How much up front? Today's standard is around 6 percent, but experts say commission fees always are negotiable.
Pumped up about putting your house on the market? Before you sign on the dotted line with a real estate listing agent, it's important to understand exactly what math goes into the fine print - specifically, the listing commission percentage or fee that is assessed.
As is true in most sales professions, real estate agents typically make their bread and butter by earning a commission, which amounts to a pre-determined percentage of a sold home's sales price. When a seller agrees to a commission with an agent, typically two agents are ultimately involved in the transaction: the seller's agent and the buyer's agent. The approved commission is usually split half-and-half between the two sides, except in cases when the listing agent brings their own buyer, in which case they can usually keep the entire commission. Each agent commonly only gets to pocket half of the commission portion he or she makes; the other half typically goes to the broker company the agent works for.
All agents must disclose exactly what this commission percentage is with a seller before completing a listing agreement. However, many sellers are not aware that this commission rate is negotiable or do not bother to barter the percentage despite this knowledge.
"By law, real estate commissions are negotiable between the broker and the seller or buyer," says Michael Soon Lee, author of "Black Belt Negotiating" (Amacom, 2007) and instructor for the California Association of Realtors. "Consumers have a full range of choices in the real estate services they purchase and what they pay for those services."
Jeremy Brandt, CEO of FastHomeOffers.com, Southlake, Texas, says that any real estate fees are always open to negotiation.
"Many agents will say they are 'standard commissions,' but the reality is, with a competitive housing market and a glut of real estate agents in the market, nearly all agents have discounted at one point or another," he says.
According to Brandt, the "gold standard" for real estate commissions in the last few years has been a total of 6 percent (with 3 percent going to the buyer's agent and 3 percent to the seller's agent). Brandt says the national average is approximately 5.1 percent, based on recent research published by Real Trends, an industry watchdog group.
"Most real estate companies in America are full service, charging anywhere from 5 to 7 percent," says Lee. "Each broker sets his or her fees based on business considerations and what it costs to run his or her company. The average real estate company has a very low profit margin, ranging from only 1 to 4 percent."
A broker may or may not allow an agent to discount his or her commission rate, says Brandt, in which case "the agent may discount behind the broker's back in the form of a personal check made out to the seller at closing."
In the current market, which favors buyers, Lee often sees a seller's agent charging a higher-than-average commission so that more than half of the commission can be given to the buyer's agent to entice their client to visit and purchase a listed home.
"Sellers recognize the law of supply and demand. If we can bring more buyers to look at their properties, the ultimate sales price will likely be higher than average, as well," says Lee.
Sellers should realize that "it's a little-known fact that buyers actually pay the real estate commission," says Lee. While it's true that the seller cuts a check that gets divvied up between both the seller's agent and the buyer's agent, "every seller has a bottom- line amount that he or she must net from the sale of a property. So to be sure that he or she gets their net, they add the closing costs, commissions, attorney fees and other costs on top. In essence, the buyer is paying an inflated price to make sure the seller receives the net amount they desire."
Additionally, sellers should keep in mind that "real estate agents are in the highest tax bracket in America because they are self-employed," Lee says. "Not only do they pay around 35 percent federal tax and 8 percent state tax - where applicable - but there is also a 15.3 percent self-employment tax putting most agents in a 58.3 percent marginal tax bracket. It's a common misconception that agents do little to earn an obscene amount of money. The average real estate agent in 2005 earned only $12,850 in gross commissions before taxes."
The times, they may be a-changing, however. Brandt says that the real estate industry gradually is moving toward a flat-fee or discounted commission structure. The traditional commission model "is somewhat outdated, given how educated home sellers are today. Most buyers and sellers have done a lot of research - thanks to the Internet - about their property before contacting an agent. This reduces their need for all the services of agents."
Brandt predicts that, in the not-too-distant future, "the regional multiple listing service will be rolled up into one national, distributed service that lists all property for sale, cutting out the primary hold that agents have on the market. The model will change to a situation where you may hire an agent for specific services and pay a flat fee, rather than an arbitrary amount based on your sales price."
Until that day arrives, what should sellers expect to get for paying a
listing commission? Lee says that sellers paying an agent for full service
- A pricing strategy and targeted marketing plan that attracts the greatest number of qualified buyers.
- A marketing plan that attracts the greatest number of agents with appropriate buyers.
- Staging information on how to make the property look its best.
- Superior negotiating skills with the buyer.
- A liability reduction plan ensuring that the seller provides all required disclosures to the buyer.
- Oversight of paperwork required to transfer a property.
- Coordination of all the professionals involved, including the title officer, home inspector, lender, appraiser and buyer's agent.
- All the actions required to bring a property to a successful close.
Published March 28, 2007