When selling a house with the help of a real estate agent, that 6 percent real estate commission can eat into any profit the seller might receive from the sale. In today’s depressed real estate market, that fee could even result in an overall loss. Even with the funny accounting used when people sell their homes — the accounting that doesn’t consider all the costs of owning and selling a home as part of the cost basis — in a bad market, it’s difficult to show even a fake profit.
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Who pays real estate commissions
That standard 6 percent commission is paid by the seller to the real estate broker, who often splits the fee between itself, the seller’s agent, the buyer’s agent, and possibly another agent on the seller’s side if they had additional assistance with the listing. Even with the agent seeing possibly only 3 percent of the total sales price, good real estate agents could make a living. Better agents can negotiate better arrangements with their brokers, and receive more than this share.
For the seller, this commission is a big expense. Many agents are willing to negotiate the real estate commission. If the seller is willing to compromise with the agent and perhaps do some of the legwork involved with the process, many agents will work with the seller to come up with a reasonable fee.
Negotiating real estate commissions
One reason that agents are willing to negotiate is that it is become easier for sellers to sell houses without the help of an agent. If a seller is just looking for a listing and is willing to show the house without an agent and the property is in New York City, RealDirect will charge a monthly fee of $395 or a commission of 1 percent for distributing the listing. Even with these smaller fees, the seller’s agent must still be paid, so there is an additional commission of 2.5 to 3 percent to consider. Still, this is a better deal than real estate agents offer sellers, but it’s only worthwhile to sellers who are confident in their ability to close the deal.
More low-cost do-it-yourself services like ZipRealty put pressure on agents to compete with lower prices as well.
If you’d prefer a full service broker but still want a reduced price, be willing to shop around. While agents are more likely to be willing to reduce their commissions if your home has a high value, today’s slower real estate market means the agents who haven’t given up their job are competing for fewer salable properties. Talk to several agents from different brokerages and ask for a reduced rate from each. The more agents you speak with, you’ll be able to have a better who will do the best work for you at the best rate.
By law, commissions must be negotiable; otherwise, the industry would be guilty of price fixing. The 6 percent commission is ingrained in the collective consumer consciousness, and that’s the way real estate brokers like it.
Even reducing a commission by 1 percentage point could save thousands of dollars. Not exploring reduced commissions would be a sign of financial mismanagement. I understand that for a large transaction, a 1 percent point difference might seem negligible, but this is real money you can save, thousands of dollars, just by shopping around and negotiating. This is not saving two cents a gallon by driving out of your way to an off-brand gasoline station; this has an immediate impact on your finances.
Photo: austinevan
Updated April 13, 2016 and originally published July 29, 2011.
{ 26 comments… read them below or add one }
For the record, I will negotiate anything including prices at retail stores, but that is another story. Negotiating a real estate commission can be a double edged sword! If your house is easily marketable and well priced, you probably don’t need a broker. That is a huge “if”! When the market was going up, you could sell anything, but now we are in a buyer’s market. It is much trickier. If you knock off a 1%, sounds great until you give up much more in price. There is no easy answer, so do your homework!
I flipped a condo a few years back, when they were flying off the shelves. My realtor took 2.5% and the buyer’s agent took 2%. Be careful not to drastically disincentivize one realtor or the other. This was an easy seller’s market and my realtor was my friend. That hampered my ability to get my realtor to take 2% as well. In today’s buyer’s market, I’d want to flip those commissions to attract the buyer’s realtor. You attract more bees with honey, which in this case is money.
– Chip
Thanks for sharing your insight on real estate commissions!
Having worked in one of the biggest real estate companies for many years, I think the biggest secrets are not the commission, which is well-known if unfair.
Perhaps the biggest is for sellers. If you are selling, your listing agent has little incentive on your final selling price and really isn’t on your side in that matter. For example, if you have a $300,000 house for sale, it’s not big a big deal to your agent if your house sells for $25K less — it’s $750 or less to the agent. The agent just needs your house to sell, at essentially any price. Put another way, in this sample it may take the agent 10 hours of work to sell your home for $250,000 or 30 hours for 300,000. In the first scenario, they earn the equivalent of $750/hour while in the second they earn only $300/hour. I know of times when listing (selling) agents disclosed to potential buyers or buyers’ agents that the seller’s bottom line price was $X and that they thought the seller would even go Y% below that. One way to combat this is to negotiate a staggered commission schedule with your agent when selling. The closer to your target price they sell, the more they get in commission. To do this, though, you need to know what an honest/fair going price for your home is.
I’ve known about selling commissions and negotiating them but have never thought about a staggered commission schedule. That seems brilliant. Now to hope i ever remember that years down the road when i might need it.
Hmmmmm, this all gives one a lot of stuff to ponder. My agent had us list high and then kept encouraging us to lower the price—-he wanted a pretty quick sale. I think he gave us the high list price to get the listing, then lowered it to what it should have been in the first place once he had it.Hmmmmmmmmm.
Ceecee, this is also common. A lot of agency websites will highlight or move to the top listings that are heavily discounted. So it is also possible your agent artificially inflated the initial price in the MLS so that he could then quickly reduce it and show a big price drop to fall into the “hot deals” category. I don’t have an issue with that except 1) if everyone does it, the hot deals is useless and 2) the listing agent should tell his customer up front that is his plan.
Another trick smart listing agents will use is to constantly reduce the price by tiny amounts (say $50 or $100). Many MLSs and agency search tools only email new or changed listings and by making changes in price (albeit inconsequential ones) regularly, their listings will get in front of more eyeballs.
This is very informative. Thank you someguy.
House prices are already so high, it seriously brings into question when buying is really the best option. Too many young people enslave themselves to excessive mortgage payments, which lines the pockets of bank shareholders and real estate agents. How long will it take for people to realize that overprices housing is not “living the dream,” but is actually a form of economic slavery.
