When you decide to build leverage into your business with administrative staff, outside and inside sales agents, marketing and technology, you have to have a model to follow. This is the first, and almost the most important, decision you’ll make—especially when you’re starting out. Agent compensation models are the number one thing that is wrong with most real estate teams. Here are the key things to consider when it comes to agent compensation and your gross margin.
Don't Forget About Growth
When deciding how to compensate agents, don’t forget your ultimate goal is to step out of your business, and that means you have to expand. If you build your agent compensation model with growth in mind, the process will be much easier. When you’re just starting out, and you don’t have much production, low splits may not even seem possible. The right compensation model, and agents who are willing to work within your value proposition, are what let you scale appropriately. Most brokers don’t have very good profit margins, and you don’t want to fall into that category.
What Gross Margin Do You Need?
A good target is a buyer business gross margin of 55-60% and a listing business gross margin of 75-80%. You’re keeping a fair amount in those scenarios, with the rest paid to agents. Your overall gross margin will then be 65-70%. To achieve this, review your financial information every month with an eye out for anything that doesn’t look right. Set a time for your review, and commit to always keep that appointment with yourself.
Distinguishing Between Pay and Percentage
Whatever you think your buyer agents are worth is what you should design your splits around. If you’re providing the means and opportunity for your agents, they can make the kind of money they want, even if you’re paying lower splits. This approach is not intended to pay agents less, but rather a lower percentage that tightens up your model.