With all of the complexities of buying and selling a house, it’s nice to go through the process with an ally on your side. Someone who has been there and done that. Someone who can help you understand what you want and how to get it. Someone like a real estate agent.
Realtor.com says that 91% of people selling a house use a real estate agent, and 88% use one when they are looking to buy. Most of the transactions not using an agent are typically between family members or people who already know each other. With the use of agents being so widespread, it’s important to remember they’re not matching people up with homes out of the goodness of their heart – although all the agents I’ve ever met are pretty solid people. They’re doing this because it’s how they earn their living.
So how do agents get paid? Real estate agents work on a commission basis, meaning that their time and efforts are only rewarded once a transaction goes through. So when you see that line item in the contract, at least you know why it’s there.
I talked to Doug Gartley, a highly-credentialed associated broker with In-House Realty, about commissions. He listed some of the benefits that come from partnering with a real estate agent and some of the services your commission payment earns you.
By paying commission for a real estate agent, you get someone who will
- List your property
- Market your home to the public
- Offer their negotiation experience
- Make price recommendations
- Discuss all options and potential scenarios once an offer is made
- Follow the transaction through the closing once an offer is accepted
- Facilitate the ordering of title work
- Coordinate and attend closing
- Deal with home inspection results and handle any negotiations
“If the average consumer understood what was fully involved, they’d probably be more inclined to pay more,” said Gartley.
What are real estate commissions and how do they work?
Now that we know a little about why we pay real estate commissions, let’s take a closer look at what they are and how they work. According to Investopedia, all of the specific information about the agent’s compensation will be included in the contract you sign. Be sure to take a close look and ask any questions you may have about it. There are plenty of tools out there, like this one, to help you figure out what the commission costs of selling your home might be.
Although compensations vary and can be negotiable, a 6% commission is the standard going rate. That 6% goes into a pool and is split between the buyer’s agent and the seller’s agent, unless one real estate professional is representing both parties in a transaction (acting as a “dual agent”). That split is again negotiable and can vary by transaction.
Some of the allure of working in real estate is not only being your own boss, but growing your own business the way you want. According to About.com, realtors usually make an average of $30,000–$45,000 per year working full time. Because of the flexibility, agents can easily change their business model. If they decide to sell houses that may have a smaller purchase price, they can lower their percentage or their flat fee, taking home less per transaction but making up for it by doing more transactions.
Although the rates and fees are negotiable, the National Association of REALTORS encourages members to not drop their rate below 5%. Part of this is to encourage the profession by making sure other agents can make a living. But this is also because, even in the best of circumstances, agents may only really be taking home 1.5% of a home’s sales price. The commission is typically split between the buyer’s and the seller’s agents evenly, meaning that if they charge 6%, each one takes home 3%.
Additionally, out of that 3%, the agent may very well have to pay a fee to the broker who brought them the client, costs associated with the office they work for or other business expenses. In fact, in situations where the agent is paid directly by the brokerage, 30–40% can be withheld from the start. This also doesn’t take into account other expenses, like the average of $2,000 per year or so that it takes to keep an agent licensed by attending conferences or other professional development opportunities.
Although there are many positives to a career in real estate (setting your own hours, near unlimited earnings potential, etc.), there are downsides to the commission-based, independent contractor business model. Gartley talked a little about this in his interview: “As an independent contractor, you are operating without a safety net, no insurance, things like that. Agents spend most of their time prospecting, looking for clients. And the biggest challenge is time.” Gartley said that working nights and weekends and managing the schedules of multiple clients at once can be tough.
How can I save money on commissions?
Now that we know a little bit more about why real estate agent commissions exist, how they work and what they’re used for, we can get to the burning issue that is probably of the most importance to you. With all of the costs, rates and fees associated with a real estate transaction, what can you do while you’re buying or selling a house to control real estate agent costs?
The easiest way to control this cost, and the one that more and more people are opting for, is to just not use a real estate agent. Of course, as licensed professionals, they really do help you navigate the often complicated waters of a transaction. So if going it alone is not really your style, maybe some of these other tips would be better for you.
You may opt to go with a for sale by owner (FSBO) with help option. Although the agent would not be as involved as they would with a normal transaction, they would still be there waiting to help as needed while you sell your home yourself.
Credit Sesame offers the following five tips for saving money on fees:
- Go for half. If you’re both buying and selling a house, ask your agent to not charge you the full amount on each transaction since he or she is doing two deals for you.
- Shop around. Make sure you’re getting the best rates, and be sure to look at some of the larger real estate companies who sometimes offer discounts or rebates.
- Ask what you’re getting for your money. You’re probably paying thousands of dollars for an agent’s help, so make sure you’re getting value for your money.
- Hold out for a higher selling price. If you factor in the cost of fees associated with the transaction, you can ask the buyer to cover the expense of your agent.
You can also see if the agent would be willing to let you do some of the duties that they traditionally handle, such as hosting your own open house event. Selling in the “off season” when business is slower may also result in an agent reducing their fees in order to gain more business.
Now that you know a little more about real estate agent commissions, has your opinion on them changed? Share your thoughts or any other tips you may have on reducing real estate costs in the comments!