Ever wondered how real estate agents get paid? Well, there are quite a few different models real estate companies generally offer. We’re going to talk about the most common real estate commission models in the US, and explore their advantages and disadvantages.
It’s important to know that new real estate commission models can change and each one caters to a different clientele. So stay informed and be sure to ask the company you’re working with, about which model they operate as.
Traditional Commission
Probably the most common payment model in the real estate industry, a traditional commission model is one that offers real estate brokers an agreed-upon percentage of the property’s selling price.
Under this compensation model, real estate brokers and agents are remunerated with a predetermined percentage of the property’s final selling price. Typically falling within the range of 5% to 6%, though variations do exist, this commission structure serves as the customary method of agent compensation within the industry.
Typically, compensation is divided evenly between the listing agent and the buyer’s agent broker, resulting in a 50-50 split. While this distribution is widely prevalent, variations are not uncommon. Following this split, the buyer’s agent receives a portion of the share designated for their broker, while the listing agent covers the payment to the seller’s agent from their share.
In the traditional commission model, it’s typically the seller who covers the fee. However, since sellers commonly factor the commission fee into the property’s asking price, it’s fair to say that the buyer contributes to it, albeit indirectly.
Advantages
- The traditional commission model is a well-established model that has been around since as early as 1920, making it a widely understood and accepted method.
- Because agents’ earnings are directly tied to the sales price, agents have the incentive to negotiate the most favorable deal for the seller.
- Since the commission is only due upon the successful sale of the property, this model typically requires no up-front payment.
- The buyer typically doesn’t have to make any payments prior to the National Association of Realtors Settlement.
Disadvantages
- There isn’t a lot of transparency on how much exactly the agents receive.
- This model can be significantly costly, especially on higher-priced properties.
- This model may incentivize agents to prioritize properties with higher commission potential over those that may be a better fit for their clients’ needs.
Note: It is important to note that, following the 2024 National Association of Realtors Settlement, steps are being taken to ensure that the traditional commission model is more transparent. Starting August 2024, listing agents and real estate brokers will no longer be allowed to communicate any sort of compensation on properties posted on their Multiple Listing Services (MSL). Instead, the desired compensation (or commission) would be negotiated between the buyer, seller, and their respective agents.
Flat Fee
In contrast to the commission model, where brokers receive a percentage of the property’s selling price, the flat fee model operates independently of the property’s value. Instead, this model is solely based on the agent’s charge for their service.
Under the flat fee model, agents are compensated with a fixed amount for each closed deal. In this arrangement, an agent or broker establishes a set fee for their services, which the client agrees to pay upon engagement. This model provides predictability in terms of costs. Since clients know upfront what they will be charged regardless of the property’s sale price, they can better plan their finances and budget for the transaction. This upfront transparency helps eliminate any surprises or uncertainties about how much the seller is really going to gain from a successful sale.
Advantages
- This model helps clients save in cost, especially on more expensive property.
- It offers pricing transparency and eliminates uncertainty.
- This model doesn’t incentivize agents to choose one property over the other so as to make some more money. As such, agents are more likely to provide unbiased advice and assistance to clients.
Disadvantages
- Although this model can help sellers with higher-priced properties save money, it might be more expensive for sellers with low-priced properties.
- Since the agent gets paid a fixed amount regardless of the selling price, this may lead to a lack of motivation to negotiate aggressively and get a better deal.
Pay for Service
The Pay for Service model, also known as the Fee-for-Service (FFS) model, is a similar compensation model to the Flat Fee model in that the agent provides clients with a set price for their services. Unlike Flat Fee where the agent offers a fixed price for hiring them, the Pay for Service model breaks down the agent’s services and assigns a price to each service they offer. This model is also often called an “a la carte” agreement.
In this model, an agent lists out each service they think they’d have to render in the cost of the job and charges each of these services instead of providing a flat fee for the job as a whole. This is a model best suited for projects where the client needs professional help from a real estate agent but doesn’t need their full service.
Advantages
- This model is also very transparent and leaves no room for payment uncertainty.
- This model gives clients the most control over how much they spend. Instead of paying a flat fee, a client can choose to pay for only a select number of services and save the rest.
- The flexibility of this model makes it a great choice for use on projects where some services are needed and not others.
Disadvantages
- Choosing what services to choose and what to drop can often be a chore.
- Clients run the risk of underestimating the service needs of a project and having to spend more than they initially anticipated.
- Agents run the risk of failing to anticipate certain additional expenses leading to budget issues.
Commission Rebate
A commission rebate is a model very similar to the traditional commission model. In this model, a percentage of the commission earned by the real estate brokers on the sale of a property is returned to the client. This method is typically offered by real estate brokers who are willing to share a portion of their commission with their clients as an incentive to keep doing business with them. The percentage of the commission that would be returned to the client would usually vary depending on the broker or agent.
Advantages
- This model helps the client save (or earn) a little more on a successful purchase (or sale).
- This model can help align the interests of both the client and the broker; the more commission the broker earns, the more rebate the client gets.
Disadvantages
- This is not a very popular model. As such, many agents and clients might not be open to it.
- Some clients may perceive this model as indicative of low-quality service or lack of expertise.
Combination Models
There are various combination models that make use of a mix of two or more of the models above. One good example is a combination of commission and flat fee. In this method, agents are paid an initial flat fee, along with a commission on the completion of the job.
Another example is a combination of percentage-based commission and performance-based incentives. Under this model, agents receive a base commission percentage for their services, similar to the traditional commission model. However, they also receive additional fixed incentives based on specific prearranged performance metrics they are able to achieve. These metrics could include achieving a quick sale, securing a certain sale price or price range, or exceeding certain sales targets. If the agent is able to meet any of these metrics, they get paid the prearranged amount associated with said metric.
Advantages
This is a highly flexible model, one that can be customized to fit the specific needs of both the broker (or agent) and the client.
Disadvantages
- This model can be complex and stressful to implement and follow.
- Each individual combination model comes with its own unique problems you’d need to be aware of.
Which Model Best Suits You
From the little information provided above about the five compensation models, it is clear that each one has its advantages and its disadvantages. When it comes to choosing which is best for you, however, the answer falls to the client and their unique needs.
Take for example if you are looking to employ a real estate broker to help you sell a low-priced property, a traditional commission model would probably be a good choice since that would mean you are paying less. For a high-priced property, however, you might be better off choosing the flat fee model.
If you are looking to employ just a select number of services from an agent but not the full set of services, a pay-for-service model is probably best. If you are looking for a more customizable model though, a combination model might just be your best choice.