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If you were wondering what real estate sales commission to incorporate in your company and what the prevailing commission on real estate sale is today, then you have reached the right blog! Real estate is a tricky subject and has a varying curve based on the market and economy. Based on how the market is doing and what the demand for real estate is, sales commission structures are decided by companies.
Houses in the US that are sold via agents sell for 42 percent higher than those sold by the owners themselves in order to cut down on commission costs or a mere 5 or 6 percent. Real estate commissions play a large role in the industry as they set the precedent for sale commission in the overall sales market. It is also a key performance indicator of how the market is doing.
By understanding the commission structure for buyers and sellers, you are able to provide the most competent sales commission packages for your employees and attract the right talent from the market. In this blog, we help you through various attributes of sales commission structures for real estate agents and brokers.
Basics of real estate sales commissions
A real estate sales commission is a percentage of selling value of a property or real estate that is given out as a commission for helping the sale. In the US, this value is set between 4 to 6 percent based on the contract and agreement between the two parties. The value also varies based on the market condition and the value of the property.
The commission value is typically shared between 4 key parties which includes the selling side and the buyer side:
1. Agent of the selling side:
A real estate agent is the person that helps in the selling process and is the one who owns the contract for selling the property that comes on in the market. A sales commission for the agent is typically 50 - 50 or 60/40 in favor of the agent when shared with the broker.
2. Broker of the selling side:
A broker is a firm or an employer of the agent who hires the agents to accomplish real estate sales for their clients in the market. A broker usually charges a small percentage of the overall commission value which can either be 50 - 50 or 40/60 or lesser than that.
3. Agent of the buying side:
The buyer of the property may also have an agent of their own. In most cases, the buyers hire an agent to find the best properties on the market that fits in the clients budget. The buyer also gets a cut in the total percentage of commission on the sale. The agent is given 50 - 50 or 60/40 or higher based on the contract with the broker.
4. Broker of the buying side:
The broker is a company that employs the agent and takes a cut from the agent's commission. This firm helps in providing the right leads and helps with smooth closing of the deal. The commission can be 50 - 50 or 40/60 or lesser based on mutual agreement.
To understand the commission structure, let us assume a property is listed for 1 million USD in the market and an agent contracts the same for 6 percent commission.
- If the property sells for the asking price, the commission is then 1 million USD x 6 percent = 60,000 USD.
- This value is split between the buying broker and the listing broker at 50 percent which means both sides get 30,000 USD each.
- Now the arrangement between the agent and the broker at the buyer and the selling side can be 50 - 50 or 60 - 40 in favor of the agent. Assuming it is 50 - 50, both the agent and the broker receive an equal share of 15000 USD each.
Common commission structures
Sales commissions vary from state to state. In Atlanta and other major eastern cities, the average home rates are around 417K USD and the commission rates are around 50 - 50 which could land an agent between 20,800 USD which is to be split between seller agent and broker.
On the other hand, cities like San Francisco have a pricier real estate where homes are estimated around 1.38 million dollars and therefore, agents have a bigger commission to play with, around 65,000 USD between the seller and buyers.
There are different types of commissions in the real estate market. Some of the popular methods are:
1. Percentage-based commissions
The most common method is to set a percentage for commission which is included in the asking price of a real estate property. This is commonly set between 5 to 6 percent and is paid by the homeowners.
2. Flat fee commissions
Flat fee is rarely used and is mostly done when the market is steady and slow. In companies where the agents are on a payroll and have a fixed salary, a flat commission rate may be levied by the brokers for their agents. This fee structure helps if the property does not sell for the listed price and if there is a dip in the market.
3. Graduated commission rates
Graduated commission refers to a system where each bracket of sale price is clubbed with a certain percentage of commission. For example, if the house sale value is between 10,000 and 20,000 USD, then the percentage of commission is set to 4 percent. Between 20,000 and 30,000 is set to 4.5 percent etc. This method ensures a fair appraisal value and motivates better sales value achievement by agents.
Dual agency and conflicts of interest
As a larger real estate agency, the brokers can have multiple clients who want to sell their homes and take in new clients who want to buy new homes. In this case, the agents who sell and the agents who represent the buyer can be typically the same party. In such cases, there can be a conflict of interest as agents or brokers may try to grab higher commissions and therefore may not be fully honest with their clients.
This practice is called dual agency where the same party represents the buyer and the seller. Dual agency is not allowed in many states in the US. But in states where this practice is legal, consumers can draw out a strong case or agreement to ensure that their interests are protected.
A full house examination from a 3rd party and multiple certifications can ensure that a house is legitimately sold at the right price without any conflict of interest. The agent should also disclose in the agreement that they represent both parties.
Commission splits
The commission value is always paid by the seller of the property and in a typical scenario, the percentage of value is paid to the seller real estate agent and is split between the broker and the agent.
