Real Estate Commissions

NUGGETS FOR THE NOGGIN

REAL E$TATE COMMI$$ION$

(Primarily for Real Estate Agents)

By Jim “Gymbeaux” Brown, October 22, 2013

Disclaimer:  I was first licensed in real estate in 1980 as a Salesman and as a Broker in 1982 and have been continuously licensed by the State of Louisiana through January 1, 2013 when I officially retired from real estate sales.  During that period I was also licensed as a Broker by the State of Mississippi on two different occasions.  That represents approximately 33 years of real estate experience mostly as the Designated Broker for the companies at which I worked.  During that period I worked for small independent companies, a large independent company and 5 major franchise companies.  Special note, most company changes were the result of one company buying out another.  I believe this experience provides me a unique perspective on what would be important for real estate agents to consider in regards to being able to take advantage of the best a real estate company has to offer that will provide the best opportunities for individual success.  Contact Information:  email:  JimBrown@gymbeaux.com; Cell Phone:  985-640-3564.

This is the first Nugget for the Noggin in a series written especially for real estate agents.  I awoke this morning with a nagging question as to what would be important for a real estate agent to consider when selecting a company at which to place his or her license or for an agent to consider when transferring a license to another real estate company.  As stated in the above disclaimer, I believe I have a unique experience level that enables me to address this subject based on my knowledge of how most if not all real estate companies are organized and therefore how that organization can help or hinder the success of a real estate agent, especially one new to the business.  This same unique perspective can also assist those agents considering transferring to another company.  The following are some of the subjects that will be covered in this and subsequent Nuggets for the Noggins:

• Real Estate Commissions
• Probable Customer Calls/Inquiries
• Training
• Individual Support
• Group Support
• Individual Brand Name
• Company Brand Name
• Selling Broker/Manager
• Who Makes Decisions
• Internal Dispute Resolution
• A Company of Individuals or a Company of Teammates
• National Name vs. Local Name
• Reputation(s) Matter
• Others to follow

On the subject of real estate commissions, this is not about how much commission to charge a customer but rather how much of the commissions you earn that you get to keep. 

How do you make money selling real estate?  That is simple; you close a sale involving real estate.  In most states, at the closing, your COMPANY where your license is held earns a commission on the sale.  Once the COMPANY receives the commission an internal pre-determined commission split between the COMPANY and the SELLING/LISTING AGENT is applied to the total commission earned.  The importance of that “pre-determined commission split arrangement” cannot be over emphasized.  That is what this Nugget refers to.

As a real estate agent you can only make MORE money in one ore more of the following methods:

• Charge higher commission percentages for the sales you make
• Have a higher commission split arrangement with your sponsoring Broker/Company
• Learn to keep more of what you earn by learning how to take advantage of tax regulations
• Lower your cost of doing business meaning lower your operating expenses
• A combination of all of the above

It starts with the commission split you agree to with your sponsoring company.  There is no set rule for companies and agents.  In fact real estate commission split arrangements are truly negotiable between the agent and the Broker/Company.  Agents new to the business are typically not aware of this and usually accept whatever commission split is initially offered.

Most conventional real estate companies will tell the agent that there is an approved commission split.  The approved split may start at one calculation, example, 50% to the Company, 50% to the Agent.  This split may be graduated to where it increases during any given year as the Agent closes more and more sales.  Given enough sales the 50/50 split may actually increase to a full 100% commission but that is rare.  Therefore at most real estate companies, agents within the company are rarely all on the same split at any given time.  Agents new to the business usually start at the lowest split whereas the more experienced agents are usually on another schedule entirely.  The commission splits within the company typically restart either at the beginning of each year, or restart based on the company’s fiscal year which could start at any time or on the anniversary of the agent’s start with the company.

Every licensed agent SHOULD be required to sign an Independent Contractor Agreement with the sponsoring broker and that agreement SHOULD define exactly what the agent’s commission structure/schedule is with the company.  If you take nothing else from this Nugget, you can take this next bit of advice to the bank:  IN REAL ESTATE YOU WANT EVERY AGREEMENT, EITHER BETWEEN YOU AND YOUR BROKER/COMPANY OR BETWEEN ALL PARTIES TO A REAL ESTATE TRANSACTION; OR BETWEEN AGENTS TO BE IN WRITING!   NO EXCEPTIONS!  Therefore, get your commission split agreement IN WRITING!

Obviously you want to “think” in terms of earning 100% of the commission on a sale of real estate; why wouldn't you?  There are companies where that can happen such at national franchise companies (e.g., Keller Williams Realty®, RE/MAX® and others) and local independent companies (you will have to check with your local companies for examples).  I have seen splits as low as 40% to the Agent/60% to the Company for agents new to the business and as high as 100%.  The 100% companies usually require the agent to pay monthly to the company a pre-determined amount for the agent to conduct their business regardless of the number of sales they make (RE/MAX®) or there may be some form of graduated rate they pay (Keller Williams Realty®).  The latter involves starting at one rate and once a pre-determined amount is paid to the company the split is changed to the 100% level.  In the first example there is great risk to the agent because the agent incurs the monthly expense to the company even if no sales are closed.  In the second the risk has been negated or reduced because the cost to work at the company is very low but the company retains a percentage of commissions earned UNTIL a pre-determined amount paid to the company has been reached.  In other words, the agent has “capped” the amount paid to the company during any given year.  At the start of the next year the agent typically reverts to the original agreement; the cap is terminated and the agent starts over.  Having worked at both types of companies, I personally prefer the second method (Keller Williams Realty® as it significantly reduces the risk to the agent while at the same time provides the agent the ability to earn 100% of the commission.  In both cases, you should determine how much you are going to pay to the company to be able to enjoy earning 100% of the commissions; get this agreement IN WRITING.

