MYTH: It is a common myth that a real estate broker’s commission is fixed or somehow regulated by the state but this is NOT true. In fact, real estate broker’s commission rates are actually completely negotiable.
When you want to sell your home you will probably think about hiring or will hire a real estate agent who will help you through the process. At this point, people usually think that the commission rates that a real estate broker will expect you to pay are set in their state and that this is usually fixed at around 6% or 7%. This is not true and actually, you can pay your agent whatever amount you both agree on.
What is the right amount?
There is no finite answer to this question. It depends on what you think is fair and the amount that your agent agrees with. You do not have to pay any set amount but your agent also doesn’t have to accept an offer from you if they do not feel that it is fair for the amount of work they will do for you. As a general rule, most agents will ask for anything between 6%-7% depending on where you live and their level of expertise. Some sellers tend to think that 6%-7% is a large amount to pay to an agent but it is important to remember a few things:
- Your agent will not receive that entire amount. Actually, when everything is done they will only get around 37.5% of the 6%-7% that you pay them. The reason for this is that the buyer’s agent’s company will usually get half of the amount (so if you agreed 6% with your agent then the buyer’s agent’s company will get around 3% of this). The listing agent’s company then gets around 25% of the remaining 3%, and the real estate broker will then get whatever is left, which will be about 37.5%. The above is an example only some differ.
- If the sale goes through without any issues (which is rare when it comes to real estate deals), then the agent may not have to work very hard on the sale of the house and everything else that comes with it. If there are any issues, however (and this is very likely) then the agent may have to spend a lot of time working on the sale of your home which will usually mean that they will have to work late into the evening as well as on the weekend.
- There is no guarantee for the agent that they will ever receive this payment. The reason for this is that the buyer may change their mind at any time during the process and you may decide not to sell your home after all. If this happens then all the work that the real estate broker has done will be for nothing.
- Most agents work on commission. This means that they have to pay for everything upfront themselves and do not get an expense account. So the reality is that they will have to pay for their own gas, phone calls, signs, insurance, ads to market your home, and everything else on their own.
- It is clear that the listing side of the sale is the one who pays for marketing the property and for organizing showings as well as reporting feedback. In addition to this, the listing agent also works hard to keep the buyer and the seller interested so that they want to negotiate. An example of this could be that the buyer has made an offer which is $15,000 less than the price the home was listed for. The seller may then have come back with a counter offer of $4,000 under the list price and the buyer may then say that they have made their highest offer and will not move on that price. In this case, it is common for a seller to feel offended and refuse to negotiate any further. After this happens, the listing agent may then ask the seller to counter the offer again and also bring the buyer back into the negotiation process to see if they want to move from their initial offer. Finally, the buyer decides to come up from the first offer and the deal goes through and all the parties in the negotiation are happy. This negotiation was down to the skill of the listing agent who understood that the buyer and the seller would be able come to an agreement and was able to use their experience to convince the seller that the buyer was serious.
- You can also ask for an incentive-based compensation for the agent. This means that if your house is not going to sell for a high price, or it is not going to be an easy sale (perhaps the area is flooded with similar homes or you are in a difficult situation such as a divorce which will require managing different interests) then your agent may have to do a huge amount of work to sell the house without much financial reward. On the other hand, if your home is worth around $500,000 and houses in your neighborhood are in high demand then asking for a discount of 1%-2% off the agent’s fee may be a reasonable negotiation for you to make.
One important thing to remember:
The commission is divided between the listing agent’s company AND the buyer’s agent company…
Let’s look at an example: If you agree on a 6% fee for your agent then you can know that 3% of this is immediately going to go to the buyer’s agent’s company who brings you the eventual buyer. Many people want to know why you have to pay this 3% to the buyer’s agent’s company which is a good question. After all, shouldn’t the buyer have to pay for it themselves? That way you would only have to pay 3% to the listing agent and you would be able to save the other 3%.
