How do Real Estate Agent Commission Plans Work?
In my blog, How to Pick the Right Real Estate Brokerage for Your Business (which you can read HERE), I discussed the importance of asking brokerages about their agent compensation plans during interviews. Just like how there is no standard education a brokerage has to offer its agents, there is no standard commission plan that brokerages offer. Brokerages can decide what types of plans they want to offer and also how much (or little) they want to pay their agents.
Although they can offer whatever they want, there are typically three that most brokerages tend to focus on, so I want to break these down so you don’t get blind sided by the person interviewing you. Before I do, keep in mind that brokerages can also offer plans outside of these, so keep an open mind, and if you hear something I haven’t discussed, make sure you ask enough questions to fully understand their plans before you sign anything.
Set Commission Plan
The first place I want to start is the plan you are most likely to see, which also just happens to be the most straightforward plan. A set commission plan is about as basic as it gets. Basically, you get a set percentage of every commission check you receive (after the brokerage takes out all of their fees, of course). So, for example, let’s say you bring in a $5,000 check and your split with the brokerage is 50%. The first thing that happens is the brokerage takes out its fees; for this example, I’ll use $500 total (if you want more information on what fees brokerages charge, check out my blog How Much Does it Cost to be a Real Estate Agent HERE). So right off the bat, your commission is cut to $4,500. Then, you get half of what’s left. In this case, $2,250. Yep, that’s the amount you receive for all of the hard work you put in. Less than half.
I know this is an example, but it is more common than you’d think. Also, the other thing to keep in mind (and why I used 50%) is that as a new agent, you are likely going to be offered a lower split until you start generating more income. Once you do, the brokerage likely won’t automatically increase your percentage. So you must do whatever you need to start closing deals (like educate yourself and get as much experience as possible) so you can create enough leverage to ask for a higher split. Even still, don’t expect a huge increase. Brokerages make money from agents’ commissions, so the longer you are producing at a lower split, the more money they make.
For example, an agent I know has generated a lot of income for his brokerage while working there for over a decade. When he recently went in to ask for a higher split, he was rewarded with only a 3% increase for all his hard work. Which was the same as the inflation amount for that year, meaning he essentially was now breaking even on the regular life things he paid for.
Capping Plan
The next most popular commission plan you are likely to run into is a capping plan. This plan is more complicated than a set commission plan, so bear with me as I do my best to explain it as simply as possible. With capping plans, your commission percentage doesn’t stay the same. It has the potential to increase later that year. Sounds awesome, right? But, there’s a catch: you have to sell a certain amount (or make your brokerage a certain amount) before the increase happens.
Typically, with capping plans, you start at a low amount, around 50%. Then you will be required to generate a certain amount of income for the brokerage, let’s say $10,000 (this number is different with every brokerage, so make sure you fully understand what the number is when you interview), before your split increases to the maximum amount. This can vary, but usually around 90-95%. So, for example, if your brokerage requires you to make them $10,000 before the increase, you will need to sell around $2 million in real estate before you can go up to the higher amount. This might not sound like a big deal, but keep in mind that when you are just starting, it can take you time to get to this amount each year. Also, when you hit the cap makes a difference as well.
The other important factor to keep in mind with these plans is that they reset EVERY YEAR! This means, each year you will be starting back at the lower commission percentage until you hit the cap amount again. For veteran agents (which I believe this plan is better for), this might not be a big deal since they will hit the cap number early in the year. But for new agents, IF you cap it would likely be later in the year, where you will only be able to enjoy the higher split during the winter market, where sales are few and far between.
As a new agent, I would be cautious about agreeing to a capping plan. This type of plan will benefit you more once you have consistent business year over year and understand when you would cap. For example, my first brokerage had a capping plan, and the veteran agents I worked with would pay the brokerage the full amount ($20,000) up front at the beginning of every year, so they would be at the higher split for the full year, knowing the spring and summer markets are the busiest and where they make the bulk of their income.
Transaction Fee Plan
The last plan I want to talk about is the transaction fee plan, which is very similar to the capping plan. The only difference is how the capping happens. With this plan, the cap is based on the income your brokerage makes from transaction fees. Brokerages that offer this plan have transaction fees that they charge their agents for every sale they make. For example, being required to pay the brokerage $500 off the top of every commission check. Meaning if you brought in a $5,000 commission check, right off the bat, the brokerage takes $500 before any commission splits.
With a transaction fee plan, you will be required to make the brokerage a certain amount of income through transaction fees. For example, if the capping amount is $5,000, this would mean you would have to sell 10 properties at the lower split before your percentage is increased to the maximum amount. Again, this doesn’t sound like a big deal, but on average, according to the National Association of Realtors, most new agents with two years of experience or less sell around three properties a year. So, unless you can sell a lot earlier in your career, you will be stuck at the lower split for a while.
Choosing the right brokerage is so important to your development as a new agent and your business. Before you sign any paperwork, make sure you fully understand how you will be paid. Only after you have all of the relevant information can you make an informed decision.
“A good decision is based on knowledge and not on numbers.”—Plato
P.S. IF you are serious about becoming a real estate agent and want to learn how you can avoid the mistakes 87% of new agents make, I encourage you to check out the coaching program I have developed to help agents before they enter the industry. The program is designed to help you avoid the frustrations I and so many other agents felt when entering the industry, struggling to survive while clinging to the belief we will succeed. It is completely based on proven results from my experience as a top-producing agent, owning a brokerage for almost a decade (where I helped agents average 2x4 times the amount of sales and income), and from spending over 25,000 hours learning from history’s most legendary people! If this sounds like something that would benefit you, please click HERE to set up a FREE 30 Minute Virtual Call to learn more about how I can help you.