As a Real Estate Agent, I see many strange and unusual things in the housing industry, from cruel and unusual photos of properties, pricing blunders, to people with little or no real estate experience attempting to sell their homes. None is more unusual than the commission cut.
Commissions in property sales come in all shapes and sizes. There’s no regulated standard for property listing commissions here in the United State, but there are widely accepted percentages. For Instance, a property selling for less than $100K might be negotiated at 10% commission total. Before you say, wow that seems a bit much, you have to take a few things into consideration such as:
- Is the commission being split (buyer & seller agents)? That would mean 5% each.
- How much will the agent lose to their broker? Some places that can be as much as 35%.
- What kind of costs did the agent incur? Office space, operating expenses, ads.
- Are they part of a team? They could lose additionally half to their team.
- How much time did they spend listing, taking photos, answering calls for the property, showing it, negotiating, creating the contract, working on the inspection, the appraisal, etc.
At the end of all this, a single agent could walk away with as little as $1400 (for 30-40 days of work) and that’s before taxes. So just imagine if agents were splitting a property selling for less and a 6% commission split.
So speaking of a 6% commission. That tends to be the standard for most listings in the United States. Generally when a home sells, each agent would receive 3%. Now that commission amount is not the standard and an agent who works diligently can in fact achieve both sides of the sale of the property, but it’s no small task handling both sides of a single home sale. Often times more experienced agents will come to an agreement when listing a property to take a 7% or even 8% commission on the property sale. Generally those types of agents are pulling all the stops for their clients that far exceed the normal expectation a seller would expect from their agent. Sometimes an agent will accept a 5% commission and on occasion I’ve seen a 4% commission.
When it comes to lowering commissions to 5% or possibly 4%, a seller is reducing their chances of selling a home and it all comes down to the asking price and the work involved in not just selling the house, but also buying it. Let’s just take the $100K example I used earlier. If the commission was set at 4%, each agent may take home as little as $500 before taxes. With all the work that the agent has to commit to, $500 may not quite be worth it. Especially if the agent could take home the same amount or more in 3 days from taking on a rental listing.
Now let’s try something a little more realistic. So let’s take a 350K home that is being sold with a 4% commission. The take home for each agent could be as little as $2400, and it the agent received the listing by referral, that number could be as low as $2000 not including taxes. At the standard 6% commission an agent would expect to take away $4200 before taxes. To be fair, technically the agent could make as much as $21,000 before taxes if the agent receives both sides from the deal, owes nothing to their broker, is not on a team, and has very little operating expenses, but that’s rare in this industry.
So what does a seller gain/lose from removing 1% or 2% commission from the sale of their home? On a $350,000 home, 1% equates to $3,500. So they potentially are saving $3,500 to $7,000 on the closing of their home. It might actually feel like a solid win, however the potential loss is far greater. When looking at listings to show potential buyers, one thing most agents keep an eye on is the commission. Experienced agents have a pretty good idea what they’ll be taking home from a transaction before they ever show it to their clients.
Let’s try a simple test in human nature:
You’re selling fruit at a stand and you have the same quantity of each item
- Apple sell for $0.25 each
- Oranges sell for $0.35 each
- Kiwi’s sell at $0.45 each
- Mangos sell at $0.55 each
- Watermelon sells at $0.65 each
- Bananas sell at $0.75 each
Which item are you going to try to sell 1st? If your answer is anything other than bananas, then chances you are partial to that fruit or bananas yourself. For no additional effort if people have an opportunity to make extra money, they will take it. At the end of the day, what fruit will be the last to sell, most likely Apples because they have the least amount of return. This is the standard for profit and you’d be crazy to think Real Estate agents would behave any differently. Of course, if the client is dead set on a house where the return is going to be 2%, I would sell them that house to make them happy. Many agents would feel pretty cheated during the length of the transaction.
What is the grand lesson here? If you make a deal with an agent to give them a smaller commission, expect fewer offers and showings unless the property is priced right. Sometimes, you will find agents who may offer to take a 5% commission on the sale of a house as a last ditch effort to pick up the listing. By making that agreement, you may be placing your home at the bottom of most buyer agents’ showing list. At a 4% commission, buyer agents may ignore the listing all together. It’s almost like self-sabotage. On another note, if an agent cannot justify a higher commission rate, would it stand to show that they may fail to negotiate a higher sales price on your home? I’m just saying… So I have to ask, what’s the savings of $3,500 compared to when you’re forced to lower your asking price $10,000 or $20,000 because you’re receiving no interest from buyers. By the way, I have seen listings that have been lowered as much as $150K because of this exact reason. The lower commission agreement could potentially cost you tens of thousands of dollars and it could’ve been completely avoidable.
On another note, what do you think happens when you raise the commission rate? Say you raise it to 7% or 8% ($3500-7000), Every agent and their mother will be trying to sell that home. As long as the home is priced to sell, the property will sell very quickly with agents on both sides working their hardest to make sure the closing is perfection. If it’s priced right, you may not even have to make a reduction. A great agent would know how to save you $3500-7000 making their value to your transaction unquestionable.
One last thing for For Sale By Owners out there… Most For Sale By Owners FSBO’s are not shy when it comes to telling off agents… “No, I don’t want you to sell my home. I will sell it myself.” It’s literally the equivalent of “No of course I don’t need a cardiologist for my chest pains, I’ll just diagnose myself.” One is a trained professional dedicated to their work, the other is using Google to do the job. The most common line a Real Estate agent hears from a FSBO is, “if you bring me a buyer, I’ll give you the standard 3% commission.” For most real estate agents that line is a friendly way of saying, “Bless your heart” or “Fat chance buddy.” For the agent, there’s no benefit to bringing a buyer to a FSBO unless the home has been on the market for an extended period and the FSBO is desperate to sell the home. The FSBO may be willing to take $10,000-50,000 less just to sell the house. It doesn’t make much sense when you think about it that way. Never in all my days have I ever heard a FSBO offer a 4% commission for a buyer. I would predict the result might be a different. Well I guess I’ll just have to wait and see.
I hope this article was informative. Please share your comments.
Written By Sean Sassoon