The Best Commission Formulas for Commercial Real Estate Agents Today

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There is always plenty of discussion around the industry as to how much commission should be paid to an agent working within a brokerage.  There are also many variations of what is paid and why that is so.

When an agent says to me that they are worth more in commission from the deals that they do, I quickly try to imagine (and then ask) what real value they are bringing to the brokerage.  How many deals have they done?

In my view, only the best agents command the best commissions and that opinion is based and set on their ability to show results from the market.  If the results are there, then the commission should reflect that fact.

Yes, top agents command a reasonable share of the brokerage commission, but they also have to produce ongoing results to sustain that high share of commission.  Being a top agent is not a ‘walk in the park’ ; they control their market through a big focus on quality listings, and controlled stock.

All of this goes back to a key question that I ask when employing a new agent.  Here it is:

‘What deals have you done in the last 12 months, and what percentage of those were exclusive listings?’

Those numbers will tell me a lot.  I would expect the agent to give me numbers that are solid and accurate.  From that I would want to know:

  • The types of properties sold and why
  • Time on market averages
  • Marketing strategies used
  • The numbers of properties by value that have been sold
  • The commission value of the average deal
  • The frequency of the deals
  • The quality of the listings converted
  • The quality of the clients in the agents database
  • The size of the agents database

From these numbers I can get a real impression of just what value the agent may be to the brokerage in the next 12 months and beyond.  From that I would assess potential commissions possible (not before).

To give you an idea of the types of commission structures and methods out there in the industry here are some of the most common ones:

  • Commission only – this is usually the level held consistently by top agents that have a strong and established pipeline of deals, clients, and commissions.  They can prove that they have done a good percentage of the deals locally and that they dominate their market.  In commission only employment arrangements between an agent and a broker, the commissions paid to an individual agent are usually between 55% and 80% of the total commission.  The balance of commission still goes to the brokerage in reimbursing desk fees, marketing, and administrative support.  Now before you get too excited here, these numbers are for top agents; those in the top 10% of the market.  They are not average people in any way.  They are the ‘best of the best’.
  • Base salary plus commission percentage on a sliding scale – the base salary is set and not ‘reimbursed’ from commissions, however the agent has to perform in commissions and deals very soon otherwise they are a drain on operational costs.  Base salaries are usually between $75,000 and $100,000.  The higher the base salary, the lower the commission percentage paid.  Commission percentages here are usually between 25% and 45%.  This salary based system is usually found in the bigger established CBD brokerages where the deals are specialized and larger (sometimes very large) but less frequent.  If for example you specialized in ‘Shopping Center Sales’, I would expect this package to be useful.
  • Retainer plus commission percentage on a sliding scale – the intention here is that the ‘retainer’ is paid back to the brokerage from commissions settled.  The retainer is usually a low base of say $40,000; note that in some parts of the industry, the retainer is a fixed amount and has to be paid as part of industry regulations applying to employment.  This retainer based system is used in most general and average sized brokerages in towns and suburbs.

So what commission and salary structure is best?  I answer the question this way.  If you are new to the industry then you will need some money (salary or retainer) to survive whilst you build your listings, client base, and commissions.  Those things take time.  If you work really hard and with a focus on growing your business fast in a market that can give you opportunity, then you will move up the chain of income based on your results.

Let’s look at the ‘sliding scale’ concept.  Focus on how your commissions can improve when you bring in the commissions to your brokerage.  Over a 12 month period, what do you expect to bring in by way of new business and how will that be spread?  Are your expectations realistic?  What’s your sales plan?  From those questions it is simply a matter of determining just how you can get quality listings and close on more deals.  You control those things (not your brokerage).

Top agents can earn at a personal level well over $500,000 a year in gross income from their commission splits.  That fact will be set and based on their market location, property speciality, market size, deal size averages, deal frequency, personal experience, and on the job commitment.  Those top agents are special people; they work really hard to achieve those numbers.  They know that when they ‘perform’ the income and results are there.  It is a good rule to live by in our industry; but it takes real focus and consistent action.

So let’s go back to the ‘average agents’ that are starting up in the industry or have been working in it for up to 2 years (beyond 2 years I would expect an average agent to be ‘beyond average’ and achieving).  Most brokerages will offer a sliding scale of commission based on achieved and settled deals (that is a good idea).  The ‘commission clock’ is reset every 12 months so the bases go back to lower levels in January or July depending on your business year.

Support and Administration

If you are keen to improve your commission share of the deals that are done, consider first the amount of support that you get from your brokerage.  Administrative support doesn’t come cheap and on that basis your brokerage is entitled to a fair share of the commission action to cover operational issues and marketing.

I would rather work for a brokerage with good administrative support than one with none or very little.  The amount of administration that we have to do as agents can be like a ‘boat anchor’ holding you back.  Get out into the market and let others do the paperwork that is not deal related.

Commission Splits

Forgetting about the ‘commission only’ agents for the moment, you will find that commission splits for ‘average agents’ are between 35% and 50% back to the agent.  The brokerage keeps the rest to reimburse back the operational costs to the business plus some profit.   Commission splits are largely based on agent experience, knowledge, and lastly (and most importantly) results.  Those percentages will improve as the agent improves with results and commissions.

If you are worried about the fairness your commission splits and income, take a look at the commissions that you did actually bring in to the brokerage in the last 12 months.  If the results are only ‘average’, then you cannot ask for a larger percentage of the ‘commission pie’.  If your results are improving, then look to your ‘sliding scale’ of commissions based on performance.  How can you improve at a personal level?  How can you move up the ‘sliding scale’?

We are about to start a new period of twelve months in the property industry.  Consider all of these issues based on where you want to go personally in performance, and how you are going to achieve those results.

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