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Commissions - How Much Should You Pay?


Fact - Real Estate Broker's commission rates are not regulated in any state and are ALWAYS 100% negotiable. When you decide to sell your house, if you are like most people, you will want to hire -or at least consider hiring- a real estate agent to handle the process.

Surprisingly, many people think that real estate brokerage commission rates are "set" in their area and they have to pay 5% or 6% (or, the area's going rate) of the sales price to the agent in order to get their services. This is absolutely not the case, and in fact, you can pay whatever you and the agent agree to.

What is a fair amount?
"Fair" is whatever you and the agent decide is fair, and just as you are not under any obligation to pay any more than you want to, the agent is not under any obligation to do business with you if they are not going to earn what they want. You will probably find that most agents will want to get a commission rate somewhere between 4%-7%, depending on your particular area. While you may think that this is too much, keep in mind the following:

The agent is not getting the entire amount. In fact, they get about 37.5% of the total on average (this varies also by geographic area), because the buyer's agent's company usually gets half of the entire amount (say 3%), and of the remaining half (3% in this example), the listing agent's company gets about 25% of that or more.
If the sale goes smoothly (real estate transactions rarely do), the agent may not put in a huge amount of time and effort into the process, but if complications arise (there usually are some, if not many), the agent may put in a great deal of time and energy, including many evenings and weekends.
The agent has no guarantee they will get paid and if you change your mind halfway through and decide not to sell, the agent may have invested a lot of time and energy for nothing.
The agent is most likely on straight commission and has to pay for everything (i.e., gas, cell phone, signs, insurance, etc.) out of their own pocket.
While it is understood the listing side pays for marketing the home and facilitating the showings and feedback process, the listing agent also plays an important role in keeping the buyer and seller at the negotiation table. Example: A buyer offered an initial price of 15K less than the list price. The seller countered at 4K under list and the buyer responded that they had offered their top amount and there would be no counter. The seller was offended and the talks were off. Two weeks later, the listing agent convinced the seller to counter again and invite the buyer to the table to see if the buyer would be willing to come up from his initial offer. He did and eventually, the deal was closed and everyone was happy. Ultimately the listing agent recognized that some amount in between the two was reasonable and was successful in coaching the seller to see the benefit of dealing with this particular buyer.
You might consider an incentive-based compensation for the agent.
So, if your house is not going to sell for very much and/or is probably not going to be an "easy" sale for whatever reason (perhaps there are a lot of homes on the market and not selling quickly, or you are in the middle of a divorce and you know the agent is going to have to deal with a lot of tension and communication with multiple parties), when you do the calculations, you may find that the agent is actually doing a lot of work for very little compensation. However, if your house is worth half a million dollars or more, and houses are flying off the market, then asking for a 1% or 2% reduction of the agent's requested rate might be very fair for both of you.

Understand how the commission is divided between the listing agent's company and buyer's agent's company:
Let's say that you agree to pay 6% to the agent you are going to hire. The assumption is that 3% of this right off the bat is designated for the buyer's agent's company that brings the successful buyer to the table. The question you should ask is why do you have to pay 3% to the buyer's agent's company? Can't the buyer pay that themselves? Then, you could just pay 3% or thereabouts to the listing agent and you would save yourself a lot of money, right? Well, here's how it works: Most buyer's use a buyer's agent to help them in the home buying process. Now they could pay their agent themselves, but then they would probably expect about the same amount they are paying to be discounted from the price of your home. In other words, consumers understand that real estate commissions are put into the price of the home and have been done so for decades, so even though you as the seller are paying the entire commission, you are still probably going to net about the same as you would had you only paid the listing agent.

The problem in most states is that the contracts used are written by lawyers paid for by the realtor associations, therefore making it difficult to benefit from not having a licensed agent during a purchase.

Could you offer less than half of the total commission to the buyer's agent?
How about this: why not offer less than half (3% in our example) to the buyer's agent... say 2%, instead of the 3%? You absolutely could. But, some people will tell you that if you offer less than the "going rate" to buyer's agents, they won't show your home. In my experience, this is absolutely false. I have been involved in the sale of dozens of homes and have found that what buyer's agents want more than anything is to find their buyer a home that they will like, get the sale done, make a reasonable commission, and move on to the next client. I have found that lowering or raising the amount offered to the buyer's agent had no impact on how often the home was shown, as long as it was some substantial amount for their time. What mattered most was whether or not the price of the home and its condition were favorable to buyers.

"Discount" and flat fee MLS companies.
You could use a "discount" or flat fee MLS company instead of a "traditional" company (actually, since commissions are not regulated, there really is no such thing as a discount company). Even if you do this however, you are still going to want to offer something reasonable to buyer's agents so they don't get too turned off too much and not bring a good buyer. And, unless you are willing to do a lot of work yourself (being present at showings, inspections and/or other appointments), the extra that you pay the listing agent over the flat fee company may actually be worth it and you may even net more money by having a dedicated agent to negotiate for you at all times. Selling via flat fee MLS is growing rapidly in slowing markets. Many resort to this alternative selling method as it is the most economical and flexible way to sell.

Recommendations for dealing with the real estate commission:
If your home is not worth very much and/or it is not a great market for sellers, pay the "going rate" after shopping a few prominent Realtors. You will need all the help you can get, and the agents are not actually going to be making a ton of money for the time they put in.
If your home is worth a lot and/or it's a hot seller's market, tell the agent that you think it is fair to pay them slightly less of THEIR side as well as slightly less of the BUYER"S agent's side (for example, instead of 3% to each side - 6% total, pay 2.5% to each side - 5% total).
Make sure the agent will do the following: Put your home in the local MLS; add as many high-quality photos as possible (make sure they choose the best looking photo for the "primary" MLS photo); put an attractive "For Sale" sign out front; put a continuous supply of flyers in a flyer box; put a Realtor lockbox on the door; offer whatever amount that you had authorized them to offer to buyer's agents in the MLS, and make sure they guide you well in preparing and staging your home. Although about 80% of buyers first use the Internet to preview homes, a significant number of buyers still call from well-placed newspaper and magazine advertisements.
Getting Prequalified
Remember!
In anything you get what you pay for. A true real estate professional is worth there weight in GOLD, the trick is finding a Professional, A Full Time Realtor.
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