Level 14: Real Estate Math - Chapter 2: Commission

Warehouse Property Commission

A sales agent is asked to lease 1,500 square feet of warehouse space at $3 per square feet per year. The sales agent has a 3% commission rate. What's the MAXIMUM amount the sales agent could earn in a year? To solve this problem, we'll need to use two equations. Step 1: Solve for Price.Price = Total Square Footage (1,500) x Price per Square Foot ($3)Total Price = $4,500. Step 2: Solve for commission (part).Part = Total ($4,500) x Percentage (0.03).Part = $135 Final result: The sales agent could earn a maximum of $135 in one year for leasing the warehouse property.

Math Workshop: Cassi's Sale

After being on the market for a year, Cassi's house finally sold for a total of $310,000. Yay! In the listing agreement, Cassi agreed to give 6% of the real estate purchase as commission to the licensed agents involved in the purchase: 4% to the listing agent and 2% to the buyer's agent. Cassi's Sale: Explanation 1 Explanation: To figure out how much an agent earned in commission, all you need to do is multiply the total sales prices by the percentage of the agent's commission. Easy as that! Explanation: The listing agent earned $12,400 in commission from the sale. Possible Error 1: Forgetting to convert percentage into a decimal. Remember, we can not solve an equation while a percentage is present — we must convert it into a decimal first. Explanation: The buyer's agent earned $6,200 in commission from the sale of their client's house. Possible Error: Using 4% in place of 2% as the percentage variable. We were asked to solve for the buyer's agent's commission, not the listing agent's. Explanation: The listing agent earned $6,200 more than the buyer's agent. To solve, we just had to subtract the buyer's agent commission from the seller's agent commission. ($12,400 - $6,200 = $6,200).

Math Workshop: Al Kaseltzer Realty Commission Split

Al Kaseltzer Realty is owned by Broker Al. One of his newer agents, Tommy Ache, just sold a home for $250,000.00 that he had listed himself. Agent Tommy's commission split with the brokerage is the traditional 50-50 split, and the MLS published commission rate was set at 6% to be split evenly between cooperating brokers (There was a cooperating broker in this particular transaction.). Please use the information above to answer the questions appearing on the following screens... Answer: $250,000 x 0.06 = $15,000 total commission Explanation: Agent Tommy sold the home for $250,000. We're told that the commission rate is 6%. To arrive at the commission rate expressed in dollars, we simply multiply $250,000 by 0.06 to get $15,000. Answer: $15,000 ÷ 2 = $7,500 Al Kaseltzer Realty's share of the commission Explanation: From the previous step, we know that the total commission is $15,000. We also know the commission split between the cooperating brokers is to be evenly divided. To arrive at Al Kaseltzer Realty's share, then, we simply divide $15,000 by 2 to get $7,500. Answer: $7,500 ÷ 2 = $3,750 Agent Tommy's share Explanation: From the second step, we know that Al Kaseltzer Realty's share of the commission is $7,500. We also know the commission split between the broker and agent is 50-50. To arrive at Agent Tommy's share, we divide $7,500 by 2 to get $3,750. *Because the split between the broker and agent was 50-50, the steps to solve for their respective shares would be the same.

Andie's Sale: The Story

Andie sold her home for $340,000. Nice! Andie's listing agent earned $10,200 in commission from the sale of the home. Even more nice! Andie's Sale: Explanation 2 Explanation: Using Percent = Part/Total, we discover that the listing agent earned 3% of the sale. Possible Error: Incorrectly identifying known variables. When filling in the variables, pay careful attention to which factors go where.

