3 Steps to Understanding Real Estate Commissions

The number one thing that everyone can do to clear up the misunderstandings about “The Real Estate Commission” is to

1) STOP looking at the number as ONE commission. This is true for everyone, including agents and brokers.

To do this everyone needs to understand that agents represent people, they do not SELL anything. There is one fee for the person who represents the seller and there is another fee for the person who represents the buyer. STOP adding those together as if they are both all about the seller. They are NOT all about the seller. The seller includes BOTH in the asking price so that both can be financed inside the transaction by the lender. But they are still two separate fees, one for the person who represents the seller and one for the person who represents the buyer. They may or may not be equal amounts.

When a seller puts their home on the market for sale they decide whether or not to hire someone to represent THEM in the sale of their home. They negotiate that commission, usually somewhere between 0 and 3%, with THEIR agent, The Listing Agent aka The Agent for the Seller.

When a seller puts their home on the market they ALSO “set aside” a commission that will be paid to the agent who represents the buyer. Usually 0 to 3% and not necessarily the same fee as the one they are agreeing to pay to their agent, the Listing Agent. Why do sellers set aside an amount to be paid to someone else’s agent who doesn’t represent the seller at all? So that they can be in the MLS “pool” of homes for sale and so that ALL commissions to be paid at the end are INCLUDED in the asking price for financing purposes.

2) Price of home and commission issues DO have a direct relationship.

Pretend you are selling your home right now, whether or not you own a home. Let’s say the homes in your neighborhood generally sell for $500,000 and there are 25 homes just like yours on the market. You might say, I would price my home at $470,000 to beat everyone on price, if I didn’t have to pay any commissions. You might say, I would price my home at $480,000 if I could cut the commission from $30,000 to $10,000. So price of home and commissions to be paid DO have a direct relationship to one another.

The seller may want to save his 0 to 3% by not listing with an agent. The buyer may also want to save their 0 to 3% by not having an agent. By treating the commission as two separate fees from the time the asking price is set, everyone is free to either have representation or not and save accordingly.

The seller should NOT benefit if the buyer chooses to not be represented IF the seller intended to pay a buyer agent at the time the home was priced. If the seller “set aside” 0 to 3% within the original asking price for the buyer to use to pay for their representation, then the seller should not simply keep it if the buyer is not represented, nor should the listing agent just keep it “because they can”.

The only reason the seller agrees to pay the listing brokerage BOTH fees, is because the buyer and the buyer agent are unknown entities at the time the home is priced. Consequently the seller is agreeing to pay the buyer agent fee through the listing agent’s company and the listing company should not simply keep it, but legally the way the contract is currently worded, they can. Someone should change that.

3) The commission as stated at the beginning is not always the commission paid at the end.

Often the buyer and seller are just a bit apart a few times in the transaction.

Sometimes it is at time of offer. Let’s say the Asking Price is $519,000 and the buyer offers $490,000 and the Seller won’t go lower than $510,000 and the buyer won’t go higher than $500,000. They can both be unsuccessful and walk away or the agents, if their commissions were set high enough at the beginning, may share the difference equally creating a positive outcome for both the buyer and the seller.

Sometimes it is at the time of the home inspection. The buyer and seller negotiated OK at the outset, but now there are $7,000 of repairs and the Seller will only give $3,000 toward them and the buyer wants them all done. Again, if the commissions were set high enough at the beginning and the agents did not have to contribute anything or too much at the original price negotiation, the agents may split the difference and the transaction will proceed to close.

Sometimes the costs go sideways at the end. Let’s say the seller agreed to pay $5,000 of the buyer’s closing costs, but the costs are $6,500. The seller won’t pay any more than the $5,000 agreed and the buyer just doesn’t have it. Again, the agents can step in to cause the transaction to close by splitting the amount, or one or the other can pay the whole thing.

This is one of the reasons that people say commissions are 6% but NAR says in final calculations they come out to 5.1% on average. Without any budge room, often the transaction fails as agents who gave at the beginning, will not give again at the normal timeframes in the transaction where budge room is needed. Perhaps this “budge room” should be a set aside that goes back to the seller or the buyer in the event that money is not needed. That may create a better scenario than simply cutting things to the bone up front and leaving everyone without a satisfactory recourse as issues arise while the property is in escrow. Just a thought.

Postscript: In comment #44 of Gordon’s Post, Q-Diddy asked, “Tim & Ardell-Since I’m obviously in the wrong, If I’m the Seller what are the “traditional

Lower Cost Options for Buyers & Sellers of Real Estate

As I get ready for 2008, I reflect back on the progress, and lack thereof, of an industry flailing with the challenge of providing more and varied options for people buying and selling homes.  Seems to me that the answer is in each and every agent being their own business within the company, and offering options to consumers, vs. the company as a whole trying to provide the more and many options consumers need.

How does a company survive?  How does an agent become one who stays vs. one who quits?  How do you accomplish these two objectives AND nurture the environment of better cost options for consumers all at the same time?

I’m throwing my thoughts out here, not necessarily in order of importance, to spark some discussion that may help us all in 2008 and beyond.

