A Guide to Real Estate Commissions

by | Mar 2, 2022

Gears work spin together, representing the complexity of using commission spreadsheets

When tracking commissions for real estate agents, brokers calculate payments whenever a sale occurs. Since commissions are paid upon the sale of a piece of real estate, they may be paid at any time. There’s no schedule or cycle involved with real estate commissions.

Schedule aside, a number of factors play into real estate commission plans. The hierarchy of realtors along with the commission rate depends entirely on the details of each sale. Additionally, each commission splits between a number of people involved with the sale.

On average, real estate agents in the U.S. earn just north of $94,000. The vast majority of these agents reach that salary through commissions. And those commissions get complicated.

Real estate agents and brokers split commissions earned upon the sale of property.

If you need a primer on how to set up real estate commissions, we created this guide for you. Read on for more information about how real estate agents and brokers get paid.

Who’s Getting & Paying Real Estate Commissions?

In real estate, you have real estate agents, brokers, realtors, sellers, and buyers.

  • Agents: The person charged with representing a seller or buyer is an agent. These salespeople are licensed by their state to deal in real estate. By law, they must work for a broker and cannot negotiate a commission directly from the client. When representing a seller, they’re known as the Listing Agent. If representing the buyer, they’re the Buyer’s Agent. Any agent can represent either a seller or a buyer — or in some cases, both.
  • Brokers: If an individual earns a license as a broker, they gain the ability to run a real estate firm and hire agents. Commissions are always paid directly to a broker before getting split between agents and other parties. A broker may employ Listing Agents — in that case, they’d be the Listing Broker.
  • Realtor: Either an agent or a broker has the ability to be a realtor. They get the title when they join the National Association of Realtors.
  • Seller: The person or organization offering property for sale through an agent is the seller. They are typically responsible for paying the commission to their broker.
  • Buyer: The person or organization who purchases the property through an agent is the buyer. Unless otherwise negotiated, the buyer does not pay commission.

Who Gets Real Estate Commission?

Upon a sale — whether commercial or residential — a commission goes to a broker. Typically, the seller pays the commission directly to their broker (often called the Listing Broker). Each new seller negotiates the commission with the broker through the listing agreement. While the buyer doesn’t directly pay commission, sellers often factor the cost into the selling price.

Once the seller pays the Listing Broker, the commission then splits between all brokers and agents involved in the sale.

What’s a Reasonable Real Estate Commission Rate?

Commission rates vary with each sale. The Listing Broker negotiates the commission in each individual listing agreement. Due to anti-trust laws, brokers cannot require fixed commissions. However, common real estate commission rates fall between 4 percent and 6 percent.

After the commission is paid, the Listing Agent, Buyer’s Agent, and Buyer’s Agent’s Broker each get a cut. The two brokers first split the commission evenly. Then each broker splits their half with their agents. Often, brokers have an agreement with their agents that they’ll split commissions 60/40, meaning agents get 60 percent.

As an example, if a house sells for $400,000 and the negotiated commission is 5 percent, the Listing Broker will be paid $20,000. From there, both the Listing Broker and the Buyer’s Agent’s Broker split the commission, getting $10,000 each. Then the brokers pay a percentage to their agent.

Let’s say the Listing Broker has an existing agreement that the Listing Agent gets 60 percent, then that agent earns $6,000. However, the Buyer’s Agent’s Broker may have an agreement that the Buyer’s Agent gets 50 percent, meaning the Buyer’s Agent takes home $5,000.

If the Listing Agent also finds the buyer, the commission, which has already been stipulated in the contract, goes to just one broker. That means the Broker and the Agent both receive a larger cut.

When Are Real Estate Commissions Paid?

Commissions are due upon the sale of a home. While there may be seasonal upticks in home or property sales, there isn’t a set schedule for commission payments. It happens whenever someone buys property.

It may take time to fully distribute all commission payments after a sale. The Listing Agent will need to receive full payment before splitting it with the Buyer’s Agent’s Broker. From there, the brokers will be on schedule to pay agents. It’s important for brokers to clearly communicate the timeline and how long the process may take.

However you need to pay real estate commissions, Core Commissions can fully automate the process for you. Contact us for more information. Set up a free demo with us and we’ll even walk you through it. We look forward to working with you on setting up your real estate commission plan!

Related Posts

Sometimes it Takes a Sixth Sense to Calculate Commissions

As Halloween approaches it is all too easy to reflect on terrifying topics: scary movies, public speaking, heights, messing up a handshake, ...

What is On-Target Earnings (OTE), and How Does it Apply to Commissions?

Some commission plans refer to a term called OTE, also known as on-target earnings, or on-track earnings. Different versions of commission plans ...

Why Bother Integrating Commission Software with Payroll

Commission management often happens separately from payroll. It requires a different set of numbers and stats to calculate the correct earnings ...
Share This