If home prices are at an all-time high, how can we say that commissions are going down? Here’s what agents might not be noticing when it comes to their commission.
If you ever want to rile up a room full of Realtors, mention commissions. Trainers, coaches and brokers will tell real estate agents they are worth a certain percentage and that they should be charging their clients accordingly.
Most real estate agents charge a percentage of the sale price payable after the sale closes. I’ll admit the system is pure genius, and it’s not only surviving but thriving. That’s especially true now as more and more people are getting real estate licenses, letting us know that they’re ready to help people buy their dream home, and they can be called upon to help sell a house, too.
In 2011, I helped someone buy a house, and later this year, I will list that same house. It will sell for almost twice as much as my client paid for it. I will charge him a percentage that is 20 percent less than what I was paid to represent him when he bought the house, and I will end up getting paid 66 percent more.
Even accounting for inflation, I’ll be making more money while charging a smaller percentage of the sale price. The house will be on the market for a fraction of the time that it took to sell in 2011, which means I get my bigger check sooner.
Real estate agents get so hung up on charging clients a percentage of the sale price that they might not have noticed they are getting paid more. There are buyer’s agents out there who get upset if the listing agent offers a lower percentage payout. They talk about their value and how important their job is.
If home prices are at an all-time high, how can we say that commissions are going down?
The reason charging a percentage has worked so well in real estate is because the percentage (always a single-digit number) sounds like a bargain when compared with four- and five-digit numbers.
Back when the housing market crashed, and home values declined, commissions went down too, even though many were charging x percent and maybe even more. In fact, when I compare median home prices today with what they were 10 years ago, I’m confident that, in dollars, commissions have gone up across the board.
Commissions will continue to go up with housing prices, even as the percentage of the sale price that consumers are willing to pay may continue to go down, as more agents and new business models offer more competition.
Often, homesellers believe that when we charge a percentage, we are highly motivated to help them get as much as possible for the house. Most agents come out ahead if the home sells quickly, even if it does sell for slightly less.
The percentage that is commonly charged to sell real estate isn’t an actual amount because it fluctuates. It’s kind of vague and even squishy.
The work of a good real estate agent is worth something for sure. There aren’t any rules that say that the payout to a buyer’s agent must be a percentage. Flat fees are money, too — and they can cover an agent’s worth.
In fact, it might be better to offer a flat fee to a buyer’s agent. That number might look better than a percentage and distract the buyer’s agent long enough so that they show the property for a potential payout that is a smaller percentage than what he has come to expect.
Selling a $400,000 house isn’t twice as hard as selling a $200,000 house, but I get paid twice as much when I charge an x percent commission for each. Marketing costs will be similar, and depending on where the houses are located, the more expensive house could sell twice as fast.
It is a myth that real estate agents don’t make housing more expensive. I have read that agents save buyers money, and I have also read those homes listed by real estate agents sell for more.
Some studies have shown that houses listed on the MLS sell for more. If that is true, then buyers must be paying more for them or the amount that’s being paid in commissions and fees makes up the difference.
It is very difficult to save the buyers and the sellers money in a real estate transaction unless we are talking commissions and fees.
Over the years, I have met with many clients who have told me what the “going rate” is, and it’s always a percentage — never a dollar amount. It’s also often more than I would have asked for.
When buyer’s agents start to look at the bottom line on individual real estate transactions, they might see that even when they are not being paid x percent, the pay in actual dollars is usually pretty good, and it’s getting better as home prices rise.