Commission Talk

It seems it's on everyone's mind...Realtor Commissions.  How much commission are you going to charge?  Can I negotiate the commission?  What am I getting for my money?  There are all kinds of theories out there but what many Realtors fail to explain to their selling prospects when negotiating a listing agreement and commissions is how the money is actually used and where it goes.

Where Does the Commission Go?

Despite what the general public believes, the whole commission does not go into the pockets of the Realtor. In fact, Realtors only get a small portion of the total commission. Below is a traditional breakdown of what happens to a commission when it is paid upon closing.

Let’s say you sold a $300,000 house this year and paid 6% commission, or in this case $18,000. Traditionally the commission is split between both the buyer’s broker and the seller’s broker. Therefore, both brokers would gross $9,000. Then, your listing agent and the buyer’s agent would each get a portion of the $9,000 each of their brokers received. The portion amount will differ for each agent depending on their split agreement with each of their brokers. Let’s just figure 50% or $4,500. Now factor in all the advertising costs including flyers, mail-outs, ads in the various papers and industry magazines, open house costs, installation of signs, virtual tour costs, multiple listings service, lockbox, gas, etc. that the listing agent is responsible for.  Suddenly of the $4,500, the agent is netting less than $3,000. Under extremely favorable conditions, the time it takes to list a home, market it to be sold and take it to the closing table is 50 days. If you do the math, and based on $3,000 take home for the Realtor, they earned $60 per day while actively selling your home.

If your Realtor is highly professional and very knowledgeable about the market and marketing homes, they are worth EVERY penny they earn. As your "employee", your Realtor is responsible for the marketing and negotiations of a VERY expensive product, your home. In most cases a house will be the largest priced product you ever buy or sell.

Do you really benefit from negotiating a lower commission?

I would like to discuss Realtors that are so easily willing to reduce their commissions to get your listing. Don't get me wrong; you have every right to negotiate a lower commission for Realtor services. But what are you really negotiating? As mentioned above, the commission is usually split four ways and another large portion goes into marketing costs. So, if you are the seller, and traditionally a seller pays the commission, you are actually negotiating AWAY your marketing dollars.  Or, for some agents, it is a numbers game, where they "buy" the listings to meet their expenses but are unable to provide you the personal service you desire. You are negotiating away the earnings of the expert that is supposed to work hard at reaching your ultimate goal…selling your property at the highest possible price with the fewest hassles. When this occurs, your Realtor has no real incentive to work hard for you and the sale of your house. In other words, a Realtor might decide not to market your property as much as they normally would if paid a higher commission.

If a Realtor is willing to give up the money they work for and support their family with just to get a listing, how easily will they give up your money that you deserve and work hard for in the sale of your house?  In fact, an agent who is able to negotiate an appropriate fee is showing you their negotiating skills and will give you an insight in to their abilities to negotiate a good contract for you.

A recent study done by Texas A&M University titled "In Search of a Better Deal - Effects of Limited Service Representation and Agent Experience" (by James Ford and Ron Rutherford) compared traditional brokerages to the new discount brokerages.  Some of these brokerages offer consumers menu-based pricing, with fees for specific services, such as listing the property on a MLS system, rather than an across-the-board fee for full representation. Others advertise sharply lower commissions while still promising to provide consumers with all of the traditional services.  The following is an excerpt from that article:

Limited Service Research Results

Most of the study results were statistically significant,

indicating valid relationships exist between limited

service representation and agent experience and

marketing performance (time to sale and sales price). Licensing

type did not demonstrate such a clear relationship.

Interestingly, the empirical results from the models show

that limited service listings sold for 1.7 percent less than

typical exclusive-right-to-sell listings and took 17.1 percent

longer to sell. Given that the typical discount offered by

limited service brokers is approximately 2 percent, there does

not appear to be any net gain to sellers using limited service

representation.

If the limited service broker charges a total 4 percent commission,

then the commission plus the 1.7 percent lower price

is approximately equivalent to a 6 percent commission from

the seller’s perspective. If this result holds up in additional

studies, it would indicate that limited service brokerage offers

no dollar advantages to the seller over typical brokerage when

using the exclusive right to sell contract.

If a Realtor is willing to cut their commission fee, ask them what services you will not be receiving in order to obtain that fee.