How Do You Calculate a Real Estate Commission Check?
For many agents, the commission they get, is the right commission. They don’t check or calculate anything.
They’ll go out and do all the hard work. Their broker will provide support where needed. Once the deal is done and the house is sold, all that needs to happen is for the commission to be paid out.
This is where it often goes wrong. Agents don’t check their commission and brokers don’t check their split.
This harms both the agent’s and the broker’s business. So it’s important for everyone involved in a transaction to make sure the commission check is calculated and checked accurately every time. But, even the most seasoned agents don’t always take this to heart. They just assume everything’s OK and they can trust the person writing the check.
But can they really?
On average, 7 out of 10 commission checks are incorrect… across a brokerage with dozens or even hundreds of transactions per week, this adds up big time.
So how is the commission calculated? Well, it really depends on the brokerage. Agents should get a deep understanding of their brokerage model, so they know what to expect.
The commission check calculation involves splits, caps, royalties, wraps, flat fees, and so on. In addition, you may have a referral fee, a team member split, an admin fee, a transaction coordination fee, an E&O fee, etc.
Let’s walk through a few real-life example. If an agent sold a house for $450,000 at 3% commission, would you know the exact amount of the commission check?
Most major franchises will have their basic split and a royalty percentage. We’ll start there!
Using the above scenario, you're looking at $13,500 GCI (Gross Commission Income). Let's assume you have a 30% split with your office and a 6% royalty/admin fee with your company. That would be a company split of $4,050 and a royalty split of $810. In most cases, both of those percentages are calculated against the GCI ($13,500).
Now, your commission as an agent is $8,640. Your office may have an admin fee, you may have paid a transaction coordinator.
Don’t forget about taxes and business expenses
For any budding real estate agent, seeing a profit of more than $8,000 is a huge slap on the shoulder and they’ll be fired up for the next sale.
Unfortunately, it’s quite common for agents to -- conveniently -- forget that they’ve got fees and taxes to pay. Often these are payable as a yearly lump sum, and many agents don’t stash away enough cash to deal with this.
Now I'm not here to be Negative Nelly. The sole purpose of me writing this blog is to make sure that you are in business next year, and I’m not only talking to the new agents. This is a lesson some veterans should take to heart as well.
Let's take the same scenario above and add a few more complexities to the equation.
Let’s go back to our calculation. If you sold a house for $450,000 at 3% commission, your GCI is $13,500. In addition to your splits, royalty, admin fee and TC fee, what if you had a buyer's agent or showing specialist? Or you paid out a referral fee?
Ready? If you paid a 25% referral fee, that equals $3,375 which comes right off the GCI. Now you have $10,125 remaining. If you have a buyer's agent at a 50% split, you would payout $5,062.50 to them. Then you still have your office split and company royalty, which brings the new total to $3,240. And, you may still have to pay your admin fee, TC fee, and let's not forget about taxes and business expenses.
Taxes and business expenses are location-specific, but can easily amount to 30% or more. So, if you’re an agent that means you might end up with $2,268 in your pocket for this individual sale.
Here’s the full calculation again:
After referral fee
After buyer’s agent split
After office split and company royalty
After taxes and business expenses
Use automation to calculate all your commissions
It’s important to make sure this calculation is done correctly. It’s quite common for either the broker or agent to lose out due to incorrect calculations. This doesn’t happen because people have bad intentions. People just don’t have time… or maybe they were tired when they made the calculation.
Human error lurks around the corner at all times -- you should always be prepared to double check commission calculations. If you don’t, you’ll almost certainly be losing out on tens of thousands of dollars every year.
So make sure your agents understand your brokerage model and verify every commission check to make sure it’s accurate. It’s your and your agents’ job to verify that you’re getting paid correctly.
Depending on the size of your brokerage, you may have hundreds, if not thousands of transactions per month. Mistakes are bound to happen at some point. That’s why it’s a good idea to automate commission calculations. It doesn’t really matter whether you use a spreadsheet or a tailor-made tool. Automation will make the process faster and more accurate. You’ll be surprised at how many commission checks are wrong!
So start checking commission calculations, ideally using an automated system, so you catch all mistakes. You’ll see incorrect commission go down, as your commission grows over time.