Now we can move on to everyoneís favorite type of math Ė calculating commissions!† The commission is normally based on the sale price, so thatís how we will learn to calculate commissions.† Just multiply the sale price by the rate of commission.† If a house sells for $100,000 and the commission rate is 7%, just multiply 100,000 X 7%.† Remember our lesson on how to use your calculator.† You can also multiply 100,000 X .07 to get the answer, which is $7,000 either way.
We can also work problems backwards again.† If we know the seller is paying a 7% commission and we know the total amount is $7,000, we can find the sale price by dividing 7,000 by 7%.
Notice going forward the formula is:
100,000 X 7% = 7,000
Going backwards we start at the answer of 7,000 and work backwards step-by-step and number-by-number.† Going forward we multiplied by 7%, so going backward we divide by 7%.† Dividing is the opposite of multiplying.† So 7,000 divided by 7% = 100,000.† Notice itís the same number that you started with.
You might actually use this in real life.† If you determine that on average you yourself get 1.5% of the sale price of a house, and you decided that you wanted to earn $30,000 in commissions, you can use this to determine the total value of the property you would have to sell to do that.† Going forward, the formula would be:
Total Sales X 1.5% = 30,000
So going backwards, just use:
30,000 divided by 1.5%, to get $2,000,000
A lot of people think that when an agent asks for a 7% commission, the whole thing is going to the salesperson (Hey, some people think when we sell a million, thatís what weíre making). Actually, the commission is normally split 4 ways.† First it gets split between the listing broker and the selling broker (the listing broker is the one working with the seller, and the selling broker is the one working with the buyer).† Then each broker splits the commission with their salesperson.† Of course, if you sell your own listing, you and your broker would each get twice as much!
Letís put this into a math problem.† If a house sells for $180,000 at a 6% commission, the commission is split evenly between the brokers, and the listing salesperson gets 60% of that, how much does that salesperson get?† Work it out, then click here to see if you got it right.
The correct answer is $3,240.† 180,000 X 6% = 10,800; 10,800 X 50% = 5,400;
5,400 X 60% = 3,240
Now when you get a question on this, it wonít be put in the order that things happen, so you need to put it into the correct order (Remember, the order that things happen is important).† The question might be worded:
Bob, a salesperson for White Star Realty, gets 60% of all commissions he brings into his company.† Ray, an agent for Blue Sun Real Estate, sells one of Bobís listings and the seller pays a 6% commission.† The commission is split evenly between the brokers.† How much will Bob get if the house sells for $180,000?
It may look more complicated, but itís the SAME question!
Now, suppose we have to go backwards on this question.† Letís reword the question slightly.
Bob, a salesperson for White Star Realty, gets 60% of all commissions he brings into his company.† Ray, an agent for Blue Sun Real Estate, sells one of Bobís listings and the seller pays a 6% commission.† The commission is split evenly between the brokers.† How much did the house sell for if Bob gets $3,240?
Everything still happens in the same order.
Sale Price X 6% X 50% X 60% = 3,240
We have to work backwards again, starting from our final answer, the commission amount received by Bob.† Now think, what was the LAST thing we did when we were going forward?
Hmmm, could it be that we multiplied by 60%?
Yes, thatís it, so the FIRST thing weíre going to do when we work backwards is to DIVIDE by 60%.† DO NOT change the percentage.† The second to last thing we did going forward was to multiply by 50%.
So the SECOND thing we are going to do working backwards is to DIVIDE by 50%.† The first thing we did going forward was to multiply by 6%, so the LAST thing we are going to do working backwards is to DIVIDE by 6%, which will get us our answer, the sale price of $180,000 (Hey, itís the same number as before!).
If you are having trouble putting things in the right order, think it out logically.† First, NO commission can be paid before you know the sale price, so that has to be listed first.† Next, the seller has to pay the ENTIRE commission before it can be split between the brokers (i.e. you canít split it between the brokers if the seller hasnít paid the commission yet).† Finally, a salesperson cannot be paid before their broker gets their share, so the order MUST be: sale price, then total commission, the split between the brokers, then pay the salesperson their share.† This is the order things MUST happen when you are going forward.