It has been my experience that agents new to the business typically DO NOT research the various commission split options available in their specific area and go with the first company they interview with.  There are options and these options should be researched but I would caution everyone that commission splits are only one part of the decision process, especially for new agents.  For example Training would be a HUGE issue if I were new to the business.  What type of training am I going to receive and is there any costs associated with that training.  For example a company may state they put all new agents on a 50/50 commission split schedule and have a great training program but fail to explain that there may be a cost for that training.  Other companies may start agents out on a 40/60 split and then have no cost for the training provided.    These are only examples; there is no set or specific split for agents.  Learn to see “the BIG picture” before making any decision regarding which company to join.

If your plan is to make a career out of selling real estate, my recommendation would be to join a company that has a plan to get you to the 100% commission program as quickly as possible and without a great deal of financial risk to you to achieve this status.  You do not want to join one company for one reason and then be required to transfer to a different company to fulfill your goal or desire to reach the 100% level.  Changing real estate companies is usually not a good thing because it confuses your database of customers who have come to know you by the company you keep – the company you work at.  And you may NOT be permitted to take your pending business with you.  This is exactly what a great many agents experience.  They start out with no sales and then work their way up to making a lot of sales and suddenly realize they would make more money at a different company doing the same amount of work.  If that situation turns out to be the case, that would be an excellent reason to transfer to the company that enables you to make more money.  But having said that, wouldn’t it make more sense to research the industry and go with “that” company when you start your career?

Here are some questions to ask your potential Broker/Company during your interview process;  the answers to these questions should enable you to make a prudent business decision as to which company to join.  In face I would strongly suggest using the Ben Franklin method of decision making.  Place a large capital "T" on the paper.  On one side of the "T" write PROS and on the other side write CONS.  They as you research the various company choices you can write down the Pros on one side and the Cons on the other.  When completed, one side will usually be longer than the other and that should help you with your decision.

• Do you have a printed commission scheduled that I may look at and keep?  I would be skeptical if a company could NOT provide such a printed schedule.
• Is the commission schedule part of your company Policy and Procedure Manual?  This is another way of asking if the company has a Policy and Procedure Manual.  If the answer is no, I would recommend interviewing with another company.  A company that does not have defined policies and procedures can change their policies and procedures on the spur of the moment; you do not want to work at such a company.
• Are ALL agents within the company on this scheduled or does the company make exceptions for “special” agents?  As an example, a special agent may be a highly productive agent, an agent transferring from one company to another who has a track record of producing sales, or an agent with a special trait such as computer technology who is agreeable to teaching technology within the company, etc.  If all agents are NOT on the same schedule you want to know why all agents are not treated the same and how can you be given or earn this “special” treatment.  The real question is why you would want to work at a company where all agents are NOT treated equally and fairly.  Ideally the differences should be included on the commission split printed schedule and would therefore be available to everyone including you.
• What additional costs will I incur such as training costs, office fees, insurance premiums above and beyond the commission split schedule?  What you may earn with a higher commission rate you may lose by being required to pay additional costs for Training or other miscellaneous expenses within the company.  Make absolutely certain you are fully aware of all company costs you are expected to pay.  In fact, ask the person who interviews you to give you an example of exactly how the commission is handled in the company and how much you would earn on an average sale.
• If I join the company and it turns out that it is not working out for me, would I be able to take my current listings, my pending sales, and my customer database with me to a different company that I join?  Some companies WILL authorize you to take your business with you, some (actually a lot of companies) will NOT.  In my opinion I would avoid working at a company that would NOT permit you to take your business with you.  That, at least to me, would indicate they have something to hide from you and you do not want to start a business relationship based on mis-trust.  If the company indicates you CAN take your business with you, make absolutely certain that you get this agreement IN WRITING.
• If I decide to join your company at (enter the commission split) what do I have to do to get to the 100% level?  If they have a plan, they will tell you.  If they do have a plan, make certain you get the plan they have in writing.  If they do NOT have a plan, you may want to continue your research for the best opportunity available to you at a different company.

VERY IMPORTANT CONSIDERATION:  If it is your goal to sell real estate on a part-time basis, earning 100% commissions may not be your initial goal or even possible for you.  But…it has been my experience that a lot of agents “think” they are going to sell real estate part-time and then discover that a career in real estate is an outstanding choice and then decide to do it full time only to discover they made a poor decision regarding the company they joined at the outset.  Don’t make this mistake.  Make certain you engage in a due diligence period of researching the various real estate companies in your area and then decide which offers you the best opportunity to soar!

TRAINING:  In my state, Louisiana, you take real estate courses approved by the State and then take the State Exam to become licensed.  Unfortunately the courses you take typically do not have much information on actually listing and selling real estate.  Therefore the education you receive AFTER you become license is critical to your eventual success, or not.  Therefore, in your due diligence period of researching the various opportunities available to you, make absolutely certain you also ask about the training available to you and how much that training will cost you.

NEXT NUGGET:  How does your company handle incoming probable customer calls or Internet Inquiries?  How they do it can either enhance your ability to make more commissions or hinder it.  You will want to read this Nugget when available.