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Why Do I Have to Pay My Real Estate Agent 6%?!

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Selling a house can be expensive. Not only are you probably going to have to lay out some cash to spruce it up so you can get top dollar, you also have to plan on paying a real estate commission, which usually runs 6% of the sales price. On a $300,000 home that’s $18,000 — not a small chunk of change.

So why 6%? Why not 3%? Why not a flat fee of $2,500?

In the 1940s and ’50s, the National Association of Realtors required its members to set commissions at a certain level — and also required its members to either work full time or have enough customers to earn a living as a Realtor — in order to join (only members had access to the Multiple Listing Service). In 1950, the Supreme Court ruled that requiring certain rates was illegal. (After that it became a “suggested” rate, some sources say.)

How it became 6%, however, no one seems to know.

“I have been in the industry for nearly 40 years and know of no one who can say how, when or why it was established originally,” says Steve Murray, president of REAL Trends, which tracks real estate data. “I do know that we have been tracking it since 1991 on a national level (and are used as the source for such data by the Federal authorities) and it has fallen from an average of 6.1% that year to just above 5.18% in 2014. We see signs that it is continuing to decline at this time,” he said in an email.

Is the 6% Commission Outdated?

One thing to keep in mind is that real estate services are generally bundled. Services on the seller side may include marketing, advertising, open houses and help during the negotiation process. On the buyer side, real estate professionals may spend a lot of time finding and showing houses to prospective buyers, as well as helping them navigate the purchase. Similar to other bundled services, like Internet, cable or phone service, however, bundling sometimes requires consumers to purchase services they don’t need.

More and more, consumers are seeking (and finding) an “unbundling” of such services. Years ago, potential homebuyers talked to an agent, seeking advice on areas with good schools and public transportation, or low crime — now they may research it themselves. In addition, they may be checking online for homes for sale and contacting agents about a house that just went on the market, instead of looking to a real estate agent to find them a home. Furthermore, sellers may not want open houses, or to pay for services they won’t use.

Alternatives to a Full Commission

Rates can be negotiated. If you are a seller and a contract calls for a 6% commission, you can ask whether the agent will take less. “Offer 4%,” suggests Bob Nettleton, a social media editor for a natural health products website, who negotiated the commission when he used a real estate agent to sell his home. Or, he says, offer 2% if you find the buyer on your own and just need the agent to help with the standard process. He added that other factors, such as home price and how many services you expect, may also affect how much you can negotiate on the commission.

While some worry that a smaller commission gives an agent less incentive to sell the house, it may be relative. After all, a $300,000 house doesn’t necessarily take twice as much work to sell as a $150,000 one, even though it nets double the commission. If someone saw your home on the Internet and called an agent to see it, the agent may not be any less likely to show it even if the commission is lower.

Another alternative is to look into services such as Redfin, ListingDoor or local flat-fee MLS agents that don’t use the traditional commission structure. And of course, some DIYers (or FSBOs — For Sale By Owners — as they are referred to in the industry) are using Craigslist, Zillow and similar sites to market their homes themselves.

But before you automatically think cheaper is better, there can be times when you get what you pay for. Tom Scanlon, a financial advisor with Raymond James in Manchester, Conn., tells this story: “About 20 years ago, we were trying to sell our home. It just wasn’t moving. My wife suggested we drop the price $10,000 to move it. I did the math and called my Realtor. I told her I wanted to rip up our contract. I then told her I wanted to INCREASE her commission to 7%. She drove right over to our house with a new contract. Two days later, the house was sold for very close to the asking price. All of the other agents saw the 7% commission and jumped on it!”

Buying or selling real estate is a costly financial transaction, and the commission is just one part of that. Negotiating a real estate commission may pale in comparison to the extra money you’ll pay over the lifetime of a mortgage if your credit isn’t excellent. Someone with poor credit can end up spending hundreds of thousands of dollars more in interest, than someone with great credit (this tool estimates your lifetime cost of debt, based on your credit standing).

Buyers should review their free credit reports and check their credit scores (something you can do for free on Credit.com, with updates every 30 days and get an action plan for improvement, if needed) several months before they start house hunting, in order to give them time to fix any mistakes that arise. And for sellers, working with a buyer who has already been preapproved can help you avoid the headache of a deal that falls through due to financing glitches.

