Real Estate Commissions – Part I: Who gets how much?

This is another of those things that often gets discussed with potential clients when they are considering listing their home with a Realtor.  It’s a very valid question.

Remember – all real estate commissions are negotiable so the total amount of the commission will vary. What I’m discussing here is what happens to the commission after you pay it at the closing.

Let’s start with the assumption that you are paying a 6% commission on your $100 house. Let’s also assume that your listing is an Exclusive Right To Sell and the home is listed in the Multiple Listing Service for your area.  We’ll also assume that the Realtor who listed your home and the Realtor who brought the buyer work for two different Real Estate Companies.

So when you get to the closing, your attorney will have received all the funds from the buyer – which total $100.  He will then write two checks, each for $3.00. One is given to each Realtor.

The Realtor then brings the check back to his Broker at the Real Estate company he works for.  The check is deposited into the company’s bank account.  The broker will then pay the Realtor his portion of the fee. This is known as a “split”

A split is the portion of the commission that is paid to the Realtor.  The amount of the split is negotiated between the Realtor and the Broker.  Experienced, top producing agents will get a bigger split.

In many R/E companies the split is paid on an escalating scale throughout the year.  A level is set at the beginning of the year and the Realtor’s split will increase as they bring in more business during a 12 month period.

A typical scale for a new agent might start at 50%. In other words, for the first sale of the year, the agent might get 50% of the 3%.  At pre-determined levels of business, the scale will increase.  If the agent generates a certain amount of revenue his split will escalate. It might jump to 55% or 60% or 70% or higher.

Often times the split is reduced a little more regardless of sales volume for administration and marketing costs.  A broker sometimes will deduct an additional 5 or 6% before calculating the split.  This goes to cover the costs of running the office and paying for marketing and advertising for the company.

Splits are often used to recruit top agents from one firm to another.  A top agent at company “A” might be getting 70% of all commissions he brings in.  A broker from another firm will offer the Realtor 75% (or more) if he will switch companies.

So every Realtor’s split of the commission from your home might be different.

For our example, we’re going to assume a mid-range split at 65%.

So here’s how it might work.

• SALE PRICE: $100.00
• TOTAL COMMISSION: $6.00
• PORTION PAID TO YOUR REALTOR’S COMPANY: $3.00
• 6% ADMINISTRATIVE FEE DEDUCTED BY COMPANY: .18 (leaving  $2.82)
• 65% split calculated on $2.82: $1.84

So in this scenario you paid a total of 6% or the selling price.  Your Realtor earns a net amount of 1.83% of the selling price.

Using a more realistic number than my favorite $100 house it would look like this.

So using a more realistic number, if your home sells for $300,000 and you are paying 6%, your Realtor would be paid $5,400.

STAY TUNED FOR PART II:  DO THEY DESERVE IT?