Decoded: The hidden costs of high commission splits
The appeal is understandable, but many agents who choose a high commission split model today may not have the foundation they need to make the most of it.
Key points:
- Many agents who embrace high commission splits approach these models with a completely different background from those who found success in the 1990s.
- Agents who seek success need to invest in training and tools — and those costs bite into their profits.
- Instead of going it alone, joining a team can be a helpful way to build experience while scaling up.
The direction of your business depends on decisions you make every day. Agents Decoded can help you by presenting the perspectives of seasoned pros who have been there, made mistakes, and found success.
Lowering expenses and lessening overhead are always welcome ideas to business people like real estate licensees. It's quite understandable, especially for new or less experienced agents whose businesses are not yet off the ground, to want a higher agent-brokerage commission split. If you get fewer oranges to squeeze, you want to maximize the juice.
Some of these agents gravitate toward models where they will get a super high — nearly 100% — split. Unfortunately, and in increasing numbers, these agents are falling prey to the hidden costs associated with this approach.
How high split models came to be
High split models gained prominence in the 1990s. They attracted experienced, established agents with active practices who found themselves at a crossroads: Either grow out of the legacy business models in which they built their brands or strike out on their own as independent brokers.
At the time, higher split models gave them the best of both worlds: They kept more of the commission pie and were able to dock with a brand to avoid broker-owner responsibilities.
This model attracted a fairly specific agent profile. They were established. They didn't need their hand held. They were always full-time breadwinners, and the training wheels legacy brokerages offered didn't present them with the same value it once did.
In short, their business plane was off the ground and in the air.
High split models pose challenges to today's agents
As the decades passed, I have seen the rise of many business models, including those used by independent brands, that jacked up their split offers in order to compete. The issue is that many agents attracted by these models skipped the first steps their predecessors took, namely in solidifying their clientele and revenue sources.
If I am an agent who hasn't yet cracked the code of full-time selling, I am going to need as much of the commission pie as the handful of sales I make can yield. But that is where the hidden price is paid.
The tools needed to reach that next level aren't all free
It takes more than an impressive optic on a closing statement to build a real estate practice and become a full-time high producer. Accomplished agents typically credit their success to training, mentoring, robust use of their CRM, strong digital assets and a fairly cutting-edge tech toolbox. They might pay an inside sales associate (ISA) or use software that performs some ISA functions, typically powered by industry-specific AI.
These all cost money — which a brokerage getting a miniscule slice of the revenue does not have to spend.
These agents have a choice: Either spend their part of the commission pie on their own technology, training and coaching, or stay stuck in a low production holding pattern. With the latter, it's status quo. With the former, they are not realizing their high split anymore — and worse, they're experiencing an expensive trial-and-error process as they search for the tools with a sustainable ROI.
When your income is missing a few zeroes, it is profoundly difficult to dedicate the time and resources needed to scale up.
Joining a team can help
This is not a takedown of business models — it is an observation of math. Associating with a team yields the same math regardless of the model used. Brands or teams that have what might be considered legacy or traditional splits aren't a worthwhile option because of their models — they are worth considering because they have the revenue to train, mentor, support and furnish their professionals with vetted tools.
There are legions of agents out there who have never had a discussion with a seller about reducing their price. They have only known one or two market cycles, and have never experienced a buyers market. Worst of all, they have never had a true local manager for regular training, mentoring and support. I've had to co-broke with my share of them, and it is hard to watch all that hard work not get any traction because of important steps that have been missed.
For most of our clientele, this is the largest and most stressful transaction of their lives. We owe it to them to be the best trained and best equipped we can be.
That client support has to come from a brokerage that has the revenue to provide helpful resources. Once an agent's business is off the ground, they have options beyond the current Faustian choices of death by a thousand a la carte cuts, or doing little and earning less.
My advice? Go where they give you what you need.
J. Philip Faranda is a manager and associate broker at Howard Hanna | Rand Realty serving Westchester and Putnam Counties, just north of New York City. He was previously a broker-owner at J. Philip Real Estate, the top independent brokerage in the two counties by transaction sides, which he founded in 2005. He also writes a real estate blog which has been cited by major media outlets. The views expressed in this column are solely those of the author.