The same thing happens at the purchase of a property. If the value of purchase is set to 500,000, the commission may be set at 5 percent and so, the agent is to be paid 30,000 USD which is split between the agent and the broker at the buying and the selling end.
This value of split is to be discussed and negotiated when new agents are hired or contracted by real estate brokers. As a real estate company or a broker, you will need to iron out the details of payment, the percentage of commission and the split value. Most companies in the US adopt the 50 - 50 value but this may be a biased system. The agent spends a lot more effort and time behind closing the deal and a lenient split of 55 - 54, 60 - 40 or even 65 - 35 is nominal to motivate and support real estate agents.
The brokerage fee goes towards helping the agents and giving them a stronger background. Being a successful agent that is backed by a licensed and larger brand of real estate can help in further pushing the face value of the agent.
The agency can also help out with real estate leads that can help in closing deals faster. Associating with a well-known agent is a win-win scenario for both the broker and the agent in this case. Some other benefits of brokers are:
- Better protection of clients property and transaction value
- Ease of documentation for large value transactions
- An array of sales related services
- Better visibility of the property and faster sale closing
Buyer's agent vs. listing agent commissions
When a house comes on the market, there are many people who get involved. One side is the seller who is represented by an agent and a broker company that hires or backs the agent.
On the other side is the buyer who is represented by another agent and a broker that backs him. The commission value which is set at 5 or 6 percent is typically allotted to commission of the agents on both sides.
As a buyer agent, you may help iron out all the details of the house, get the right price for the property and help with documentation of the house for your client. As a listing agent, your roles include selling the house for the best possible value, helping with the documentation and closing the deal as soon as possible. Both agents can negotiate the commission split and in the US, it is usually 50 - 50.
For example, if a house is sold for 1,000,000 and the commission on the same is 6 percent, then the commission value of 30,000 USD is split between the buying agent and the listing agent by 50 - 50 or as per their terms of negotiation. 15000 USD that is received by each party may be further split with their broker to accommodate the broker fee.
Types of commission costs and calculating commission costs
As a real estate agent, commission makes up all of your income. Most real estate agents work for commission and rarely are some employed for salary or a contract basis.
This is why real estate agents have to rely on their own skills, market research and knowledge of the industry and their clients to make the most of the commission. It is important to keep agents happy and to keep them productive by implementing the right commission strategy.
There are a few types of commission models in the industry using which the commission is calculated for the agents:
- Traditional Model where the agent and the broker split the commission by 50 percent
- Salary model where a large real estate broker firm hires an agent for salary along with a set percentage of commission for property sale
- Consultant model where a broker refers the client to another broker firm for sale in a particular area of the client's interest. The referred party gets the maximum commission whereas the other party gets a small cut as a thank you for the referral.
- The office fee model is where agents get the entire 100 percent of the commission and only pay a set monthly fee to the broker for their services.
There are advantages and disadvantages for all the models but the traditional method is the most commonly used method to compensate real estate agents in the US (42 percent as per survey).
Using the traditional model of commission, the agents get paid better and are motivated to close more deals so as to maximize their income. It also gives them the flexibility to increase their earnings.
The role of real estate technology
A survey by the National association of realtors revealed that 95 percent of agents used mobile phones to report their activities to the brokers. Around 66 percent of agents used a website to report their day to day activities to their brokers or firms that they worked with.
It was also noted that facebook, instagram and Linkedin were the popular social media platforms that agents used to collect data, make client contact and close deals faster in 2022 - 2023.
Today, there are many real estate agent enabling software and solutions in the market that can help agents with various sales related activities such as:
- Keep track of their leads
- Create multiple listings for their properties
- Enroll in multiple listing services
- Manage ads for their properties
- Track details of upcoming deals
- Documentation and maintaining paperwork in connection with closing deals
- Referral network and database etc
By enabling real estate agents with such software and solutions, brokers can help increase the rate at which sales deals can be closed and therefore benefit from the commissions.
As an agent, investing in a software that helps in keeping information at fingertips make you more reliable and agile to your customers, helping with better relationships and faster closing. It can thereby cut down on costs, time and increase commission rates.
Conclusion
A good commission structure for real estate agents directly helps in selling better. It helps in engaging the agents and thereby also empowering the clients to sell for a good value. A low commission structure can negatively impact sales by undermining the confidence and the aptitude of the real estate agent and can cause loss of money.
It is important that real estate agents are paid well and their commissions are fair so that they can proactively help clients to sell at the right price and to the right people while also carrying out all legal paperworks and required documentation for the transfer of the property.
By strategizing and coming up with a good real estate agent commission structure, the agents can empower themselves and sell better. They are also able to connect the right clients with each other and therefore benefit all the parties involved.
In a world where real estate is dynamically changing and becoming more challenging than ever, real estate agents are a key to bring in a positive change and help connect the right properties with the right people.
