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How to Understand Real Estate Commissions

Posted by Jesse Garcia on June 27, 2019

As a broker, it’s important for you to have in-depth understanding of how commissions work. So much depends on it - your business longevity, your agent happiness, sales success and more.

Commission structures can be very complex, making it a less transparent part of your business. Often, brokers just don’t really know what’s going on.

Here are three things you can do to gain a better understanding of real estate commissions.


1. Understand and analyze your commission plan

Most brokers tend to have a lot of different compensation plans. They may have started out with one or two but over time compensation plans are updated and amended.

This means their compensation plans tend to be a complex web with varying commission levels and systems. So it’s worth digging through your compensation plans to really understand what is going on.

Start by making an overview of your compensation plans, thinking about:

  • How are commissions calculated?

  • Who calculates them?

  • How and when are they paid?

  • To what extent are commissions eating into your profits?

Based on this information, you can ask yourself this: “Is my commission structure achieving what I want it to? Does it further my overall business goals?”

For instance, if one of your main goals is to increase profits, your commission plan should be geared towards this goal. It should be clear what you and your agents need to achieve to increase profits and what over what time frame this should happen.

Read more: why honest brokers still make mistakes with commission checks.


2. Understand current and future market conditions

It’s important to understand how your local market works because this will affect what kind of commission you can pay out to your agents.
 
Here’s what you need to know:

 

→   Where is the market now?
 
Think about things like price level, whether it’s a buyer’s or seller’s market, economic conditions, interest rates, etc.  This should help give you an idea as to what level of commission you can pay out to your agents, whilst maintaining a profitable business.
 
→   Where it is going to be in 3 to 5 years?
 
This is where you need to keep your ear to the ground. Things you can do include reading real estate press, talking to colleagues, talking to businesses, using economic forecasts, etc..
 
This doesn’t have to be an in-depth market analysis, but should still give you a solid idea of what is likely to happen.
 
It’s important to always keep a forward looking approach to this. You need to know how your commission structure will shape your business in the future. Asking questions like these will help you here:
 
How can you make sure your agents don’t suffer too much when the market starts tanking?  How can your business reap maximum benefit from an upsurge in the market?

3. Create transparency by using systems and tools

In order to help you gain insight into your commissions - how much are you paying out, who are you paying it to, what effect does your commissions structure have on your business - tools can help.

This could be a simple spreadsheet where you track transactions and calculate commissions. For larger businesses, however, it’s better to use a tool that’s tailored to real estate brokers. The best systems help you manage everything that’s related to commissions. You’ll be able to track agent commissions, calculate commissions, approve commissions and pay them out.

Want to know more about tools? Check out our 2020 Real Estate Back Office Systems Guide.


Become a commissions expert

Do these three things and you’ll be well underway to becoming an expert on the commissions in your business. 

Why is this important? 

Having clarity on your commissions will help your agents - their livelihood depends on it and they’ll be all the more motivated when they have a clear and straightforward compensation plan to work with.

As a real estate broker, commissions play a central role in your business - use them well and they’ll help you build a hugely successful business.

Performance

Jesse Garcia

Written by Jesse Garcia