Working on commission can be frightening, especially when you are starting out, so you need to completely understand how commissions work and everything they must cover in order for you to stay in business as a real estate agent. Most people understand that agents earn between 5-7% for selling a house, but they don’t understand that the agent doesn’t get to keep all of that themselves.
The first thing people forget is that there are typically TWO agents involved in the transaction. The listing agent represents the seller and then another agent brings and represents the buyer. BOTH of those agents have to get paid from the commission that the seller has agreed to pay. Let’s use a middle 6% commission to make the math easy. When the seller signed the listing agreement they agreed to pay a total of 6% commission, with 3% going to the listing agent and 3% going to the buyers agent (they can agree to any split, it doesn’t have to be even). Right away you can see your income just got cut in half, but it doesn’t stop there.
As an agent you must work under a broker in most states for a certain amount of time before you can become a broker and work for yourself. When you work under a broker you have to pay that broker part of your commission. That payment helps pay for the office, and typically other things like the training programs, errors and omission insurance, etc. Each broker has their own method of splitting commission with their agents. Some have large monthly fees and don’t take a percentage of your commission, others take a portion of your commission and you have no monthly fees, some do a combination. Keller Williams has a small office fee (mine is $60 a month, depends on market center) and then they take a 30% cut of your commission up to a cap each year. The cap also depends on the market center, but typically ebbs and flows based on market values of homes, so in a lower market value area you have a lower cap. In Winchester VA our cap is $15k, in Leesburg VA an hour away it is $22k. The market value of homes in Leesburg is twice what it is in Winchester. Once you cap you get 100% of your commission.
So let’s work on a $100k house. It sounds like a lot when you say 6% commission, equals $6k, but now let’s start working down to what you actually get. Each agent in this scenario gets $3k, and then they split that with the broker. So if you are with KW and haven’t reached your cap yet, the broker would get $1k and you would get $2k. Of course there are other things you have to pay as well, including taxes, marketing, classes, classes to stay licensed, MLS fees, lockboxes, signs, photography and more.
A rough guideline will end with you taking 1% as your actual earnings after all expenses, so in this scenario that would be $1k. A large cry from $6k isn’t it? Of course there are ways to increase this like focusing on higher price points, lowering your marketing budget by increasing referrals, capping earlier in your year so you can reach 100% commission and more!
When you are comparing brokerages it’s important to understand how much your broker will be getting and how much you get to keep. A lot of brokerages do not cap your commissions so you will need to compare how much you will earn at the end of the year. For instance, if you are an agent that does $300k in commissions a year and you are comparing a company that has a 20% split versus KW’s 30% split you might think you earn more with the first company. But if they don’t have a cap on commissions you would actually earn less. The sample KW office cap of $25k is a lot less than the $60k the other company would take from all of your commissions! Office fees can greatly impact your bottom line earnings as well and typically don’t stop even if you have no sales. The great thing about real estate is that you are working for yourself in the end, so you can create the business you want by comparing everything each company offers.