Troy Palmquist is an indie broker in California with more than a decade of experience. His regular column, which covers a range of helpful tips for agents and op-eds on industry happenings, publishes Thursdays on Inman.
This summer at Inman Connect Las Vegas, SparkTank Media Founder and CEO Jeff Lobb gave an excellent presentation on understanding compensation. In it, he talked about the questions everyone should be asking when they are looking at a new brokerage home.
Often, agents are asking the right questions, but they don’t always fully understand the answers they’re given. To make the right decisions, make sure you are familiar with the following terms and the implications they can have for your business — and your financial future.
Different real estate organizations have different ways of structuring their company and individual offices. In addition, they might treat agents differently for tax purposes or differentiate between agents and staff. Here are some of the terms you need to know.
1099 / independent contractor
A 1099 form is the earnings document that is sent to an independent contractor. If someone calls you a “1099 employee,” this is something of a contradiction because, for all intents and purposes, if you are 1099’d, you are not an employee.
An independent contractor is self-employed and therefore is generally not entitled to benefits and other perks of an employee. Also, employers don’t deduct taxes on paychecks for independent contractors, so you will need to set aside a portion of each commission check and pre-pay taxes, usually quarterly. Consult with your tax professional for your particular tax needs and schedules.
W-2 / employee
A W-2 is the earnings statement sent to employees of an organization for tax purposes. A W-2 employee is, therefore, actually an employee. This means he or she may be eligible for benefits like healthcare coverage, life insurance, retirement and other perks. It also means that you’ll be paid either hourly or based upon a yearly salary. Employers deduct income and social security taxes from the employee’s paycheck automatically during every pay cycle.
A brokerage is the office where you hang your license. It generally has an owner, who may or may not be a broker, and a managing broker who is the supervisor for the other agents and brokers within the office.
Franchise brokerages are part of a larger brand like RE/MAX, Coldwell Banker and others. The owner of the franchise pays fees both at startup and monthly to the parent company in exchange for branding, marketing and operational assistance.
An independent brokerage operates independently and keeps revenue within the company. They tend to have more independence in regards to branding, marketing and operations because they do not require adherence to the franchise model.
A team is a group of agents within a brokerage led by a managing agent or broker, called a team lead. Teams provide a benefit for newer or less experienced agents through association with a local market top producer, as well as providing experience, mentoring, and built-in branding and marketing initiatives.
Marketing and tech
Some brokerages provide a baseline of technical and marketing support for their agents. Ask what you can expect to receive when you sign on with your new brokerage.
You may be provided a CRM or customer relationship management platform to allow you to capture and nurture leads. Such a system can also help you coordinate transactions and create marketing initiatives. Ask about your rights to the data contained in the CRM and determine who would own your personal sphere and client information in the event that you separate from the company down the road.
Some brokerages provide lead generation in the form of robust online or purchased leads. They may also provide some baseline follow-up with those leads in order to optimize and streamline communications. Ask how leads are distributed among the agents in the company and how quickly they are distributed in order to ensure that they are still relevant by the time you receive them. In addition, leads provided by the brokerage can make a big difference in the commission you can expect. Find out how these leads affect your anticipated commission.
Converting leads is the process of turning a potential lead into a real, live client. Find out what tools your brokerage provides in order to help you nurture and convert leads.
Find out what you can expect to receive from your brokerage in terms of materials like business cards, signage, and promotional items. Find out if you are responsible for all of your own marketing materials and what types of restrictions they put on your ability to brand yourself independently of the brokerage as an entity.
Many brokerages say that they provide an individual website or other platforms for each of their agents, however these may simply be individual pages without much content or search engine optimization. Ask to see an example of an agent website and determine whether you will need to build your own, individual site.
If you are moving from a traditional, salaried corporate job into real estate, you will find that the compensation model is very different and can be confusing. Ensure that you thoroughly understand the following terms so that you can know what to expect from your commission checks.
