Understanding Brokerage Commission Models

Every real estate brokerage wants to differentiate themselves from the competition.  The heads of any firm will tout their unique dedication to excellent customer service, their high integrity and moral standards, their hard work ethics, and their innovative operations.   All of this conveys zero bits of information, as Guy Kawasaki’s opposite test shows.  Just as every software company claims they will build something fast, scalable, and easy-to-use, no real estate brokerage says “our firm believes in crappy customer service, sleazy operations, and lazy agents.”

To actually gauge corporate culture, the most important feature to examine is the incentive structure, aka, the commission splits that determine how the agents are paid.

Traditional Brokerage Model

In a traditional brokerage, an agent splits roughly half of each commission with the house.  That is, a $3,000 commission check will normally result in about $1,500 paid to the agent.  The firm provides office space, training, mentoring, a website, IT infrastructure and support, branding, advertising, and most importantly, client leads.

This is still by far the most popular model today, and has historically been the most profitable for the owners of the firm.  For the agents, the advantages are numerous.  New realtors usually receive free training and mentoring, and may be matched with a more experienced agent for the first few months.  Also, potential clients who call the firm’s general phone line or enter the physical office will be matched with an available agent (which tend to be the less busy, newer members of the industry).  For the veterans, a traditional firm often provides slightly more attractive commission splits, recognizing that the agent obtains many of her own leads independent of the firm.

Discount Brokerage Model

In a discount brokerage model, the agents tend to receive less than half of the commission split.  In some cases the agent doesn’t receive a percentage of the commissions at all, but instead an a la carte fee for services performed.  Either way, the firm plays a much bigger role generating leads than in a traditional brokerage.  Examples include ZipRealty, Foxtons New York (now out of business), and Redfin.

The primary advantage for agents is that they do not need to spend as much time farming for client leads.  Instead, the firm uses their Internet presence and rebate offers to woo potential buyers and renters, and as a result the agent is willing to accept a lower than normal commission.  As an example, a home buyer who registers with ZipRealty and buys a home for $300,000 might be offered a 20% commission refund at closing from their buyer broker.  With a standard 6% sales commission co-brokered between the listing broker and buyer broker, the client would receive 20% of 3% refunded, or $1,800 refunded at closing.

High Split Models

The latest twist in brokerage models is almost the opposite of a discount broker (from the agent’s point of view).  Here, the agent gets significantly more than 50% of the commission split, and in some cases reaches 90% or more of the commission.  As expected, agents earning such high splits do significantly more of the work in finding clients and closing deals.

In New York City, a number of high split commission firms have gained traction in recent years.  They typically offer very limited office space, if any, and do not have a retail storefront for attracting walk-in leads.  Agents are expected to work from home on a day-to-day basis, but the firm often provides some technology support such as email accounts, a website, and some listing management tools.

Two types of real estate agents benefit heavily from joining these firms.  First, veteran agents who generate their own leads benefit from the high commission splits.  Also, agents who want to commit part-time benefit from the flexibility of working at home and only working on their own sourced deals.

Currently the biggest players in Manhattan are Pari Passu Realty Corp, The Level Group, and Charles Ruttenberg Realty.  A typical rental transaction may pay a $3,000 rental commission to the brokerage, where the agent keeps $2,500.  The agents also often pay a small monthly infrastructure fee of $100-$300.