In our previous piece we talked about how revenue comes into a brokerage firm. Now let’s talk about different ways that you, the NYC real agent, gets paid through “splits” and commissions.
You Are An Independent Contractor, or a ‘1099’
While an office manager or a receptionist in a real estate office may be a salaried employee, most real estate agents in New York City are not. Instead, your firm will probably hire you as an independent contractor — or a “1099,” which is slang for the IRS form your firm gives you to report your earnings. According to the Internal Revenue Service website, independent contractor status is a function of how much control you have to do your job, and whether the work performed is a key aspect of the business.
How the Commission Gets Split
When you get hired by your firm, you may be able to negotiate your “splits.” Splits is shorthand for the percentage of commissions that you get to keep. Let’s say there’s a $1.5M apartment, which the seller’s broker listed at a 6 percent commission. The total commission on that sale would be $90,000. If the seller’s broker is doing a 50-50 percent co-broke, that means 50 percent of the commission ($45,000) goes to the buyer’s brokerage and the other 50 percent goes to the seller’s firm.
And if you represent the buyer on this transaction, will you make the entire $45,000 buy-side commission? Probably not. It’s more likely that your firm will define $45,000 as “gross commission” and then pay you some portion based on your “split.” For example, if your split is 40 percent, the firm will pay you 40 percent of $45,000, or $18,000. If your split is 45 percent, the firm will pay you 45 percent of $45,000, or $20,250. If your split is 55 percent, you would make $24,750.
How Your Split Goes Up
Split percentages usually go up as you increase your volume of business. In other words, as you make more money for the firm, you keep a larger chunk of it. Often there’s a compensation system where agents make more money as they pass certain commission breakpoints. Many agents who become more and more successful negotiate their split every year and occasionally threaten to jump ship to another brokerage if they are not rewarded with a better split.
As a new agent, you might start at a 40 percent split, but then find that your splits increase as you do more deals. Let’s imagine that you have a split schedule where you make 40 percent of the first $50,000 in gross commissions that you bring in, but then your splits go up to 50 percent for the next $50,000. As we mentioned above, when you close that first $1.5 million deal, you’ll make $18,000. But on the next $1.5 million deal, even if you bring in the same $45,000 gross commission, you’ll make $22,000!
If you want to break down the math, you would be getting paid at two different levels: 40 percent of the remaining $5,000 that takes you up to $50,000 in gross commissions (which pencils out to be $2,000) plus 50 percent of the $40,000 after that (which pencils out to be $20,000).
While many agents and firms try to keep their split schedules under wraps, an article by E.B. Solomont of the Real Deal in 2014 revealed that three large New York City brokerages each paid splits of 65 percent to agents who brought in gross commissions over $250,000. Likewise, depending on what you negotiate with your brokerage, your split could go down if you fall under your agreed-upon amount.
Is Your Brokerage on Calendar Year or Rolling Calendar?
One important consideration with splits is how long you have to pass each breakpoint. For example, Firm A and Firm B might each increase your split percentage once you pass the breakpoint of $100,000 gross commission in a year. However, Firm A might run on a calendar year, and reset your gross commissions back to zero every Jan. 1, while Firm B might run on a 12-months-previous (also known as “12-months-rolling”) basis to calculate your gross commissions based on what you have made during the past 365 days. In our example, if it’s June and you are thinking of going to work at one of the two firms, Firm B would be a more attractive option, in terms of splits, than Firm A. Either way, your splits are going to start small.
Another consideration would be “hold period” — or how long it takes, after a deal closes, for you to receive your check. New York City-based Kian Realty, for example, mentions on its website that it has no hold period and that agents get paid the same day that a deal closes.
Giving Up the Split for More Support
There are expenses involved in running a brokerage firm. Under a traditional split system, the portion of commission that the firm keeps is used to pay operating costs such as management salaries, office rent and utilities, advertising and marketing expenses, website development and maintenance, trade association membership, licensing expenses, agent training, insurance costs and more.
Therefore, some agents prefer a brokerage firm that pays them a lower split, but provides a higher level of support in some of these categories. For example, you as an agent might think that a dominant firm’s advertising and marketing support is so strong that it will help you sell apartments.
About 100% Commission Firms
But other firms, known as 100% commission firms, cover these expenses by charging agents fees for the brokerage’s support — and then allow agents to keep the commissions that they earn. For example, for a $1.5M deal, where the commission is $45K to each brokerage firm, an agent at a 100% commission firm might keep all $45K, minus perhaps a “transaction fee” of $3,000. The fees are the rub; these firms often charge monthly fees (known as “desk fees”) for the agents to maintain their affiliations. These firms can also charge agents for their use of copiers, or business cards, or for insurance — there are as many ways to charge agents as there are brokerages.
Whether a 100% commission model is right for you will depend on the volume of business that you think that you’re likely to do. Agents who expect long fallow periods might not like the idea of having to cover a fixed expense each month.
Things to Ask a Brokerage Before You Join
Before you join a brokerage, make sure you understand how their commission works, your splits and monthly fees that you could be charged such as:
- What is the starting split?
- What will my split be after [x] revenue?
- Do I need to pay for desk use?
- Do I need to pay for my listings or photos on the website?
- Can I work part-time?
- Do I have to do floor time (i.e., answering phones in the brokerage)?
- What kind of listings system do you use?
- Do you have a subsidized group insurance plan?
- Do I have to pay for trade association memberships or will the firm pick up that cost?
As you have seen above, real estate compensation can be complex — but now that you have an understanding of the finer points, you can feel confident about finding the best compensation plan fit for you.