Let me paint you a picture of the perfect world. A world in which you'd have all the clients you could ever want. You'd be able to pick and choose the clients you'd work with. You don't have to work on every loan deal that comes along just to make a buck. In this world, every loan closes, your client is happy, and you take home 100% of the commission. Did I mention they give you a referral the very next week! Don't we wish it worked this way?
In reality, you work hard for every loan deal, and they are far from perfect. Then there's the issue of who gets paid what out of your commission. Usually you lose money every day because of commission split, so you must charge your clients more to make up the difference. The higher fees offset the experience and knowledge a broker brings to the deal and that makes it less beneficial for a borrower to use a broker.
While there is no true "industry standard" for how commissions are split, what we know is that it is industry standard to split commission. The split may be 25%, 30%, 50%, or more. Maybe it's a point here or a point there. The split may be with the lender, a referral agent, a brokerage house, or a number of others. When it comes right down to it, the split costs you money and therefore costs your client money. There must be a way to provide the best service with the best loan product and charge the client a reasonable fee.
What does it look like when someone takes a percentage of your commission? Most brokers know it all too well, but take a look at the table below for a look at the hard dollars lost from a potential commission split. In this example, the loan value is $1,000,000, the commission is 3%, and the split is 50%.
LOAN VALUE- $1,000,000.00
ORIGINATION POINTS (3%)-$30,000.00
SPLIT (50%)-$15,000.00
BROKER COMMISSION-$15,000.00
HARD DOLLARS LOST-$15,000.00
If you didn't have to split your commission you would have the opportunity to charge a little less commission and still make more money. That would result in a happy client and happy clients give referrals and I don't have to tell you that referrals mean more money. On top of that, if we make it cost effective, that client may just come back to you for the refinancing and for the loan on their next property. Sounds like a win-win for everyone.
The question is why do we split commissions? You remember the guy in high school who didn't participate in group projects and still got the A? How did it make you feel for someone to do none of the work and still get the credit? Commission split is the same thing. Trust me the people you are splitting commissions with make a lot more money from other sources. Your commission may be your only source of income. It's how you feed your family and put gas in your car. If you do the work, you should get the reward. I remember my years waiting tables and bartending. I would split my tips with the bus boy, but at least he cleaned the tables. What are you paying for when you split commission: referrals, overhead expenses, marketing? I don't know about you, but I already split my paycheck with someone and they take a big enough piece of the pie. That is good ole Uncle Sam. The difference is that he provides a service called freedom and the American Way of Life.
Examine your business and determine how much of your earnings you're sharing with others. What can you do this year retain more of your commissions? If we can minimize or eliminate the need to split commissions we can better serve our clients without being forced to charge a high commission. The next time you have to give away your hard earned dollars to a commission split, ask yourself what you are getting for the money and how much more you have to charge your client just to make an honest dollar. Being a broker is about serving clients and providing solutions for fair compensation. Without them I would be back waiting tables.
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