The Real Estate Commission Structure: How Flat Fees, Splits, And Thresholds Will Motivate Your Agents
Everyone knows the most important thing in the real estate industry is location, location, location.
But for realtors and real estate teams who help clients buy and sell properties, there’s another key phrase: commission, commission, commission.
According to research from The Conference Board, realtors have a career satisfaction rating of 68%. This is higher than the national average of 51% and is among the highest in any profession.
One of the most likely reasons is job flexibility. However, earning potential also plays a significant role, as agents earn a commission for successfully completing a sale.
The commission split not only affects agent earning potential, but different split structures can also shape agent drive.
This article explains how different real estate commission structures impact agent motivation and suggests ways to optimize each of them.
Key Points
- Real estate commissions are calculated as a percentage of a property’s final selling price. This is usually split equally between the buying and selling sides before being distributed among realtors.
- A traditional split is when the brokerage and real estate agent each earn a set percentage of the commission on a deal.
- Tiered splits are when the agents earn a higher percentage after exceeding sales goals.
- With a flat-fee model (100% commission), agents keep all earnings but pay a set fee to the firm.
- In a team split, commission is shared among those involved.
- Franchises will take a large cut of your sales but will also help attract more clients.
How Is Commission Distributed?
Selling agents typically get 5-6% commission on the final sale price of the property. This commission is usually split between buyer and seller agents.
Thereafter, it’s shared among team members involved in the sale. This includes the:
- All who were involved in the sale.
- The brokerage that manages legal compliance and offers support to agents.
Commission may also cover fees (franchise, referral) and business costs (marketing, staging).
The commission model is relatively standard, but agent share varies based on negotiation when new agents are recruited and hired.
This means the listing and buyer’s agent can earn different commissions from the same deal.
1. The Traditional Commission Split Model
This is the standard sales commission structure. The total commission earned after a transaction closes is divided between the agent and the real estate broker.
In most cases, the commission is divided based on a predefined split ratio that’s negotiated when an agent joins the brokerage.
For example, if an agent on a 50/50 percentage split and 3% gross commission, sells real estate worth $300,000, the total commission will be $9,000. The broker will collect $4,500 and the agent will earn $4,500.
According to the National Association of Realtors (NAR), 42% of real estate professionals have a traditional split commission structure.
How traditional commission splits motivate agents
Traditional commission splits motivate most agents because there is a simple and direct correlation between the value of a transaction and their total commission earned.
Traditional splits also encourage agents to build client pipelines as more sales equal greater commission.
Agents can renegotiate their commission splits in the future. This motivates agents to consistently do their best work so they have a solid sales track record.
How to make commission splits even more effective
Increase agent incentive with variable commission splits based on lead source—whether through a broker or self-generated.
Commission plans that vary based on the lead source generally pay higher percentages for leads that the agent brings in themselves.
Higher percentage models offer a competitive real estate agent commission split with brokers that attract experienced real estate professionals with extensive networks.
2. Tiered Model/Income Thresholds
Sometimes known as a graduated commission split, the tiered model works similarly to the traditional commission split model.
Real estate agents start on a standard commission tier. Once the total amount of commission an agent has earned reaches a certain threshold, they progress to the next tier where a higher commission is earned. This typically resets on a regular basis—at least once in a calendar year.
The tier threshold doesn’t have to be based solely on commission earned. It can also be based on sales volume, money paid into the brokerage, number of closed real estate transactions, etc.
According to the National Association of Realtors (NAR), 19% of real estate professionals have a tiered commission structure.
Tiered commission example
Let’s say an agent is on a tiered commission model, earning 60% commission up to $100,000. After that, they earn 90% commission.
At the lower commission tier with a 3% gross commission rate, an agent who sells a $300,000 property would earn $5,400 and the broker would take $3,600.
However, they would earn $8,100 at the higher commission tier, while the broker’s share would be lower at $900.
How tiered commissions motivate agents
Tiered commissions offer similar incentives to splits in that agents are paid a percentage of the sales price.
They incentivize higher sales by offering a bigger commission cut. Top performers thrive in this system, reaping higher commissions quickly.
Tiered commissions incentivize agents to close more deals sooner. This indirectly benefits brokerages as it results in earlier profits.
How to make tiered commissions even more effective
Standard commission tiers generally jump between two or three levels.
You can further motivate agents with a final commission tier of 100%. This is sometimes known as a capped commission split. This motivates top-producing agents by giving them the opportunity to keep their total commission.
Real estate brokers wanting to offer this may want to make it a stretch goal—something they grant agents once they have earned significant commissions.
3. The Flat-Fee (or 100% Commission) Model
Instead of relying on splits to make money, a flat-fee realtor (or 100% commission) charges each agent a set administrative amount.
This could be paid when they earn their commission, or the agent may be required to pay the realtor a set monthly fee—often called a desk fee—for the use of their office and services.
This is also sometimes called a 100% commission model. However, it often comes with fewer support systems than a commission split plan.
For example, realtors may not offer transaction coordination support, tools and systems, or coaching.
Other standard fees that the business may charge are errors and omissions insurance, transaction fees, or marketing fees.
Such costs vary depending on the brokerage itself and, unless applied on a per-transaction basis, would be charged regardless of whether or not an agent closes a sale.