Multiple-Step Word Problems: An Example

Dean sold his home for $85,000. Dean agreed in the listing agreement to pay a 6% commission — 3% to the listing broker, 3% to the buyer's broker. Becky, Dean's sales agent, has a 45/55 brokerage split with her broker (the listing broker). That is, the agent receives 45% and the brokerage receives 55%. Question: How much did Becky earn in commission for this sale? What We Know: We know the total price of the house ($85,000) and we know the commission percentage (6%) that was split evenly amongst the two brokers (3% per broker). We also know that Becky got paid 45% of her sponsoring broker's commission (which was 3% of the sales price). To solve this problem, we'll need to complete the following steps. Step 1: Solve for how much the listing broker received in commission (1/2 of total commission or 3% of the sale). Step 2: Solve for how much Becky, the sales agent, got paid by her sponsoring broker (45% of the commission). First, we'll solve for how much each brokerage earned in commission. To do this, let's use our ol' trusty equation: Part = Total x Percent Part: Unknown.Total: $85,000 (sales price of house)Percent: 3% (commission rate) We'll now need to convert our percentage into a decimal. Result: 3% = 0.03 Next, let's solve the equation by multiplying. 85,000 x 0.03 = $2,550 Result: 3% of $85,000 equals $2,550 We've discovered that the listing broker made $2,550. ✔️ Now we just need to solve how much Becky, the sales agent, made in commission with her brokerage split with the listing broker. Let's recap what we've learned so far: $5,100 was earned by both brokerages ($86,000 x 0.06). ✅ $2,550 was earned by the listing agent. ✅ The sales agent earned 45% of the listing agent's commission. To solve our answer, we need to discover what 45% (sales agent split) of $2,550 (listing agent's commission) is. To discover what 45% of $2,550 is, we'll need to use our handy equation again: Part = Total x Percent Result: Filling in the variables, we can update our equation to the following: Part = 2,550 x 45% As always, let's convert our percentage into a decimal. Result = $2,550 x 0.45 All we have to do now is multiply! Result: $2,550 x 0.45 = $1,147.50 Finished! Story: Deal sold his home for $85,000. Dean agreed in the listing agreement to give a 6% commission — 3% to the listing broker, 3% to the buyer's broker. Becky, Dean's sales agent, has a 45/55 brokerage split with her broker (the listing broker). Question: How much did Becky, the sales agent, earn in commission for this sale? Answer: Becky, sponsored by the listing broker, received $1,147.50 in commission on the sale. Advance to the next screen to recap how we arrived at that answer.

A Commission's Journey

Here's the journey of a real estate commission: Step 1: The seller agrees upon a set commission rate in their listing agreement with the brokerage (x percent of the sale). The rate denotes how much is given to both the buyer's broker and the listing broker. Step 2: The buyer and seller agree on a price, and everything (financing, inspection) goes smoothly. Closing day is a success! Step 3: The buyer's broker and the listing broker receive their commission per the rate agreed to in their listing agreement. Step 4: The listing agent (brokerage) and buyer's agent (brokerage) split the commission with the sales agents who represented the clients in the deal. This split depends on the brokerage split each sales agent has previously agreed to with their broker. The split is usually written as an agent/broker split (for example: 45/55). Step 5: The sales agents watch their hard-earned commission transfer into their bank accounts.

Math Workshop: Jim Jebow

Jim Jebow, a real estate sales agent with a great ability to close on deals, worked with sales agent Erin Rogers on the sale of an $125,000 home. Jim represented the buyer while Erin represented the seller in the transaction. The listing agreement stated that the 6% commission would be equally split amongst the two brokers. Note 1: Jim's split with his brokerage was 60/40 (60-Jim, 40-brokerage) Note 2: Erin's split with his brokerage was 75/25 (75-Erin, 25-brokerage) Explanation: Our question asked how much the two brokerages received in commission. To accomplish this, we need to: Solve 6% commission of $125,000 (Part = 125,000 x 6%) Since the commission was evenly split amongst brokerages, divide the brokerage commission total by two (7,500 ÷ 2 = 3,750) Final Answer: Each brokerage earned $3,750. Explanation: The question asked how much commission Jim earned in the sale. To accomplish this, we need to: Multiply $3,750 (the buyer's brokerage commission) by Jim's brokerage split of 60% (Part = $3,750 x 60%) Final Answer: Jim earned $2,250 in commission on the sale. Explanation: The question asked how much commission Erin earned in the sale. To accomplish this, we need to: Multiply $3,750 (the listing brokerage commission) by Erin's brokerage split of 75% to solve for part. (Part = $3,750 x 75%) Final Answer: Erin earned $2,812.50 in commission from the sale. Explanation: The question asked how much the listing brokerage earned in the sale (not including the sales agent commission). To accomplish this, we need to: Solve for listing brokerage commission (which we calculated on the first problem). 125,000 x 3% = $3,750 Multiply $3,750 by the brokerage's split of 25% (Part = $3,750 x 25%) Final Answer: The listing brokerage earned $937.50 in commission from the sale. Explanation: Our question asked how much the buyer's brokerage earned in the sale. To accomplish this, we need to: Solve for buyer's brokerage commission. 125,000 x 3% = $3,750 Multiply $3,750 by the brokerage's split of 40% (Part = $3,750 x 40%) Final Answer: The buyer's brokerage earned $1,500 in commission from the sale.

