How to Calculate Commission in 4 Easy Steps

Collecting a commission check is often a final step in the real estate transaction management process, but it’s a crucial step that begins days or weeks before the close date for top real estate companies. While generating commission figures in advance will help forecast company dollar and understand real-time agent production, many real estate companies calculate commission figures just before closing and struggle to keep production data organized consistently. 

Haphazard commission calculations and reporting often stem from a lack of appropriate systems, underestimating the process, or not completely understanding how to accurately calculate splits, fees, royalties, taxes, referrals, and more. 

Whether you have just started your real estate brokerage or if you’re looking to improve the way your office generates and manages commissions, learning commission calculation best practices will keep the business growing and your agents happy. 

What is a real estate commission model? 

Most real estate agents and brokers are independent contractors who earn a living based only on the commission they generate. For your agents, earning higher commissions is a powerful incentive to encourage them to do their best work and a reason why the commission-based income model within real estate is so motivating. Conversely, staff who receive a set salary regardless of the work they do and results they achieve may be less encouraged to go above and beyond. Instead, the commission-model often helps agents cultivate a pipeline of prospective buyers and sellers, determine how to best position real estate to increase value, and how to take other actions that can improve their earning and, ultimately, increase brokerage revenues.

Commission-based compensation encourages entrepreneurial-minded real estate agents to their best work because they know they will reap the dividends. However, such a model can seem difficult to manage compared to regular salaries. The challenge is because you must learn how to calculate commission based on the transaction value of every sale instead of paying your staff a fixed amount each pay period. Furthermore, 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 hinders company growth.

Before you Begin: Define Your Commission Plans

Much 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 agent you bring on. The commission split refers to how you will divide the commission earned by your brokerage on a real estate transaction with your agent. 

The commission plan will likely describe more than just a set split. Consider and understand the commission tiers that may be in place, various lead sources that may offer your agents a higher or lower cut, and other fees that need are included, such as E&O, B&O, or transaction management fees. 

This split ratio would be applied to any sale the agent make. The share of the commission reflects both the value your firm provides to your 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 compensation models are based on a single defined split. For example, some agents keep 100 percent of the commission earned on a sale and instead pay the brokerage a set ongoing fee similar to paying rent. This covers their share of the brokerage costs. 

Though it may seem challenging, managing the commission calculation process can be simple, accurate, and helpful. Just follow these three steps to learn how to calculate every commission with ease.

(Note: The 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 professional involved is to begin by determining the total commission to be shared. 

Typically, realtors make six percent of the total transaction value, 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 six percent of the sale, then the buying and selling agents would each get three percent.

As commissions are negotiable, the 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 negotiates a lower fee.

Here’s an example of a 3% 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. 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 amount of the remaining shares.

For example, on our $23,998.50 gross commission, we need to account for a seven percent franchise fee. The amount of commission left to be split between the brokerage and agent would be $22,318.60.

3. Calculate the Commission Split with Your 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 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, such as errors and omission, transaction management fees, or marketing fees. In some cases, there may be fees charged to the agent and paid to other entities, such as photographers, independent transaction coordinators, or to the client.

You may also account for funds collected from the buyer or seller and paid to the brokerage or agent. Client fees may be rare for some brokerages, but when they are necessary, they can cause calculation and reporting errors if not handled appropriately.

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 numbers is a recipe for errors. However, 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 enter a few key details quickly, and then does the work of calculating commission splits and any other fees with just the click of a button. Furthermore, easy-to-generate income reports and forecasting allow everyone on the team to track how they are progressing towards their income goals, an essential way of keeping agents motivated.

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