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  • Warren

    I completely agree that a 6% commission to sell a home is ridiculous. I think is should be between 8-10%.
    Yes, I’m a Realtor®. Commissions are how I make a living. Just like doctors, lawyers, and anyone else who is an independent businessperson, a Realtor® has expenses. After paying for school and getting licensed, the real costs starts. The multiple listing service (MLS) isn’t free, each agent must pay several hundred dollars per year for MLS access. Also, to be a Realtor® you must be a member of the National Association of Realtors® as well as a member of your state and local board of realtors. There’s another $800-1,000 per year. Then there is the cost of your computer, internet service, marketing costs, gas for your car and when you think that you’re going to finally make money, you run in to the “split.”
    As a licensed agent you must work for a licensed broker. The broker receives a percentage of the commission received as a result of the sale. Your example of $18,000 breaks down like this.
    If the listing agent also represents the buyer, then that agent and broker split the commission. Normally it’s a 70/30 split. So the broker gets $5400 and the agent gets $12,600. Not bad right? Except it’s rare that a listing agent also sells the house.
    So now that $18,000 is actually $9,000 ($9,000 for the listing agent and $9,000 for the buyer’s agent) and the broker gets $2,700 and the agent gets $6,300.
    So what did both agents do to earn that money? On the seller’s side there were costs involved in getting a person to list their home with you. Real Estate is a very competitive market and getting and keeping your name out there is pretty expensive. Think somewhere between $2000-$3000 in marketing costs per month. Any you pay that whether you list a house or not.
    Now let’s look at the buyer’s agent. That buyer doesn’t usually walk into a brokerage, they see a home on the internet on sites like realtor.com, or zillow.com or trulia.com. Each of those sites are free because real estate agents advertise on them at a cost of sometimes thousand of dollars a month. And, again, that’s a cost whether you sell a home or not.
    Now that you’ve got a buyer to call you there’s the process of looking for a house. A buyer may look at between 10-15 houses before deciding to purchase a home. That buyer’s agent is taking a considerable amount of time making showing appointments, showing the houses and then finally, a buyer decides to purchase.
    Hopefully you’re buyer is pre-qualified (not pre-approved) and they have already begun the loan process. So now you write an offer and present it to the owner, who counters, and you counter the counter. Finally, you arrive at a good price and the real work begins. There’s the home inspection, and the appraisal, and the termite inspection and all of that involves the agent’s time.
    Finally you get to closing on that $300,000 home and get that $9,000 commission check and give it to your broker who adds on error and omission insurance, desk fees and you get a check for $5,800 (after the broker split and your insurance and desk fees). Earning that $5,800 probably took you several months and hopefully you’ve been working with other buyers/sellers so you can sell an average of 8-12 houses per year in the 300,000 range. That way you’ll make $46,000-69,000 a year. From that deduct income tax (Realtors® are independent contractors) and you can see that 6% isn’t the windfall people think it is.
    Before trying to FSBO — For Sale By Owner — or Craigslist, Zillow or similar sites to market your home consider security. Most Realtors® make sure people they work with are pre-qualified and are looking to buy your home. Security is a big issue today for Realtors® since one was recently murdered in Arkansas showing a home and others have been robbed when showing a home. When you try to do it yourself you’re letting people into your home whom you don’t know. Today, most Realtors® pre-screen buyers before they take them on as clients.
    Finally, most Realtors® don’t sell 10 houses a month. Many are lucky to sell two per month and there are a lot of costs and time involved, whether you’re a buyer’s agent or a seller’s agent.
    Don’t get wrong – I love my job. I love helping people find a home – especially first time buyers who usually cry when they get the keys to their first home. I love selling a person’s home and recognize that they are not just selling a building, they are selling memories of their life in that house – that “home.”

    The 6% commission is outdated. It should be a minimum of 8%.
    People don’t question how much their doctor charges for a major surgical procedure, nor do they shop around, or ask for a reduced rate to have the procedure done. People generally don’t ask other professionals, such as lawyers, tax advisors, investment bankers or dentists to take less for the services they perform. Why should Realtors® be asked to perform for less money? As you pointed out in your article, raising the commission rate will cause other Realtors® to show your home more often and sadly, that’s because they’re trying to recoup the cost of that four or five percent commission they are working trying to sell someone’s house.

    • Hoosier Native

      You did a fine job of explaining all the realtor costs associated with selling a house. However I have a couple of questions/comments. Most costs you list are flat fees (per year) or are initial costs like those for the license classes and exams. Given those points, why should I pay 6% on a $300K ($18K) house when a $150K house goes for $9K? Were your costs most to sell my higher priced house? No. You also do not put in more effort to sell the higher priced house. Don’t get me wrong. I would never try to buy or sell a house without a realtor. I just don’t understand the justification for the flat % fee.

      • http://www.robertmay.ca Robert in lethbridge

        Sometimes the larger homes are much less work as the buyers for the starter homes are all seeking financing and scraping up downpayment, but at the higher end lots of the client actually have money of their own and jobs too!

    • Furby

      Your writing is long, but flawed. The main point of my argument: The number is not a f lat fee, it’s a percentage, so as houses become more expensive (and they do over the long run) your commission goes up. 6% in the 50’s might have seen you sell a $30,000 home. Today that home is $500,000.
      The second part of my argument (which I’m sure you will disagree with). Also, how much actual work are you putting into selling the home. YOu meet with the seller (1 hour), you hire someone to take pictures (or do you it yourself – 1-2 hours), you write-up/post the ad to MLS (1 hour or less). You do an open house once a month (6 hours x 2 months =12 hours). Showing the house is typically done by the buyers agent – so you may field some phone calls to give the door lock code. Then negotiations (4-8 calls) may take you 1 hour (calls are short). Prep – (1 hour), most of the document prep is done by title companies, appraisers, etc. Closing (2 hours). So if you honestly look at your hours in, that’s less than 40 hours. 6% on $500,000 = $30,000. Divide that by two (half to buyers agent) and that’s $15,000. Even if you pay out $10,000 to other people, that leaves you with $5,000 for about 40 hours worth of work. If you disagree with me – please post up how many hours worth of work you HONESTLY put in.

