In my 26-year career in real estate, I have had the unique opportunity to not only run one of the most successful brokerages in the nation, but to build a brokerage from scratch and franchise it. One of the biggest problems we faced was deciding which splits and fees to offer to attract the types of agents we wanted while still remaining profitable.
Over the years, I learned an important lesson about agent compensation: How you pay your agents can be more important than how much you pay your agents. Why? Because it doesn’t matter what your splits and fees are if you have no agents.
To help you avoid some of the mistakes we made, today I am going to go over the most common splits, monthly fees, and additional services that successful brokerages are using to attract top agents in 2021. Then I’ll discuss some ways to increase revenue with additional fees and go over some common mistakes new broker owners make with compensation plans.
If you need more help creating your brokerage’s compensation plan or financial model, you can reach out to me at my consulting company 16 Strategies.
The Numbers Game: Transaction Fee Models
In part due to the advancements in cloud-based real estate software, the transaction fee model has exploded over the last few years. This model provides the basic real estate brokerage services for a very low monthly fee plus a “transaction fee” upon a successful sale. All other services such as marketing, training, errors and omissions insurance (E&O), and so on must be purchased separately by the agent.
Most transaction fee models have a monthly fee that ranges from $35 to $75 a month depending on the additional resources the brokerage offers. These resources may include lead generation websites, a customer relationship manager (CRM), or a central office.
The transaction fees that are due when a commission is earned run between $250 and $500. A very low amount compared to a split. Like a split to a cap model, in some cases these fees can cap for top-producing agents that reach certain production milestones.
Is the Transaction Fee Model Right for Your Brokerage?
Although I have never worked for or owned a transaction fee model brokerage, I have coached broker owners who have this brokerage model. I have come to see that this business model can be very profitable. That is … once you are over 200 agents!
Due to the low monthly fee and small commission share, the real challenge with this model is growing your agent count fast enough to get to the break-even point before you run out of working capital.
The way most transaction fee models have solved remaining profitable is by going completely virtual and requiring all the agents to work remotely. In the past, this has been a difficult sell to seasoned agents who are used to going to an office each day, but COVID may have changed that perspective.
If you are starting a brick-and-mortar brokerage and you want less risk of losing money for months, then consider the next compensation models.
Share the Wealth: Split Compensation Models
Even though this model has been losing ground to some of the other models, the split commission model is still the most common model in the real estate industry. This model started back in the 1950s, when the real estate brokerage’s role was to attract customers through their marketing and advertising. Then the agent’s role was to serve the customers by listing or selling them a home. The commissions earned were then “split” between the brokerage and the agent.
Most split compensation models have a very low monthly fee with an agreement for the agent to pay a larger portion of their commissions to the brokerage when earned. There are three types of split compensation models: the traditional split, the graduated split, and the split to a cap. Let’s take a look at all three and which kinds of agents they attract.
The Traditional Split Agent Compensation Model
Traditional split models (split with no cap) are common with small boutique brokerages or brokerages that provide leads to their agents. If I was to open another boutique-style brokerage today, I would offer a traditional split and provide all-inclusive services at no additional cost to the agent.
I may even pay for all of the additional fees that agents usually pay, such as marketing costs, MLS, E&O insurance, and National Association of Realtors (NAR) dues in exchange for a larger share of the commission.
Is the Traditional Split Model Right for Your Brokerage?
This compensation model is ideal for you if you are providing leads or full service to your agents. This model is also ideal if you want a smaller brokerage of less than 10 agents. This is because it is easier to remain profitable when your splits are higher. Another benefit is that you won’t have to deal with difficult agent billing.
The challenge with a traditional split will be retaining agents when they become successful and the larger split becomes a burden on their finances. If you want a compensation model that will help retain higher-producing agents, consider the next split option.
The Graduated Split Agent Compensation Model
The graduated split compensation model is similar to the traditional split but allows agents to earn more of the commission when they reach certain milestones. In this example, the agent begins their fiscal year at a 70/30 split, but when the agent reaches $60,000 in gross commissions earned (GCI), they shift to an 80/20 split. Then when they reach the next milestone of $100,000 GCI, they earn the 90/10 split for the remainder of their fiscal cycle.
Upon their anniversary, the agents split will reset back to the 70/30, or if they can show that they are likely to produce the same or more GCI the next year, you may choose to restart them at the higher level of 80/20. This gives the agent motivation to produce and increases retention with your top producers.
