A few days ago I received an e-mail from a very smart reader. I know he is smart because his e-mail address says “post.harvard.edu,” which presumably means he graduated from prestigious Harvard University.
He asked if real estate listing agents would reduce their customary sales commission rate for expensive homes. Then he gave an example of a $1 million house sale, which, he says, doesn’t include much more work for the listing agent than selling a less expensive home.
Purchase Bob Bruss reports online.
My reply noted some successful realty agents would reduce their sales commissions on expensive homes. But the big drawback of reducing the commission rate, I hastened to add, is many local multiple listing service (MLS) buyer agent members will choose to show a home with a low commission rate last to their prospective buyers.
According to the respected “Real Trends” Web site, the national home sales commission rate is now about 5.1 percent. However, this survey was taken during the recent home-sale boom during which virtually any realistically priced home sold easily. Today, with a glut of new home listings in most communities, the situation is rapidly changing.
WHEN HIGHER SALES COMMISSIONS PAY OFF.
During a recent Midwest trip, I encountered a longtime, very successful real estate sales agent friend. As I usually do, I asked her, “How’s the home sales market?”
She then informed me she currently has too many listings and not enough buyers.
“So I had to increase my sales commission rate,” she said, shocking me.
By that, she meant she now encourages her home sellers to offer 7 percent sales commissions rather than the 6 percent rate, which is customary in her community. The result is, she reports, buyer’s agents show her listings first because of the higher commission.
“When I really get desperate to sell a listing before it expires,” she revealed, she includes an incentive trip to Hawaii for two to the buyer’s agent who sells the home.
“A trip to the Caribbean or Mexico just doesn’t work any more,” she added.
DRAWBACKS OF REDUCING SALES COMMISSIONS.
Except in a very “hot market” where there is a shortage of home-sale listings, most home sellers don’t understand the big drawbacks of getting their listing agent to reduce the sales commission.
Yes, there are a few successful “discount brokers” who offer reduced sales commissions from the customary local sales commission rate. But the big problem for home sellers listing with discount brokers is these lower sales commissions don’t encourage cooperation from buyer’s agents who are often reluctant to show low commission listings unless there is nothing else to show to their buyers.
HOW HOME SALES COMMISSIONS ARE SPLIT.
Most home sellers don’t fully understand how home-sale listing commissions are split. But they think real estate agents are grossly overpaid for very little work, especially if the home sells quickly within a few days because it was realistically listed at its market value.
In a typical home sale, four parties split the sales commission. They are the listing broker, the listing sales agent who works for that broker, the selling broker, and the “buyer’s agent,” who works for that selling broker.
Although each situation is different, depending on the listing terms, each of the four parties will usually receive 25 percent of the gross commission.
For example, suppose a condo sells for $100,000 with a 6 percent sales commission of $6,000. That commission is usually split 50-50 between the listing brokerage and the selling brokerage. However, this split might be 4 percent to the listing agent and 2 percent to the selling agent, or vice versa, depending on local market conditions.
Presuming a 50-50 split, the listing brokerage receives $3,000 and the selling brokerage earns $3,000. Of those amounts, the brokerage then splits its share with the listing or selling agent. The lowest split is half to the listing or selling agent, but often higher. That means the listing or selling agent earns at least $1,500 in this example.
Most home sellers (and buyers) don’t understand their agent might take home as little as 1.5 percent of a typical 6 percent gross sales commission.
THE ONLY TWO TIMES HOME SELLERS SHOULD NEGOTIATE SALES COMMISSIONS.
Based on my 39 years as a real estate broker, there are only two times a home seller should consider negotiating a reduced sales commission from the customary local “going rate.”
The first circumstance occurs when the home’s market value is far above typical home sale prices in the community. To illustrate, if you are selling a $1 million house in a town where the average home sells for $300,000, the successful realty agents you interview about listing your home for sale should offer a reduced sales commission without your even asking.
In other words, the higher the home-sale market value, the more negotiable the sales commission becomes.
The second circumstance occurs after you interview several successful local realty sales agents, and list with the best agent at the asking price suggested by that agent. However, after exposure to the local home sales market at least 30 days, if that agent produces a purchase offer substantially below the recommended asking price, that is the time to discuss a “commission reduction” if you accept the buyer’s offer.
BEWARE OF “ADD-ON ADMINISTRATIVE FEE.” Home sellers should watch out for any unexpected “add-on” fees hidden in the fine print of the listing contract. To raise their net earnings, some real estate brokerages have resorted to adding a $100 to $500 “administrative fee,” “transaction fee” or other unnecessary “junk fee” to their charges.
These add-on fees go to the brokerage, not to the listing agent, so home sellers should be reluctant to agree to such charges unless clearly disclosed at the time of signing the listing contract.
CONCLUSION: Real estate sales commissions are negotiable between the home seller and listing agent. But home sellers who negotiate an up-front, reduced sales commission with their listing agent often cut the vital incentive for buyer’s agents to show and sell their home. For this reason, home sellers should be extremely cautious about reducing buyer’s agent incentives at the time of listing their home for sale.
(For more information on Bob Bruss publications, visit his
Real Estate Center).