complicate the process of locating and reviewing individual records, increasing the likelihood of errors.
Commission management software like Paperless Pipeline’s Commission Module can replace spreadsheets and calculate commissions automatically with just a few clicks.
With our software, your chosen commission structure doesn’t matter; the tool can calculate accurate amounts in seconds.
Errors from manual calculations
Trying to calculate commissions manually and then entering them into a spreadsheet may result in significant inaccuracies.
Having inconsistent or complex commission structures can quickly lead to incorrect calculations.
Your commission structure should be clear, and all parties involved should agree to the structure you’ve chosen.
Lack of automation
Calculating commissions manually can be time-consuming and complex, and it can also lead to errors. To avoid this, you need to simplify your commission calculations through automation.
Automating this aspect of your business means you don’t have to spend time calculating commissions, and there is much less room for error.
Try Out Our Free Real Estate Commission Calculator
To retain and motivate agents in the competitive real estate market, you must ensure they receive the correct commissions for every deal.
You can use our free real estate commission calculator to help you determine what you should pay your agents. The tool can calculate split, tiered, and flat-fee commission structures.
Use Tools to Automate Calculations, Forecast Commissions, and Track Production
As mentioned above, manually calculating commissions could be disastrous if you get something wrong. Luckily, there are tools to simplify this process, giving you peace of mind that you have handled everything correctly.
For example, an end-to-end transaction management system can track each agent’s split and automatically apply the correct percentage to their transactions.
Paperless Pipeline allows real estate brokers, admins, and transaction coordinators to accurately calculate commission splits and any other agent fees at the click of a button.
You’ll be able to access breakdowns like these with our real estate commission module:
The software also allows you to generate income reports and forecasts easily. This helps everyone on your team track their progress toward income goals, which is an important way of keeping agents motivated.
Ready to Simplify Your Commissions Calculations?
Getting your commission calculations wrong could damage your brokerage. Relying on spreadsheets or manual calculations is the quickest way to make mistakes and pay all parties incorrectly.
Paperless Pipeline is a purpose-built transaction management tool designed to help brokerages manage their transactions more effectively while remaining compliant and audit-ready.
Visit our website to try Paperless Pipeline for free. You’ll discover how our software can assist you in automating and streamlining the real estate commission process.