Are commissions going up or are they going down? New data from America’s top real estate firms holds some interesting answers to this often-contentious debate.
Recently there has been a spirited debate among Inman News readers about the future of agent compensation. What few people are discussing, however, is a pattern that has been consistent for the 30-plus years I have been in the business. Commission rates are primarily contingent upon whether an area is experiencing a buyer’s or seller’s market.
In 2005, I wrote a book called "Waging War on Real Estate’s Discounters." In that book, I outlined how to use the full-service real estate model to compete with cost-cutting competitors. When agents compete exclusively on price/commission, they are treating their services as a commodity. Another way of looking at this is to say, "A potato is a potato is a potato." Thus, it’s smart to choose the lowest-priced potato. Since 15 percent of all clients choose their agent based solely on price, cost-cutting models serve a well-defined market niche. In contrast, only 5 percent of all clients want premium service at a premium price. The other 80 percent are up from grabs. This group decides based upon value, i.e., a combination of price and services provided. When you compete on the value you provide (helping the seller obtain the highest possible price in the shortest time with the least amount of hassle), you attract sellers who are willing to pay a full commission.
Today, many of those who relied upon the "price only" value proposition are no longer in business. The same thing happened in the previous booms in the 1980s and ’90s. Commission rates decreased during the seller’s markets as cost-cutting models flourished. When the market shifted to a buyer’s market, commission rates increased while cost-cutters failed. The logic is simple. When there are hundreds of competing properties and prices are declining, it is in the seller’s best interest to do whatever it takes to sell as quickly as possible before prices decline even more. The result is increased buyer incentives and higher buyer commissions. While these don’t cause the sale, the additional exposure often results in more showings, a quicker sale, and a higher seller net.
In a buyer’s market, the "value" of an experienced agent who can close a difficult transaction increases dramatically. Despite the tremendous number of REO, short sale and foreclosure properties where commissions are normally set at 5 percent or less, commission rates in 2008 increased just as they have in previous buyer’s markets.
Keller Williams (KW), in a study including all transactions from 2003 to 2008 for their 74,175 agents, confirmed that this pattern is repeating itself now. In 2003, KW’s median commission rate increased 0.4 percent. As the market improved, median commission rates fell 0.01 percent in 2004, 1.7 percent in 2005, 0.03 percent in 2006 and 2007, followed by a 4.8 percent increase in 2008. Realogy reported a similar pattern in which commission rates declined 1.95 percent in 2005 and 1.59 percent in 2006, while increasing 0.81 percent in 2007 and 1.2 percent in 2008. Real Trends also reported an increase in commission rates (up to 5.2 percent) in 2008. …CONTINUED
While commission rates increase as the market worsens, and total commission dollars decline, the reverse is typically the case in a heated seller’s market.
Specifically, KW reported that the annual change in the median commission amount on the seller side increased by 8.3 percent beginning in 2003, and rose 8.54 percent in 2004, 10.7 percent in 2005, 2.3 percent in 2006 and 0.5 percent in 2007, but declined 4.8 percent in 2008. KW reported a similar pattern among commissions for the buyer side. The median prices also mirrored the same pattern as the average prices. KW also reported a 2 percent increase in their per-agent productivity, while the National Association of Realtors reported a 2.9 percent decrease.
What’s fascinating about the KW numbers is that during the time that commission rates were falling, agents were actually making more in the average amount of commission they were earning.
The KW numbers also confirmed another interesting pattern. Up to 90 percent of all transactions in some markets are REOs or short sales (across all brokerages). The lenders normally offer to list these properties at 4 percent or 5 percent commissions. Listing agents understand that to stand out in the crowd, they often have to offer a high percentage to the agent representing the buyer. Thus, a 5 percent commission might be split 3 percent to the buyer’s agent and 2 percent to the listing agent. KW’s numbers for 2008 support that this is exactly what is occurring. The median amount of commissions for buyers in 2008 was 32 percent higher than it was for listing agents.
Will commission rates go down when the market improves? Based upon past markets, the answer is probably "yes!" Will agents make more money per transaction when the market improves? If the past market trends predict the future, the answer to that question will be "yes!" as well.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com.
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