Item: While conducting an open house recently, a real estate broker engaged a visiting homeowner in conversation. She asked where he lived and he told her. “I do a lot of business in that subdivision,” she said. “If you list with me I’ll cut the commission for you.”
Item: A seller listed her upscale home with a broker and agreed to pay a 4.5 percent commission. After six months, the property was still on the market. She recently listed with another broker who is charging 5 percent.
Item: Last summer a couple with a house in the $150,000 range interviewed five brokers before listing. They asked each to reduce the commission from the 6 and 7 percent asked for; four said no. One agreed to take a percentage point less on the purchase of a new home if both transactions were handled by her office.
With stories like these floating about the real estate market, little wonder the subject of sales commission is baffling. It is also (not surprisingly) one that brokers are reluctant to discuss in more than abstract terms. We put together the following guide to dissolve the mystique and, perhaps, put extra bucks in your pocket. Or a trendy new sofa in your den.
What is a sales commission?
It’s a fee paid to real estate brokers and their offices for matching buyers with sellers. The money is paid directly by the seller, as it comes out of his final check at closing, and indirectly by the buyer. The commission is built into the selling price.
What is the going rate?
Ask 10 brokers and they’ll tell you that there’s no such thing.
“It is illegal to fix commission rates and agents are very sensitive to those allegations,” says Laurene Janik, general counsel to the National Association of Realtors. “In the ’50s, commission schedules were promulgated by real estate boards and viewed as a way of keeping the public from being gouged. Then the industry got hammered with price-fixing litigation and schedules were perceived as a price-fixing mechanism. We now go overboard to caution our members they need to independently establish their rates.”
With that disclaimer out of the way, what is the going rate?
Four to 7 percent. The figure varies, however, from city to suburbs and from suburb to suburb. It also depends upon local custom and the salability and price range of your property.
“You may find commissions vary upon how hard it is to sell a home,” Janik says. “If it’s a market where they are selling like hotcakes, you may see commissions drop. In a market where it is harder to sell, you may see them go up because brokers have to work harder.”
Who gets the money?
In a typical transaction, it is divided four ways-listing agent, listing agent’s office, selling agent, selling agent’s office. Their shares may or may not be equal. Volume producers, for example, may get a bigger slice of the pie. Agents who work as independent contractors may retain their offices’ shares but are charged a hefty monthly fee for doing business there.
Are commissions negotiable?
In theory, yes. In practice, maybe. Deals can be made but you won’t find a flea market mentality in which haggling is expected, much less encouraged.
“Is everything negotiable?” poses Millie Rosenbloom, president of The Habitat Co. Brokerage Division in Chicago. “Yes, but we don’t make it a policy in our company to cut commissions. We try to minimize the number of times that can happen. If we allow our agents to do it they feel they always have to offer.”
A long-time northwest suburban broker who asked not to be identified has a different take on the situation: “I know I have to negotiate to be competitive. A lot of other people are out there cutting commissions.”
Under what circumstances are brokers most willing to cut their commission?
Let’s assume you are not your agent’s mother. Nonetheless, long-standing relationships sometimes count, says Cynthia L. Duffy, consumer real estate instructor at the College of DuPage in Glen Ellyn and a former broker. “If a Realtor has a customer he or she has been getting a significant amount of repeat business through, as a courtesy” the agent might cut the fee. “It’s not normal on one sale.”
“It depends upon how the property shows,” says the anonymous northwest suburban broker. “If you know you have a salable listing, chances are you’re willing to do it for less rather than have some other agent come in. If it’s a dog listing that is going to stay on the market and you have to keep advertising it or if there are a million of the units, say in a condo development, on the market, chances are you’re not so willing to cut the commission.”
The higher the price of your home, the more likely a broker is willing to deal. A strategy that has become popular within the last few years is the tiered commission structure. As an example, you might agree to pay 6 percent on the first $100,000 of the selling price, 5 percent on the next $100,000 and 4.5 percent on the balance. If you sell for $300,000 using this method, the commission will be $15,500 versus $18,000 at a straight 6 percent. The savings comes to $2,500.
Rosenbloom admits she toes a hard line when it comes to cutting commissions. As a rule she doesn’t do it for transactions under $1 million. “If I can’t negotiate a full commission for myself, how can I negotiate for you?”
Another possibility is if you are willing to do all the work, Janik says. “There are companies that offer lower levels of service. If you’re willing to show the home and pay for the ads, maybe the broker is willing” to take a reduced fee.
On occasion one far west suburban office charges 1 percent to merely place a home in the multiple listing service. A broker, an independent contractor, charges her closest friends $500 for the same service. Sellers make separate arrangements to pay buyers’ agents.
Am I locked into a commission rate once I’ve signed a listing agreement?
Definitely not. When selling price negotiations get to the point where offers and counteroffers are close but everyone involved is battle-weary, agents have been known to make concessions simply to close the deal.
“Occasionally there are times when a bargain is not struck and the buyer or seller might say, `Let’s all throw in a quarter’ ” of the difference, Rosenbloom says.
“Research shows there are a lot of hot-water heaters purchased by Realtors,” Janik says with a chuckle.
Should I ever pay more than the suggested commission rate?
Perhaps. The multiple listing services print the percentage that will be paid to selling agents. Suppose you’re selling a four-bedroom Colonial and there are two dozen similar homes on the market in your neighborhood. You’re paying 5 percent and the others are paying 6. Agents will note whether they’re getting a 2.5 versus a 3 percent commission. Their natural tendency will be to steer clients to the higher-paying properties. Conversely, if you’re paying 7 percent, of which half goes to the selling agent, they may bring their buyers to you first.
“If you’re interested in moving your house very quickly, consider putting in a higher commission rate,” advises Duffy, the real estate instructor.
What can I do if I have to sell and there is no equity in the house to cover the commission?
Unfortunately, this happens when a seller has not lived in the home very long or when prices have dropped.
“In this case, I recommend the seller take a class in how to (sell) his own home and have a real estate attorney sitting at his shoulder,” Duffy says. “The consumer is better off working hard on his own behalf than frantically shopping for the Realtor who will do the job the cheapest.”