Is the Graduated Split Model Right for Your Brokerage?
The graduated split model can be a solution for retention of top producers that the previous business model is challenged with. This model will also increase your ability to recruit and retain more agents and allow your brokerage to grow well beyond 10 agents.
The Split to a Cap Agent Compensation Model
Some brokerages also offer a split to a “cap.” The term cap refers to a maximum the agent will pay within the agent’s fiscal year. An example of this would be a 70/30 split to a cap of $30,000. This plan allows the agent to pay 30% of commissions earned until the 30% of their commissions paid reaches the $30,000 cap.
Once the cap is reached, the agent will receive 100% of their commissions for the remainder of their fiscal year, but agents don’t traditionally have to guarantee or owe the brokerage the difference if they don’t reach the $30,000 cap.
The split to a cap model has become popular because it can support multiple agent types. Keller Williams, Coldwell Banker, and eXp all offer the “split to a cap” model because it allows new agents to start with lower monthly expenses, but it also limits the costs that they will pay the brokerage when they later become a top producer.
Is the Split to a Cap Model Right for Your Brokerage?
You may think that this is the perfect model to follow, but the challenge that you will face if you start with this model is maintaining month-over-month profitability while your agent count is below 40 agents.
This is because your higher-producing agents will cap in just a few months. This will expose you to supporting them without receiving any commission revenue from them. Therefore, I suggest starting with a traditional split or graduated split model and getting to 40-plus agents before considering a cap.
Monthly Fee Compensation Models
The monthly fee model is similar to a landlord and tenant relationship. The brokerage (landlord) provides all the necessary services the agent needs to be successful with their real estate career in exchange for a fixed monthly fee. The agent (tenant) pays for additional features and services like training, marketing, private office, and transaction coordination separately.
Like a tenant, each agent signs an agreement that they will pay a monthly fee for the brokerage services and in exchange, they will receive 100% of the commission check when it is earned. This model allows agents to control their costs and have more predictable monthly expenses.
Overall, the monthly fee models charge less than a comparable company’s split to a cap model. For example, if a comparable brokerage has a cap of $20,000, your brokerage monthly fee may be $1,200 a month ($1,200 x 12 = $14,400) for similar services. This is because your revenue is essentially guaranteed, and not dependent upon your agents selling a home.
Is the Monthly Fee Model Right for Your Brokerage?
The benefit of the monthly fee model is once you grow your brokerage to the optimal size (10 to 30 agents), you will have more predictable revenue than the split models. This is because your income is not reliant on the market fluctuations, seasons, or the sales of your agents.
The challenge you will face with the monthly fee model is attracting new, newer, and low-producing agents into your brokerage. RE/MAX was faced with this in the early 2000s, when they discovered that the average age of a RE/MAX agent was much older than the industry’s average.
They feared that if they didn’t begin attracting newer agents, they would simply “age out” as their agents retire. RE/MAX solved this by offering the options of both splits to accommodate newer agents and a fixed monthly fee for the mid-level and top producers.
How to Increase Revenue With Additional Fees
Due to the competitive nature of real estate brokerage, most brokerages have found it difficult to increase their brokerage fees to keep up with inflation. For example, 25 years ago, back when I was a RE/MAX agent, my brokerage charged a monthly fee of $1,100 a month. Here in Colorado in the 1990s, Keller Williams set their cap at $18,000. Due to technology and new competition, neither company has raised their brokerage fees in the past 20-plus years!
To beat inflation, brokerages have had to increase their agent count as well as add fees and additional services to find creative ways to generate more revenue. Many of the new services and fees are commonplace for many agents and are a simple way for you to mirror them to create additional revenue for your brokerage.