Math Workshop: Landon Bridges Realty Commission Split

Let's do another one! Landon Bridges Realty is owned by Broker Landon. His top agent, Brook Waters, has a very agent-friendly 80-20 commission split deal. Agent Brook represents a buyer that is paying $500,000 for a home listed by Broker Flo Current of Rip Tide Realty. The commission rate was set at 5% to be split evenly between cooperating brokers. Please use the information above to answer the questions appearing on the following screens... Answer: $500,000 x 0.05 = $25,000 total commission Explanation: Agent Brook of Landon Bridges Realty represented a buyer who purchased a home for $500,000 that was listed through Broker Flo of Rip Tide Realty. We're told that the commission rate is 5%. To arrive at the total commission expressed in dollars, we simply multiply $500,000 by 0.05 to get $25,000. Answer: $25,000 ÷ 2 = $12,500 Landon Bridges Realty's share Explanation: From the previous step, we know that the total commission is $25,000 We also know the commission split between the cooperating brokers is 50-50. To arrive at Landon Bridges Realty's share, then, we divide $25,000 by 2 to get $12,500. Answer: $25,000 ÷ 2 = $12,500 Rip Tide Realty's share Explanation: From the first step, we know that the total commission is $25,000. We also know the commission split between the cooperating brokers is 50-50. To arrive at Rip Tide Realty's share, then, we divide $25,000 by 2 to get $12,500. *Because the split between the cooperating brokerages was 50-50, the steps to solve for their respective shares are the same. Answer: $12,500 x 0.2 = $2,500 Broker Landon's share Explanation: From previous steps, we know that Landon Bridges Realty's share of the total commission is $12,500. We also know that the commission split of the $12,500 between Agent Brook and Broker Landon is set at 80-20. So, to arrive at Broker Landon's share, we multiply $12,500 by 0.2 to get $2,500. Answer: $12,500 x 0.8 = $10,000 Agent Brook's share Explanation: From previous steps, we know that Landon Bridges Realty's share is $12,500. We also know that the commission split of that $12,500 between Agent Brook and Broker Landon is set at 80-20. So, to arrive at Agent Brook's share, we multiply $12,500 by 0.8 to get $10,000.

Solving for Part: Example

Okay, let's do a quick one together before I ask you to take some on your own. The Story: A licensed real estate sales agent helped a client buy a home in Camden for $250,000. The listing agreement states that 6% of the sale will be given to license holders — 3% to the seller's agent and 3% to the buyer's agent. The Question: How much money did the buyer's agent make in commission from this sale? Step 1: Identify known variables.Let's use some example numbers to identify the known variables. Part: The amount of commission that an agent made in the sale is our variable — it's unknown and we'll solve for it! Total: The total sales price of a house was $250,000.00 ✔️ Percent: The buyer's agent made 3% commission on the sale. ✔️ Step 2: Convert to decimal. We can't solve any equation with a percentage in percent form, so we'll need to convert 3% into a decimal first. Result: 0.03 Step 3: Multiply. Our variables are filled in with numbers and our percentage has been transformed into its decimal form. It's now time for us to solve for part (the commission made by the agent) — yay! Result: $250,000.00 x 0.03 = $7,500.00 The Story: A licensed real estate sales agent helped a client buy a home in Camden for $250,000. The listing agreement states that 6% of the sale will be given to license holders — 3% to the seller's agent and 3% to the buyer's agent. The Question: How much money did the agent make in commission from this sale? Final Answer: The buyer's agent made $7,500.00 in commission on the $250,000 sale.

What Is a Commission?

Real estate sales agents make their money from real estate sale commissions. A commission is a fee paid to a broker in exchange for services in a real estate transaction. The size of a commission is commonly measured as a percentage of the sales price. This percentage is given first to the listing broker and buyer's broker, and is then split with their sponsored sales agents who represented the clients.

Solving for Part

The formula above is the one we will be using to find the total of a commission payment. In solving for the commission, we are solving for the part of the equation.

Formula Recap

This should look familiar from Level 10. These are the formulas that can help you solve for different parts of a commission, whether you are looking for the commission total, the commission percentage, or the sales price.

Solving for Commission

Way back in Level 10, we solved quite a few equations about interest. You can use those skills in this chapter, too. That's because commission, like an annual interest rate, is a percentage of a total. To figure out how much that percentage is worth you'll just need to multiply the total by the percentage.

Chapter 2 Key Terms

✏️ commission: a fee paid to a broker in exchange for services in a real estate transaction