About Real Estate Commissions

Commissions are how real estate agents, their companies, support staff and those who conduct ancillary services get paid. There is a lot more going on behind the scene than is readily apparent. To paraphrase, “it takes a village to sell a home.”

It is important to understand how commissions get paid. The commission rate stated in the listing agreement is shared between both sides of the transaction, i.e. the listing side (sellers) and the buying side (buyers). It is a common practice that commission fees are actually part of the sales price. For example, a home that might normally sell for $100,000, can expect to receive offers in the $90,000 to $92,000 range if sold without agents. Also, commissions are usually paid at settlement out of the proceeds of the sale. That is the only assured source of funds. The sellers are often short on funds after having the house prepared for sale and the buyers never have excess funds after arranging for down payments, inspections, surveys, application fees, etc., PLUS furniture purchases in the near future. The practice of including the commission in the sales price of the property basically allows the buyer to finance their portion of the commission.

This is an example. Rates vary from agent to agent and by services provided.

It seems as if prospective sellers would like to open their conversation with something like “Hi, I’m Bill. I want to sell my house. What’s your commission rate?” ** Actually, (legally) there is no answer to that question. Commission rates cannot be “fixed” or “standard”, it is forbidden. Commission rates are discussed and negotiated between the seller and the listing agent and vary based on a number of factors, which include:

• Points of salability (plus and minus), (significant)
• Perceived marketing challenges, (significant)
• The quality of the services provided by the agent. (minor)
• The marketing plan and services recommended by the agent, (minor buy may affect salability)
• The options and services selected by the seller (significant)
  
  

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Low Rates
(Check the facts FIRST, Don’t be lured by false goals)

Cut Rates and Come-on's
With the rapid growth of all facets of the real estate industry, there are agents and agencies offering numerous ways to "SAVE BIG ON COMMISSIONS" if you “do it with us”. Whether it is a “get rich quick” offer or an offer to “save thousands with us”, it just never seems to be as easy as it is portrayed. Most of the time, lower commissions are tied to a lower level of service.

If you are a serious “do-it-yourselfer” who is committed to selling your own home and you just want a little boost and a sign in the front yard, then a cut-rate commission may be right for you.

If you want an agent who will develop a personal marketing plan to meet your specific needs and spend time and money promoting it, it is unlikely you will get that level of service with a cut-rate commission.

Sometimes there are conditions associated with the big savings. Some examples:

• Sometimes a lower commission is offered when you agree to use other services affiliated with the broker, such as a specific lender or title company that the broker has some type of ownership or financial interest in. Of course, by committing to these affiliated businesses companies, you lose the ability to competitively shop for the best price with competing businesses.
  
• Another come-on is to run an ad offering a reduced commission but the reduced commission being offered (and not made clear in the ad) when you agree to buy your next home through the same agent or broker. The reduced commission is not really being offered on the sale of your existing home but on the purchase of the home you will be moving to.

So you can see there are as many offers and come-on's as there are stars in the sky (at least visible in my part of the world). If you are interested only in the number(s), I am sure you can find an agent that will mention whatever number you like. You will probably even meet some agents who should actually pay you.* I encourage you to BE SKEPTICAL and ASK LOTS OF QUESTIONS. Closely examine the value of the services being offered and choose based on best value, not price alone.

Let me ask,

• If you needed a life changing surgery, would you look for the surgeon with the best skills or the lowest fee?
• If you were going to trial on a sticky legal issue where the value of your home were at stake, would you look for the lawyer with the lowest fee or the attorney who would research the facts and best fight for you?
• You are preparing to embark on the most significant financial transaction of your life, do you choose the person with the lowest fee or the person who will best represent your interests and do all the things that will help assure you receive the best offers for your property?

Discount Brokers
Yes, some real estate firms claim very low commission rates. Stuff like signs that read OUR FEE X.XX%, (not AS LOW AS X.XX% or STARTS AT X.XX%; just X.XX%). Now that you have studied the typical distribution diagram above and understand how commissions get paid, do these very low commission rates make sense to you or does there seem to be something missing?