First let’s look at the agent specific issue.  It is that time of year when many real estate licenses go back to the DOL.  Not because the license is due for renewal, but because it is time to pay both MLS dues AND REALTOR dues.  Many who have held on to a license just in case they want to buy or sell a house, or to help their friends and family buy homes, are opting to turn those licenses in vs. paying the dues.

Brokers should step aside and even encourage agents to get out of the business of selling a house or two a year.  That is not to say that every agent who only sold a house or two last year should quit.  But if your goal isn’t to become excellent at what you do, and sell at least 10 to 12 houses in 2008, maybe it’s time to sign out altogether.  OR agents should (and their broker’s should let them) develop a model that provides a lower cost option to consumers indicative of the agent’s lack of expertise in the meantime.  Be honest with consumers about your credentials and price your services accordingly.  This way you will have assisted many in achieving their objective of lower cost, and at the same time increased your experience level by participating in more home sales and purchases.  Seems like it could be a win-win strategy, as long as the consumers are happy with a decreased experience level at a decreased price.

How does a company survive?  If the company has to charge the agent more and more to survive, causing the agent to charge consumers more and more to survive, well then maybe the company should quit.  OR brokers should charge agents less, so they can be free to price their services more fairly, and maybe all will become stronger as a result.

While consumers seem to want the transparency of a NEON SIGN heralding a cheap price for real estate services, seems the answer lies somewhere else.  The answer lies not in the smaller quantity of companies trying to configure into more and varied options.  The answer lies in the vast number of individual licensees each being free to offer varied prices.  More options for consumers would be greatly expanded if each and every licensee could negotiate freely with consumers and develop varied options, vs. simply the companies that house the licensees.

If an agent gets to keep most of the commission, vs as low as half of the commission, then the agent can negotiate better deals for consumer as a result.

My thougts are this.  I’d much rather have 60% of agents be excellent at what they do than the typical 10% to 20% of agents.  I’d rather have more agents paying less per sale, and paying the smaller cap rate, than lots of agents selling one house and paying 50% of the commission to the company.  I’d rather have all agents free to negotiate with consumers, than one set price  or small range of pricing, dictated by a company policy.  By giving each agent the freedom to create their own business model, consumers will have more choices than any number of companies can provide.

To Brokers, take your cap rate of say $30,000 per agent and reduce it to $20,000 or less.  Instead of taking half the commission from ANY agent, try to have double the amount of agents paying you the lesser cap of $20,000, than paid you the higher rate last year.  Now you will have more money, agents will pay less and hopefully charge consumers less as a result, and each agent will have more freedom to capture more money for themselves via better priced options for consumers.

At year end double check to make sure that the agents passed some of the savings that you gave to THEM, on to the consumers.  Don’t reward greed and don’t charge less simply so the agent can make even more.  Make sure they are honoring the spirit of the change by passing forward the benefit in a meaningful way.

Sounds a bit like a fairy tale, I know.  But it’s the time of year to dream and plan and strategize based on your highest hopes for all.  Peace On Earth…Good Will Toward “Men” is not just a quote from on high.  It’s a way of life, or it’s just a bunch of words.  Do your best in 2008 to create a better way for as many as possible, yourself included.

Department of Justice Speaks Out

[photopress:doj.jpg,thumb,alignright]This website put out by the Department of Justice’s Antitrust Division is…Oh MY GOD!!!  It’s almost an indictment of the entire industry!

Most of you know about the lawsuit that is still ongoing filed by the Department of Justice against the National Association of Realtors.  There are a few other cases as well, noted on this website.

Based on the entire content of this site, which is well worth your time to peruse, it seems the DOJ is taking a stand whether they win or lose in the individual suits.

It’s a Call to Action.  Will the Industry respond accordingly?  Quite an amazing site!  Portions appear to have been written by Glenn Kelman 🙂


Added to post from comments below.  What can Brokers do to help the DOJ’s efforts:

There are many things that Brokers can do to help.

1) Remove all commission language that reduces the mls offering to the Buyer Agent, if the Buyer Agent is not present when the buyer first views the property. In fact, I think the mls should not permit these clauses, as they are not being uniformly enforced, and in fact may be totally unenforceable.

2) Remove all minimum commission language directing agents with regard to agent client commission negotiations. While a Company can set a minimum amount that the agent must pay to their broker, they should not control the amount an agent can negotiate with a client.

Don’t you think it’s a bit odd that many agents will not pay a Broker for a whole year, what they would charge some clients for one move out-move in?

3) Clearly no Broker should permit talk within their office against any new business models. No talk about not showing certain property. No talk about how to combat the intrusion of certain business models on their income stream. In fact, I will not talk about commissions en masse at any office meetings.

I will meet one on one with any agent to discuss their individual goals and business plans. I can further discuss the amount the Company expects that particular agent to pay to the Company in a year’s time. But I will not discuss commissions as general policy, nor tell them what commission they must charge their clients.

Each agent is their own business. So any company that binds these separate businesses together as one commission model, is hindering competition in the marketplace. I know that’s a different way to look at it. But it’s true. No Company should have a policy that addresses in any way, the commission dollar that is not staying with the Company.