There are a variety of models for brokerage fees including percentage and flat fees based on the type of transaction you are completing. For example, you may find that your broker charges a percentage of your commission on a sale or purchase, while they may charge a lower flat fee on a rental. Understand the various brokerage fees and how they impact your bottom line.
Unlike its use in much of the sales world, commission caps in real estate are the point at which you are no longer required to pay the brokerage its share of your commission split. Caps generally allow you to earn most if not all of your commission directly, without being required to pay a percentage to the brokerage. Caps may be annual or lifetime and may reset each year or be cumulative. However, you may still be liable for some specific fees on the transaction or on services provided by the brokerage.
Your commission is generally based on a percentage of the sale price of a home, agreed to and noted in your Listing or Buyer Representation Agreement. For rentals or property management, a commission may be a percentage of the annual rental, a percentage of the first month’s rent, or a percentage of the monthly rental price. It is important to understand the various ways your brokerage handles commissions and the fees that are charged on those commissions.
A desk fee is generally a flat fee charged every month and can help to defray brokerages’ operational costs, franchise fees, and other costs of doing business. Some brokers may cap desk fees so that once a certain amount in commission income is earned on the year, desk fees are no longer charged.
Errors and omissions insurance helps to cover you in the event that you make a mistake in a contract or on a transaction. Some brokers provide errors and omissions insurance to their agents, some charge an E&O premium monthly or quarterly, and some include E&O in the desk fees that they charge.
Equity stock may be offered to agents based on a variety of performance or recruitment indicators and provides partial ownership in the company. Stocks may be subject to a required period of service (called vesting) before they can be cash out or retained upon leaving the company. It is important for you to understand what affects the acquisition of equity stock at your new brokerage as well as at what point you would be considered fully vested.
Franchise fees are paid from individual brokerages to their corporate headquarters every month and can result in a greater emphasis on monthly desk fees and transaction fees.
Gross Commission Income (GCI) is the amount of commission paid on behalf of a buyer or seller at the closing of a real estate transaction. It is subject to a variety of fees at the brokerage level before the net commission is paid to the individual agent.
Production refers to the level of productivity of an individual real estate agent or team. It can involve any of the following:
- Number of leads generated
- Number of buyers signed
- Number of listings represented
- Number of transactions closed
- Number of properties managed
- Number of rental contracts completed
- Recruitment of new agents
You may encounter brokerages that base some or all of your commission split, fees, and other required expenses on some aspect of production. Is important to understand what specifically they are referring to when they use this term and how it affects your income.
Some real estate companies provide profit sharing incentives to individual agents and brokerage employees. Profit sharing incentives may be based on a variety of production factors or income levels so it is important to understand what is required in order to optimize this benefit.
Revenue sharing is based on a percentage of a company’s earnings without regard for its expenses. Like profit-sharing, you’ll find a variety of models for compensation so it is important to understand what is required of you in order to participate in revenue sharing.
A commission split is the percentage ratio earned by the brokerage versus that earned by the individual agent on each commission. While many brokerages may have favorable commission splits, they may implement a number of additional charges and fees that result in their taking a bigger piece of the pie than the split percentage would suggest.
It is vital that you focus not just on splits but on other charges applied to your commission. In addition, splits can vary based on a number of factors including lead gen and transaction coordination. Make sure you understand all of the possible scenarios.
Some brokerages use a variety of compensation models depending on various factors including production numbers and lead sources. Instead of one commission split scenario, therefore, they may have a number of different tiers that you fit into depending on your particular GCI and organizational structure.
Many brokerages charge a fee on every transaction in order to cover items like administrative support, office supplies, and transaction support. You may choose to pay these fees out of your commission or pass them along to your clients.
Upstream and downstream
At many brokerages there may be revenue sharing or profit sharing based on recruitment. Your upstream will involve the agent or broker who recruited you as well as his or her upstream. Your downstream will involve any agents or brokers whom you subsequently recruit.