Commission split

Key Takeaways

• A commission split divides the commission a firm earns on a closed sale between the firm and the broker who did the work, using a percentage agreed in advance.
• The split is applied to the firm's share of the commission, which is often only part of what the client paid, because two firms frequently divide the total first.
• In Washington, a broker is paid through the firm's designated broker, so a split is an arrangement between the broker and the firm rather than between the broker and the client (RCW 18.85.301).
• The amount a client agrees to pay the firm is negotiated and written into the services agreement, separately from whatever split the firm has with its brokers (RCW 18.86.080).

What It Means

A commission split is the formula that decides how much of a closed sale's commission the firm keeps and how much goes to the broker who did the work. The firm collects the commission at closing, then pays the broker an agreed percentage of it. A 60/40 split in the firm's favor means the office keeps 60 percent and the broker keeps 40 percent of the money that reached the firm.

The firm's share is not profit alone. It pays for the things a broker cannot easily buy alone: supervision by a Designated Broker, errors and omissions coverage, transaction management, office space, and back office support. Firms that offer a high broker share usually charge for those services another way, most commonly through a Desk Fee the broker pays whether or not a sale closes.

Splits are negotiated, not fixed. Two brokers in the same office can be on different arrangements, and firms commonly use tiers that raise a broker's share once production passes an agreed threshold. Whatever the arrangement, it is an agreement between the broker and the firm, and it is separate from what the client agreed to pay.

How It Works in Washington

Commission money reaches a broker through the firm, and Washington says so plainly. Under RCW 18.85.301, a licensed real estate firm may not pay any part of its commission to a broker or managing broker who is not licensed to do business for that firm, and a broker or managing broker may not pay out any part of a commission to any person, licensed or not, except through the firm's designated broker. The split is therefore an arrangement between the broker and the firm. The client never pays the broker directly.

What the client owes is settled earlier, in the Brokerage Services Agreement. RCW 18.86.080 requires that agreement to state the terms of compensation, including the amount the principal agrees to compensate the firm, the principal's consent, if any, to compensation sharing between firms, and the principal's consent, if any, to the firm being compensated by more than one party. The same section confirms that an agreement to pay or the payment of compensation does not establish an agency relationship between the party who paid and the broker.

Example

Dana lists her Spokane home with Cascade Realty. The services agreement says Dana will compensate Cascade 5 percent of the sale price, and Dana consents to Cascade sharing half of that with the firm representing the buyer. The home sells for $540,000.

Cascade's compensation is $27,000. Half of it, $13,500, goes to the buyer's firm, so Cascade keeps $13,500. Marisol, the broker who listed and sold the property, is on a 60/40 split in the firm's favor. Cascade retains 60 percent of its $13,500, which is $8,100, and pays Marisol 40 percent, which is $5,400.

Marisol's $5,400 comes from Cascade through its designated broker. Dana writes nothing to Marisol, and the buyer's firm pays Marisol nothing either.

Common Mistakes and Exam Traps

• The split applies to the firm's share, so a 40 percent broker share on a co-brokered deal is 40 percent of what the firm kept, not 40 percent of what the seller paid.
• A broker cannot take a commission check straight from a client or from the other firm. In Washington the money reaches the broker through the firm's designated broker (RCW 18.85.301).
• A desk fee is not a split. A desk fee is a fixed charge the broker pays the firm regardless of production, while a split is a percentage of commission the firm retains when a sale closes.
• Paying compensation does not create an agency relationship, so the party who writes the check is not automatically the firm's client (RCW 18.86.080).