Flat fee example
Let’s say an agent’s brokerage requires them to pay a $300 monthly desk fee and a $1,000 per transaction flat fee from their commission. They sell a $300,000 property at 3% gross commission. The brokerage takes $1,300 and they earn $7,700.
The next week they complete a similar deal. But because they’ve already paid the desk fee, the brokerage only takes $1,000 and they get $8,000.
The following month, they only work one deal and it falls through at the last moment. The agent still has to pay the transaction fee and the desk fee, even though they haven’t earned any commission, leaving them $1,300 out of pocket.
How flat fees motivate agents
The example above shows that flat fees are ideal for experienced agents with strong networks, allowing them to keep a higher percentage of their earnings from selling real estate.
On the other hand, new agents may find ongoing costs less appealing and would worry about their earning potential.
How to make flat-fee commission plans even more effective
Some realtors use the flat-fee model to help them grow and recruit new agents. You can also consider fee waivers or tiered structures to further incentivize agents.
4. The Team Commission Split Model
Most brokerages thrive on competition. Agents compete for commissions by working independently on their deals.
Unlike traditional brokerages, team-focused brokerages let high-performing agents collaborate on deals.
A real estate team commission split is similar to a standard split. The realtor usually takes its share first, along with any fixed fees. The rest is then split among the team members.
Team commission model example
Let’s say our team consists of a broker/lead agent, two junior agents, a transaction coordinator, and an admin assistant. The broker takes 30% of the commission, while the other team members each take their own split.
For example: On a $300,000 property with 3% gross commission, the lead agent earns $2,700, while each team member receives $1,575.
How the team commission model motivates agents
The amount of commission real estate agents earn on each deal is lower.
However, their combined expertise allows them to bring in more deals and sell at a higher volume, so there’s potential to earn more if the team works well.
How to make the team commission model even more effective
This model could also be attractive to clients, as it tends to be more customer service-oriented.
Make sure your marketing and sales reflect this unique selling point..
You can apply the principles mentioned in the standard commission split section to a team model. For example, by offering splits that change based on the lead generation source.
5. Franchise Fees
Franchise fees eat into agents’ commissions. This includes start-up, monthly, and per-deal costs. These aren’t the only fees agents can be charged—desk fees and other factors can tally up quickly.
These fees include:
- MLS: This might be charged per listing.
- Marketing: Charged for general printing and advertising costs.
- Errors and omissions (E&O) insurance: This liability insurance covers the brokerage and agents against being sued for making professional errors.
- Technology: This might cover the cost of providing laptops, phones, tablets, and even 3D tour technology.
- Training: Used to cover any training, coaching, or mentoring provided.
- Transaction coordination: Your brokerage may charge agents for using an internal or outsourced transaction coordinator.
Franchise fee example
Let’s say you’ve earned $9,000 gross commission. You pay a 1% franchise fee on every deal. Then your brokerage has a 50/50 traditional split with agents.
The franchise would be paid $90. The remaining $8,910 is then split between the real estate agent and the brokerage.
How franchises motivate agents
Franchises provide you with brand recognition so agents can bring in new clients quicker.
They provide software that facilitates effective real estate transactions whilst also providing guidance and training.
The downside is that franchise fees cut profits on every sale.
How to make the real estate team commission model even more effective
Franchises are great for new brokerages or those that take on less experienced agents.
When hiring new agents emphasize the exposure and learning opportunities on offer. This will allow you to offer lower commission rates.
Does Brokerage Size Impact Real Estate Agent Commission Structures?
Yes, it does. Real estate teams at large brokerages have a very different set of priorities than real estate teams at smaller ones.
As a rule of thumb, the more back-office support your agents get from transaction coordinators and admins, the more your agents pay—either via fees or lower commission earnings.
Agents with less support earn higher commission because they have to spend more time generating leads and have additional expenses to cover.
Here’s how the size of a brokerage affects a real estate commission split with the broker:
Traditional small real estate team
This involves having an admin function to support your real estate agents. This means that real estate team commissions will be lower—around 50/50—in order to pay for that additional support.
Mentor real estate team structure
This real estate team model is where an experienced real estate agent supports a small number of inexperienced agents. Agents are responsible for all their admin and the team lead only provides advice and support. The commission split is usually very favorable for the team and can be as high as 90%.
Larger traditional team structures
Larger real estate teams typically have separate buying and selling agents, as well as an inside sales team that will all take a chunk of the commission. You could reduce the real estate agent commission by 10-20% to cover the costs, charge additional fees, or reduce the brokerage’s cut.
Hybrid teams
In a hybrid team, agents operate as both seller and buyer’s agents. Because this model usually attracts more experienced agents, a flat-fee structure might work well, as it encourages agents to work independently as much as possible.
Keep Your Real Estate Team Motivated
Regardless of the sales commission structure your brokerage employs, there are some key ways to ensure the earning potential of your agents continues to drive them to do their best work.
Specifically, it is essential to offer agents tools that make it easy to track their commissions (and to calculate commission potential).
Paperless Pipeline’s Commission Module makes it easy to calculate everyone’s share of the commission in seconds and delivers updated figures straight to agents’ inboxes.
Updating commission schedules manually or having to rely on a wide array of tools increases the complexity of managing a brokerage, but with Paperless Pipeline you can keep track of everyone’s progress automatically.
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