Additional Fees & Services to Increase Revenue
|Agent Transaction Fee||Transaction fee charged to the agent at closing||$100-$250|
|Buyer Transaction Fee||Transaction fee charged to the buyer at closing||$200-$350|
|Listing Transaction Fee||Transaction fee charged to the seller at closing||$200-$350|
|Personal Transaction Fee||Fee for agents on personal transactions, when the agent doesn’t take a commission or pay a split||$300-$500|
|Franchise Fee||Fee paid by agent to the franchisor||5-8% of GCI|
|Desk Fee||Fee for a reserved desk or area in the office||$50-$150|
|Office Fee||Fee for a private or shared office (includes desk)||$200-$1,000|
|Brokerage Advertising Fee||Monthly fee paid to support marketing the brokerage||$25/month|
|Annual Fees||Annual renewal fee||$300-$1,100|
|Setup Fees||Fee charged to the agent when they join (includes the first set of business cards, website setup, and announcement)||$150-$300|
|Errors and Omissions Insurance Fees||Fee paid monthly, quarterly, annually, or on each transaction to cover the cost of the E&O (this is usually at a profit)||$25-$60/month or $150/transaction|
|Transaction Coordination||Contract-to-closing file management (optional)||$300-$600/transaction|
|Showing Service Fee||Fee charged monthly or per listing||$20/month or $75/listing|
|Signs and Lockboxes||Sign rental and installation (optional)||$75-$150/listing|
|Open House Signs||Rented and/or installed (optional)||$50-$100/listing|
|Listing Marketing Fee||Listing marketing packages (optional)||$300-$600/listing|
|Individual Property Website||Individual Property website (optional)||$50-$100/listing|
|Listing Presentations||Professional quality printed listing presentation (optional)||$25-$50/listing|
|Just Listed/Just Sold Cards||100 cards printed and mailed, includes postage (optional)||$100-$200/listing|
|Listing Photography||Professional listing photography, drone photography (optional)||$150-$400/listing|
|New Agent Training||Typically paid with an increased split (includes materials)||10-20% additional split|
|Advanced Training||Annual onsite or offsite training events||$50-$500|
|Mentoring||Typically paid with an increased split||10% additional split|
|Coaching||Coaching fee is split between coach and brokerage||$500-$100/month|
|Continuing Education||Fee includes the cost of instructor, location, and snack||$20/CE credit hour|
Common Mistakes to Avoid When Selecting a Compensation Model
There are three common mistakes that are made when selecting your compensation plan and building your brokerage’s financial model. They are as follows:
1. Copying Your Current Brokerage
Most real estate agents who decide to start a new brokerage firm will do what I did: take the business model from their former brokerage and try to improve upon it. The mistake you will make by doing this is overlooking the other compensation models that may be a better fit for you as a broker owner and the types of agents you are wanting to attract to your new brokerage.
2. Offering a Compensation Model to Please All Agents
The difficulty with recruiting real estate agents is that they have different needs at different phases throughout their career. Newer agents are concerned with training and demand a lot of one-on-one attention. Mid-level agents look for a community and reasonable fees, and top producers and teams need to be able to grow without their expenses growing at a rate faster than revenue.
You may try to come up with a compensation model that serves all agent types no matter what phase of business they are in. This is a grave mistake. When you are incubating your baby brokerage, unless you have millions of dollars to invest, you likely will not have the resources to support all types of agent from the get-go.
I suggest building your brokerage around one agent type first, and then you can add in more services and compensation plans to attract a larger variety of agents once you have reached profitability.
3. Overestimating Agent Production
When building your business plan’s financial model, don’t make the overestimation that all of your agents will produce big numbers. This is a common mistake in brokerage business planning.
In the chart above, we looked at the data of 6,000 real estate agents in the geographic area around our brokerage in Colorado. We discovered that nearly 35% did less than one transaction, and the more shocking number is that 85% of all the agents in the area did less than six transactions each year.
You should do this research for your brokerage too. Once you have this data for your area, you can create your financial models with more accurate assumptions. If you need help with this, BrokerMetrics provides market and agent analysis software that can do this in a snap!
Your Compensation Model Helps Determine Your Business Plan
Ultimately, the type of agents you recruit and the amount you choose to charge them will determine the agent count your brokerage will need to reach in order to remain profitable. The type of agent you want to recruit will also determine the services your brokerage will need to provide to attract and retain those agents.
Once you have determined the compensation model, type of agent you want to recruit, agent count, and services, you can determine the overall costs to run that brokerage model. If you find—and you will—that the expenses are higher than you anticipated, you will go back through your plan and adjust your agent count, splits, and fees until you have a profitable business plan supporting the type of agents you want to work with.
That is why determining your compensation model is the first step to building a successful real estate brokerage! If you need more help creating your brokerage financial model, you can reach to me at my consulting company 16 Strategies.
Over to You
Do you have a compensation model that we overlooked? Let us know in the comments or join us on our Facebook Mastermind Group here.
Further Reading for Aspiring Broker Owners
If you are building or considering starting your own real estate brokerage, check out our growing list of industry insider articles on starting, running, and growing your brokerage.