Well, that is not how it works. Buyers use a buyer’s agent as they know they will help them through the process of buying a home. They could pay the agent themselves directly, but if they did that then they would assume that this was going to be discounted from the amount that they were going to pay for your home. The reality is that buyers know that all the commissions that happen in real estate transactions are already factored into the price of the home and this is how it has worked for decades. This means that even though you, as the seller, are paying all the commission, you are still going to make the same amount of money on the sale as you would have done if you had only paid a listing agent.
One of the other problems is that most real estate contracts are drafted up by lawyers who are working for realtor associations and so it is not really beneficial not to use a licensed agent when you sell your home.
Is it possible to offer less than half of the total commission to the buyer’s agent?
Could you, for example, offer to pay 2% to buyer’s agent instead of 3% in the example we used above? Yes, you could. That said, many people don’t want to do this because they are worried that their home will be shown less than other homes where people are paying a higher commission of, say, 3%. This, however, is hardly ever true.
Why? Well, buyer’s agents usually just want to find a home that the buyer likes as a soon as possible, make sure the sale goes through, and then make a fair commission as part of the process. As a result, lowering the amount that you pay to the buyer’s agent doesn’t mean that the home will be shown less as long as the amount you offer covers the time they will be using to sell your home.
‘Discount’ and flat fee MLS companies:
Another option is to use ‘discount’ or flat fee MLS companies instead of a traditional company (although remember that there is no such thing as a state regulated set fee so there is also no such thing as a discounted fee as this is up to you to negotiate). You could do this but remember that you will also have to offer a reasonable buyer’s agent’s fee to make it worth the buyer’s agent’s time. If you don’t make it worth their time, then you will have to do a lot of extra work yourself such as attending showings and inspections and all other appointments related to the sale that you would usually just leave to the buyer’s agent. As such, it may be that the little extra money that you pay to a listing agent instead of a flat fee company turns out to make you more money in the long term as you won’t have to put much of your own time into making the sale and you will have a dedicated professional who can do the negotiations for you. Many people still choose to use a flat fee MLS company however as markets slow down, they feel that this is the cheapest way of making a sale. The sad part is, most sellers end up never selling their homes & thus enlist the expertise of a traditional brokerage. The old adage “You Get What You Pay For” comes to mind.
Advice for dealing with real estate commission:
- If your home has a low sale price and the market is not very good for sellers in your area then it is better to pay the standard rate which you will be able to judge after you speak to several professional realtors in your area. This is really the best advice if you are selling in a difficult market and at the end of the day, your agent is honestly not going to make a large profit on a sale as they will have to put a lot of work into selling your home.
- If your home has a high sale price and the market is favorable for sellers then make sure to tell your agent that you would like to pay a little less both to them and the buyer’s agent as this will be fair as they will not have to do as much work to sell your home. In this case, instead of paying each side 3.5% you might instead decide to pay 3.0% (6% in total). Again, it is up to the brokerage.
- Ensure that your agent does these things…First, they need to put your home on the local MLS and choose a number of high-quality pictures to go with this. They also need to put an eye-catching ‘For Sale’ sign in front of your property. Then make sure that they offer the buyer’s agents whatever fee you have authorized in the MLS and finally ensure that you get advice on how to stage your home before potential buyers start viewing it. Also remember that around 90% m/l, of buyers, use the internet, so make sure your listing agent has the knowledge & money to pay for ads up front, the agents are responsible for this, not the Brokerage firm they are under. You must have more exposure to selling your home than a sign in the yard & it on the MLS, which also feeds out to all other websites on the internet all by itself. You need an agent with the know-how to market your home with ads that produce!
The most important thing to remember when you are hiring a real estate agent is that you get what you pay for. If you find the right agent then they will not only sell your house faster but will also make sure that you get the best deal possible. In conclusion, the best thing to do is get a professional, full-time realtor who is an expert at their job, & knows how to market your home, and who will make the process of selling your home as easy as possible.
If this has helped you please share it with others that may also find it useful to know. If you are thinking about selling or buying a home please be sure to contact me, I would be more than happy to sit down with you & go over the above as well as show you how I market homes to sell quickly & for the most amount of money.
Wendy Mundy Realtor
Hunziker & Associates Greater Des~Moines