How Do Real Estate Brokers Get Paid?
You have just moved to Salt Lake City and purchased a new home. You worked with a listing agent who works for a local real estate broker. You know how your agent gets paid, but how about the broker? That depends on the arrangement between broker and agent.
For both brokers and agents, real estate is an all-commission business. However, agents and brokers tend to work out their own arrangements. This post will discuss some of those arrangements, based on information provided by CityHome Collective in Salt Lake City, Utah. City Home Collective is a real estate brokerage and design firm with a large staff of experienced professionals.
The Differences Between Them
The first thing to understand is that brokers and agents are not the same thing. A real estate broker is a licensed professional who owns and operates a licensed brokerage. To become a broker, a person must complete training that goes beyond the training an agent receives.
An agent is a person who represents buyers and sellers in real estate transactions. Agents in most states cannot work independently. They must work as contractors under a licensed broker. This explains why brokers and agents have to work out payment arrangements between them.
Three Common Pay Structures
A general rule states that sellers pay a 6% commission on the final sale price of their properties. That commission is usually split 50-50 between buyer and seller agents. However, nearly everything in real estate is negotiable. Sellers can negotiate lower commission payments while the two agents can ultimately decide among themselves how to split commission.
Also note that real estate brokers are paid based on what their agents earn. In other words, they take something off the top of their agents’ commission payments. There are three broker pay structures common to the industry:
1. Straight Split
A straight split arrangement is fairly simple to understand. A typical arrangement would have the agent keeping 90% of his or her commission and funneling the remaining 10% to the broker. Commission splits for brand-new agents might be closer to 80-20 or 70-30. In such cases, agents generally keep more of their commission the longer they work for a broker.
2. Tiered Split
A tiered split arrangement is one that changes over the course of a year. It might start out at 70-30 and gradually adjusts to 90-10 by the fourth quarter. These types of arrangements tend to reset every year. Brokers will often use a tiered split arrangement to motivate agents to sell more. The more they sell, the less commission they lose to the broker.
3. Flat Fee
The third and final broker pay structure is based on a flat fee. In other words, the broker doesn’t take any commission from agents. Rather, he charges a flat fee to cover his own expenses and put a little profit in his pocket. Flat fees are based on the services provided.
Such arrangements often have brokers charging rent for use of office space. They might also charge for utilities, internet access, and marketing. This sort of arrangement benefits brokers by ensuring they get paid regardless of whether or not their agents perform satisfactorily.
Regardless of the pay structure brokers and agents agreed to, the person who ultimately pays both is the buyer. It is simple economics. Sellers build commission into their list prices, just like business owners build their expenses into what they charge for products and services. Who pays those expenses? Buyers. It is no different in real estate. The price you pay for a house covers all of the seller’s expenses – including commission.