    • Nadia

      I disagree completely. Your commission is relative to the cost of the house. That same $300k home went for much less years before. You get your raise as property values increase. You are in a position where you have to sell more to make more. That is how real estate works. You can go ahead and try to charge more in commission. More people are going to start going FSBO. The Internet makes this process much easier than it used to be.

    • http://www.caare.org CAARE.org

      In Europe commissions are around 1.8 – 2% and those agents typically sell about 54 homes per year. Here the Realtor Associations have lowered the entry standards so low that there are far more Realtors than are needed. As a result the average Realtor sells between 2-4 homes per year and most are severely under qualified. Plus, the MLS system which is owned by Realtors requires that commissions get split 4 ways. Its pure insanity. Consumers should look for small brokerages and only work with the broker of the office who doesn’t have to split their fee with anyone. They can avoid dual agency, being steered into over-priced, conflict-ridden title companies and actually get some representation for far less money.

    • evilp

      Actually what you’ve described is a completely inefficient system with the Realtor being the unnecessary overhead in the process. Thats why the cut gets so small by the end of the process. The market will find equilibrium always.

  • N.C. Overton

    It is understandable that many people don’t truly see the value of a Realtor®. However, it is important to understand that Realtors® are not just salespeople. We are licensed professionals. Warren below is right. Having and maintaining a real estate license is not cheap. It’s also not free of liability. Everything you do for your client must follow established rules and regulations according to the federal government as well as the state you operate in.

    Warren has already outlined most of the fees and costs associated with being a Realtor®. This is a full time job. We work completely on commission, there are no regular paychecks. And the expertise we offer the client is pertinent to their needs. We are helping someone buy your home. Whether to live in or invest in, purchasing a home is a big decision and a Realtor® understands and guides their clients through the entire process.

    The seller pays for the expertise and advice their own Realtor® provides and the buyer’s agent for spending all the time it took to search for and set up a showing for their buyer’s to see your home. If you want a cut rate to sell your home, you can use “Help-U-Sell” and get the limited services they provide.

    • Tommy Eliassen

      Hey Overton,
      Excellent explanation.

  • steve_milford

    Even though this article is about commission rates, the point that I see that is really missed here is that bad credit is more costly to a transaction than the rate a Realtor charges. Yet so many people don’t worry as much about their credit as the do about how much a commission rate is.

    Regarding commissions – these are all relative to the costs that every Realtor has. The commissions from each sale is not just meant to cover the costs for that one client only. There is also the portion that Realtors must pay for desk fees, liability insurance, splits to the agency itself, taxes, and more.

    Just like those that earn an hourly wage, the rate that one earns at the top is not the same amount of money that eventually flows into one’s pocket.

  • Judy

    Wonderfully stated, Warren. One other point is the sheer number of homes and the time that takes not to mention gas and car maintenance as well as particular insurance on said car required by most brokerages of their agents.
    The longest we have worked with one buyer is THREE YEARS. Loved every minute of it though. And the top amount of homes shown to one particular client is for us was “94 homes.”
    So real estate is a personal service, into which we hard working caring Realtors invest not only money but time. Lots of time. Some of which is also spent in hours of continuing education so that we may best serve our clients and earn their trust. I love real estate, but my one heartbreak is that so many clients walk in the door of a real estate office distrusting the service as valuable, and the agent in general, mostly because of media to the contrary. Not real experience.

    Before joining my broker husband in Real Estate, I worked in as a Dental Hygienist for 3 decades. My patients walked in my door full of hope and total TRUST and this was with full knowledge that I held their health in my hands. Literally.

    So the initial lack of trust, mostly as per media misinformation, hurts my heart. Other than that, I find being a broker a rewarding career filled with new friends whom i treasure. Thanks for the great article all.

  • chandra

    I give owner and respect to your beneficial thought about real estate business

  • Stanley Steamer

    Commissions aren’t set by law – they are always negotiable. Do you get to negotiate your financial advisor’s fees? Doctor? Dentist? Hairdresser? Yet when it comes to getting assistance to sell your largest asset you want to bicker over fees? How ridiculous is that? Now, tell us what you do for a living so we can beat you up over the price of YOUR services.

  • http://missleonabrown.tumblr.com/ Leona Brown

    Every agent in NYC will happily accept 6%, but the reality is that these same agents will happily pick up the extra deal for a reduced commission rate. Just google discount full service agent nyc and you will find a ton of companies that offer full service for way less than 6%…

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