When I bought my first house, I used a selling agent and negotiated a cheap commission with him. He agreed to only take 1.5%, and wrote me a check for the remaining cut of his commission, which was the standard 3% (so I got 1.5%!). It worked out well!
Robert, although this is fairly common, it is against the real estate regs/laws in at least some states. Usually it is ok for a realtor to take a lower fee (on the buy or sell side) and “apply” that to lower the purchase price or increase the net sale proceeds, but they are not supposed to “kick back” cash from a commission.
That said, I do think 3% is way too high for the buy side of 90% of today’s real estate transactions.
A lot of big agencies are desperate to keep the 3%+3% arrangement in place. Some large agencies would blacklist smaller niche companies who offered reduced commission percentages or flat fees. Generally, the big agencies covering a given MLS would hide from their web site all listings of the “non-compliant” agencies. In many markets where a couple agencies dominate, having them hide listings on their sites would be devastating since most buyers start their house search via web listings. I’ve been out of the industry for a while and I know there were big lawsuits, so some of this may have been forcibly changed.
I purchased my last property using only a lawyer. He charged a reasonable flat fee instead of 3%, and the difference was applied at closing to cover all my closing costs, property taxes, and HODs for almost a year! It was also quite nice to have an actual lawyer reviewing my contracts and helping me negotiate the lowest price possible. I don’t think I’ll ever use a real estate agent again.
I just had 4 agents over and each of them said the going rate was 7%, but they’d do it for 6%. I know the rate is 6%.
If I sell, it will be on my own. I can wait out the market. Plus I have what everyone in the country is now looking for – land and a small well maintained house.
Oh and I live in a Low cost area.
Redfin is another option. They operate in some major cities. They charge 1.5% for seller commision/ minimum $6000 and 2.5% for buyer.
thank you for the information. i had no prior knowledge regarding this topic.
At one time we used one of the Sell by Owner and let me tell you it was more trouble than it was worth. I think we had a total of three people even tour the house. And trying to showcase the house by our selves was a pain. While, I don’t think I would pay the 6% anymore, especially since I have became adapt at bargaining, I am willing to pay for a real estate agent. I guess I am just too attached to my home and took it personally when people criticized it.
The 6 percent commission was a bit to swallow for us but we had a good realtor and he did a very good job at the negotiations with a bank owned property. It took us 5 months to get the house after doing many tests for mold and working with contractors. If you have someone who isn’t going to fight for you and eager to just get rid of you and move on to the next customer then you won’t be getting your money’s worth. Our initial offer was 90% of the homes value with new appliances and home warranty. We met in the middle eventually but after it was all said and done, that 6% commission was well earned. He made over 100 phone calls during those 5 months, I often felt bad at how much work he put in.
Recently, I used the same realtor to list my house to sell, plus I used her to find me a new house. Because she would be making money of my home purchase as well, she reduced her commission from 6% to 4.5%. The other 1.5 she would make up on the buying end, which was paid by the seller of the house I purchased. Using one realtor for both transactions probably about $2,200.
I’ve sold by owner in the past too. It’s a pain.
SHELLYE: What made it a pain? I was thinking of doing that if I sell.
Read Cejay and free money mentor’s comments above, then add the time needed to get the appropriate paperwork done once the house sells (I work full-time so would need to take time off to do so), finding a title company to use, marketing the house. (BTW – make sure to take lots of GOOD pictures to put in your listing), setting up showings (especially if you work), basically becoming your own realtor. Good realtors are worth their weight in gold, if you ask me. Plus, they have access to the multiple listing service, which an owner doesn’t have, unless he’s an agent, too.
And in my original post, I meant to say “using one realtor for both transactions probably SAVED me about $2,200” in commissions.
Especially in this current market – a realtor can market your home in places that homeowners can’t. BTW – I’m not a realtor, and nobody paid me to write this. But I heart my realtor and recommend her to everyone I can. She’s well worth the money. Good luck.
I just signed a contract to buy a house in Topeka Kansas and the agent that showed us the house and wrote the offer presented us with a separate buyers agency contract in which we were bound to pay his brokerage office an additional $150. He is an agent with Great Plains Realty. He said the sellers were paying a 7% commission split between the Selling Office/Remax and the buyers agent’s office of Great Plains Realty. He said that he was sure Remax had made the sellers pay a 1
$150 records retention fee as well. I was a broker in another state and we always paid our own records fees to our broker, we never charged them over and above the commission to the customers. So I am wondering if you all are seeing these fees charged to you as well when buying and selling??
Don’t sign it! It is a little late for a Buyer’s Rep now. What is the agent going to do if you don’t sign? Yeah….that’s right…. nothing. Let him make his 3.5% that is already agreed upon. It is plenty.Those “sneaky fees” are just that… sneaky. There has been some legal issues with these type of fees and the RESPA regulations. I am an Agent in Houston Texas and I have always seen these fees as sneaky…. period!
WENDI: None of the agents that looked at my property said anything about a fee. Did the realtor tell you ahead of time?
Lynn: No, the agents didn’t bother to talk about a fee while showing property to us as buyers. It was when we went to write an offer that we were presented with paperwork that we were to sign agreeing to pay paperwork retention and storage fees for the buyer agent brokers office.
Has anyone heard of a lower negotiated commission as a disincentive to potential buyer’s agents. For example. If negotiated a 5% commission, with a 2.5/2.5 split between listing and buyer’s agents. Is there a chance that some potential buyer’s realtors would not show their client’s a listing because of the lower potential commission?
Scott
There is a lot of confusion when it comes to real estate commission rates, this article certainly helps in educating the consumers to get the right real estate deal.