The obvious question that screams out is “if a firm’s full service commission is X.XX% (allow me to substitute 1.75% to allow for comparisons), how can that agent pay the customary commission to the buyer’s agent” (which tends to range from 2.50% to 3.00%)? The simple answer is the agent cannot pay it nor is this 1.75% program a full service program.

Now, this is my personal opinion. I know I take the risk of sounding like “sour grapes” but my feeling is that some of these “low fee” firms have ads that seem to speak out both sides of the mouth – mentioning the very low rate and the term “full service” in what seems to be the same breath. The ads usually go on to state something like this is one of several programs offered but that, to the unsuspecting ear, only confirms that the very low rate and full service are part of the same program. My personal feeling is that this kind of advertising relies of the unsuspecting potential client (the seller) feeling too embarrassed to kick the nice innocent agent of (what I consider) the scheming real estate firm out on their butt when the agent informs the seller that the low rate that they had called about and full service are not parts of the same program. I am sure the sellers are then informed they can certainly select the full service program.

Low rate programs that do not address buyer side commissions are usually seller assistance programs which are designed to provide some support for home sellers who are selling their own home. Some assistance programs do little more than stick a sign on the properties lawn and leave the rest to the home owner. Some plans then automatically roll into the firm’s more expensive full service if the seller is not successful in finding a buyer within a few weeks.++ Keep in mind that in today’s buyer’s market, properties are staying on the market an average of over 90 days.

One Last Thought About Commissions:

It is unwise to pay too much. But it is worse to pay too little.

When you pay too much, you lose a little money, that is all. When you pay too little. you sometimes lose everything, because the thing you brought was incapable of doing the thing it was bought to do,

The common law of business balance prohibits paying a little and getting a lot. It can't be done.

-- John Ruskin (1819-1900)

Higher Rates
(The other side of the coin can have benefits.)

When looking for low commission fee the objective is to save money. This does have the tendency to snowball in that with properties low exposure tends to remain on the market longer; the longer a properties is on the market the less interest it receives; interest equals showing; the fewer showing it receives the longer the property remains on the market; etc. etc. etc.

In slower markets the reverse philosophy (a higher commission rate) is often helpful to make money and save time. (This technique may not be appropriate when the property has no current mortgage(s), is vacant and has little or no operating expense.) This technique helps sellers who have on going mortgage payments, utility payments, insurance, taxes and maintenance payments. The idea is simply to get attention and sell the property sooner and avoid months of additional mortgage and utility payments.

How might a higher commission shorten the time it takes to sell a property? The reasons here are really quite simple – pure economics. First, when buyers sign on (an Exclusive Buyer Agency Agreement) with an agent to search for a home, there is a commission rate that the buyers are obligated to pay the agency. That commission rate can vary based on a number of qualifying and difficulty factors. The buyers often elects to be informed if the commission being offered by the seller is not sufficient to cover all (or at least a major portion) of their commission obligation. Some buyers simply opt not to be shown properties that do not. You can be sure that when a Realtor finds a property that does cover the buyers’ entire obligation; it winds up on the top of the list to prospective properties to view.

When you offer a higher commission you can be assured that even if the buyer’s commission obligation is relatively low, your property will wind up on the top of the list to prospective properties to view. You can be assured the agent will personally show every photo and virtual tour, and make sure the buyers are aware of every feature and amenity. The buyer probably will not even know of the higher commission being offered, but secretly it is bound to be a favorite of the buyer’s agent – so you will have some positive energy working for you.

Footnotes:

* “An agent paying you” is said in half jest but I have seen cases where agent mistakes have cost their clients substantially. On the selling side, this is usually because of misinformation on forms.

** Many inexperienced agents may blurt out a figure before learning the particulars of the transaction and wind up with a listing that they cannot properly service – so corners get cut and everyone loses. Don’t rush for a low rate, make sure you know what services the agent will provide for what you will pay.

† The MLS uses a comprehensive 10 page form that allows listing agents to identify every possible aspect of the property so that buyers’ agent can search for the particular aspects, features, amenities, etc. that their client are looking for. There appears to be an increasing number of agents who seem unable or unwilling to properly use the tool and consequently leave out valuable search data and marketing information.

++ If an assistance program is what you are looking for, I believe I provide the best package in the region – learn more - click here.

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