Commission splits. In some real estate circles, mentioning this topic is enough to make you a workplace pariah who has a highly contagious, terminal illness. How a real estate business sets up commission splits is an admittedly hot topic most agents and brokers feel strongly about. But it doesn’t have to be.
Splitting commissions is a reality of the real estate business, because a successful agency supports its team by providing marketing, administrative assistance and technological support. Splitting commissions is how you — as the business owner — pay for those services. They are an unavoidable part of your compensation structure.
Building a team with commission splits
Before you build your team, consider how you want to split commissions. Because commission splits are an essential part of your economic model that directly impacts your gross margins and ultimately, your profits.
When you start to recruit, this topic will come up. So be prepared. Commission splits are what you make them, and if you take the time to explain your business’ strategy, you'll have no problem attracting and retaining great agents.
Show potential agents your team structure, marketing pillars and critical technology to demonstrate your team’s culture and vision. Let them look at your presentation and appointment packets, as well as your tools and systems for tracking and accountability. You're clearly communicating that you have a vested interested in their success and a plan for them to achieve their goals.
If a candidate balks at the idea of splitting commissions, they may not be a good fit for your team.
Broaching a difficult subject
When commission splits come up during interviews with potential team members, turn the conversation around and make the candidate the focus. Emphasize their needs and goals, and learn what they have done to generate leads and sell homes.
Ask about what they did in top-line sales and expenses in their previous position. Don’t be surprised if they don’t know. If you need to, help them come up with some hypothetical numbers and walk them through their projected compensation using your commission calculator.
Laying out the split breakdown in black and white helps ease concerns around this challenging topic. Keep the focus on the net income potential to keep them from getting hung up on the nitty gritty of the commission split.
What are value-based commission splits?
Most agencies have 50/50 commission splits regardless of how the business was generated or how much effort the agent put into the transaction. REBS suggests a different model that we call value-based commission splits.
Value-based commission splits are just that, a commission split based on the amount of value the agent brought to the transaction. On both the buyer and seller side, we recommend categorizing agents’ transactions in the following way:
- Agent sphere of influence (agent provides the most value and gets the highest commission split)
- Team lead, agent close
- Team lead, team close
- “Gimmie” business (agent provides the least value and gets the lowest commission split)
The split breakdown for each of these is completely up to you. In Real Estate B-School, we recommend taking a flat percentage off the top of each transaction and splitting commissions from there. The value of those splits should be determined by your economic model. The goal is to have a blended average pay of 30 to 40 percent of gross commissions.
Value-based commission splits are necessary to build a business with long-term profitability. They ensure you're being compensated for the value you bring to your agents. They also create a fair compensation structure that rewards your agents for producing and incentivizes them to stay with your firm.
Conversations about splits can be difficult. But don’t let that prevent you from creating a split structure that honors your economic model. Do what you need to do to keep your gross margins high and ensure ongoing profitability. Remember, it’s not about what you make, it’s about what you keep.
Learn more about how to set up, roll out and administer the right commission splits for your business in our next live webinar!