Investing Assets & Markets Real Estate Investing How a Commission Split Works in Real Estate By Jim Kimmons Jim Kimmons Jim Kimmons is a real estate broker and author of multiple books on the topic. He has written hundreds of articles about how real estate works and how to use it as an investment and small business. learn about our editorial policies Updated on September 6, 2022 In This Article View All In This Article The Broker-Agent Relationship and Commission Split Arrangement Commission Fee Structure Mechanics Real Estate Compensation Models Photo: Echo / Getty Images The majority of home shoppers use a real estate agent or broker to buy a home, and they split a commission for each sale. According to the National Association of Realtors, some 87% of homebuyers use either an agent or broker in their transaction. Real estate agents make about $55,300 on average in their first year. Agents with between one and three years on the job made roughly $82,100. That number reaches nearly $150,000 once agents get between four and 10 years of experience. Aside from the number of completed transactions, pay depends on the amount of commission paid to the real estate brokerage and the commission split arrangement with the realtor's sponsoring broker. Key Takeaways Agents must collect their commission from the broker rather than from the buyer or seller.Brokers on either side of the transaction split the commission, and then each broker splits that commission with any of their agents involved in the deal.There are a variety of ways a broker might choose to split commissions, and it's up to the broker to decide how (or if) they split it. The Broker-Agent Relationship and Commission Split Arrangement Both agents and brokers hold state-issued real estate licenses. Agents must work under a broker, who serves as their sponsor. Agents cannot work independently, and they cannot be paid any fee or commission directly by a buyer or seller. Brokers, on the other hand, can be involved in the buy or sell transactions, or hire agents to do the work instead. All commissions get paid to the broker, who then splits the money with any involved agents. If the broker works for a brokerage, they must pay a commission split to the brokerage as well. Commission Fee Structure Mechanics Though the accepted broker and agent method in a brokerage consists of sharing a transaction commission, it really operates more like a multi-level structure. Note Commissions are typically split twice, once between brokers and once between a broker and their agent. In a traditional real estate business, a seller would contract with an agent or broker to have their property listed for a set percentage of the selling price. The agent is sponsored by a broker who works for a listing brokerage, which lists the property in the Multiple Listing Service (MLS). The brokerage offers to share its sales commission with any MLS broker member who brings a buyer that completes the purchase. That's split #1. Unless the broker in each of these companies is personally involved in the transaction, any involved agents would also be compensated. Per their written independent contractor agreement, each of the brokers, for the buyer and seller, would then split their portion of the commission with the buyer and seller agents as split #2. Real Estate Compensation Models Real estate agents and brokers can do business in pretty much any way they want as long as they follow their state laws for compensation. There is more than one way to get the job done, and they are intertwined with how they charge the customer for the work they do. Traditional Commission Sharing Model Under a basic commission model, the listing client is charged a commission, perhaps between 4% and 8%. The listing broker member of the MLS has agreed to share that commission, usually at a 50/50 split with any other broker or agent who brings a buyer and closes. The seller is paying all commissions on the settlement statement. However, buyers should know that it is factored into the price, so they are paying as well. The broker and their agent then split their split again based on the independent contractor agreement between them. Note Agents may start with a 50/50 split in return for specified broker services and marketing. As they build their business, brokers often raise the commission percentage going to the agent to keep them from leaving for a better deal. The Office Fee Model Under this model, the agent receives 100% of the commission amount that comes to the broker. The agent pays an office fee for their space, certain office support functions, equipment, etc. The agent is responsible for their marketing and other costs of operation. Note This model changed after a while, with the percentage reduced to the agent, though it's still significantly higher than the traditional model. The Salaried Agent Model Redfin, a large and growing regional franchise, pays its agents a salary and provides some benefits normally associated with other salaried careers. This is in conjunction with giving a rebate to the customer/client for part of the commissions received by the brokerage. The Consultant Model This one has had a tough time catching on, and it isn't allowed in some states. Also, it does create some issues with the independent contractor model, so it seems to work best for single broker business models. Basically, like an attorney or accountant, the real estate professional is paid by the hour for their services. Some also flat rate certain services, charging by the hour for extra services outside the package that's priced at the flat rate. Part of the reason this method hasn't caught on is that buyers see paying the agent as a negative. They aren't understanding that they are paying anyway, as the seller factors the commission into their selling price. Some agents offer to bill through the process and then rebate to the buyer all money over that received as the commission. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. National Association of Realtors. "Highlights From the Profile of Home Buyers and Sellers." McKissock Learning. "Study: Real Estate Income Doubles After Your First Year (So Hang in There)." Bureau of Labor Statistics. "Real Estate Brokers and Sales Agents: What Real Estate Brokers and Sales Agents Do." Redfin. "How Are Redfin Agents Paid?"