Why a Real Estate Commission Split Matters

Saved Money on My Real Estate CommissionWith an increasing amount of discount brokers representing sellers in today’s real estate market, a practice known as “sell-to-the-commission” has been springing up. When these discount brokers guarantee a lower cost for selling the house, it results in lower commissions for agents, sometimes so low that Realtors will purposefully avoid showing the properties to their clients.

Both buyers and sellers can wind up confused and frustrated, never a recipe for good relations between Realtors and their clients. More buyers and sellers should understand the importance of a fair commission, especially if they want to enjoy a timely and productive real estate transaction.

By the time you are done reading I am going to answer these questions for you:

  • Will lowering my real estate agents commission save me money?
  • Will a lower commission make my home harder to sell?
  • Will I sell my home for less money with a lower commission?
  • Will offering a lower commission hurt my home sale?

The question of why a real estate commission matters should become crystal clear for you!

Understanding The Real Estate Commission Split

In the average home sale, there will be a certain percentage that goes towards commission. If there is a commission of 5%, this amount will usually be split equally between the buyer’s agent and the sellers agent. Although the split can vary depending on the people involved and the deal that is decided upon, you can generally expect the split to be equitable. A fair split would look like 2.5% to the buyer’s agent and 2.5% to the seller’s agent. But with discount brokers, the split is not always as fair as it should be.

With a discount broker, the seller is told that he or she will have to pay a lower fee or commission because the discount broker is offering a great deal. Oftentimes what is actually happening is that the buyer’s agent is being shorted on the commission split. In the scenario outlined above, the split is 50/50. With a discount broker, it may look more like 2.5% to the seller’s agent and only 2% to the buyer’s agent.

Discounted commissions don’t necessarily have to come solely from discount brokerage companies. Any agent working for any company can set a commission structure less than what the market is accustomed to seeing whatever that may be. I say whatever that may be because commissions are never fixed. Investopedia has a good explanation of how a real estate commission works. Commissions are always negotiable but that does not mean it is prudent to discount the compensation you are offering to Realtors.

The Negative Consequences Of a Lower Commission

Lower Commission Kill Home SalesWhen you are trying to sell your house, you naturally want to walk away with as much money as possible. Who wouldn’t? But it is important to understand that in real estate, just like in everything else, you really do get what you pay for.

The more that your discount broker shorts the buyer’s agent on your home sale, the less likely that agent is to show his or her client your home. You are creating ill will in the pool of buyer’s agents, and this ill will can have disastrous effects on your home sale. Worst of all, you may not even be aware that any of this is going on. You may just be wondering why there is no one coming to look at your house.

The discount broker that looks so appealing initially may not be the best choice if you really want to sell your home – especially if you want to sell within a reasonable time frame, and for a price that you can be happy with.

Every potential buyer that is directed away from your home is a potential sale that is lost. Homes that are listed on the market can also develop a negative reputation, one that will be picked up on by all the Realtors and buyers in the area. If your home develops a negative stigma, you may wait months before its sells. You may also wind up having to take far less than you initially expected.

This is why we mention all the time that overpricing leads to extended days on market which can crush your ability to get top dollar for your home.

You’re Not Really Saving Money

What many sellers fail to understand is you are not really saving money when you have a lower commission than all of the other homes on the market you are competing with. Here is an example of what I mean. Your home is going on the market for $500,000. You have interviewed three agents and two of them tell you that they charge a 5% commission. You ask these two agents if they will lower the commission and they say no. The third agent says they will only charge you 4%. In your mind you are probably thinking I just saved myself $5000.

Cure For Commission StupidityHere is why you are wrong. The agent you have listed the home with is only offering a 2% fee to the buyers agent. Keep in mind that every home you are competing against in your market the buyers agent is getting 2.5%. Which house do you think a buyers agent does not want to sell? Ding, ding, ding – if you said yours you are 100 percent correct. It may not seem like much but a difference of $2500 to an agent can be significant.

You may be thinking well who cares everyone finds their home on the internet today. Buyers are still going to call an agent to show them the house.

Fair enough but you are missing what happens with some agents when they see you have offered what they perceive to be a discount commission. All of a sudden your home will have problems you never knew existed. They will do everything under the sun to convince a buyer your home is not right for them.

If you think this is awful and should never happen, I agree with you completely. Unfortunately it does happen and there is nothing you can do about it! So when you think you are saving $5000 you are actually not. You are making it appealing for every buyer’s agent NOT to want to sell your home.

When it comes time to be offering advice on what to offer on your home what do you think these agents are telling their buyers? If you guessed your home is priced too high then you should be hearing those bells ringing again.

Folks if you want to sell your home for the most money you want buyers agents to be thrilled they are selling your property. Giving them a bad taste in their mouth is not a good idea.

Buyer Agent Code of Ethics

Realtor Doesn't Want to Show Home You may be thinking to yourself that it is not right that an agent should be able to steer a buyer away from a property because they are unhappy about a low commission.

Shouldn’t a buyer’s agent be looking out of the interests of their client no matter what? An agent should not be putting their own pocket book before the interests of their client should they? The answer to these questions of course is YES. Realtors should always put their clients interests ahead of their own. Exceptional Realtors follow the real estate code of ethics. Remember however, we are talking about the real world here.

One of the things a good buyers agent should do right up front when meeting a client is explain how they get paid. Buyers need to understand that real estate agents generally do not get paid a salary. They should understand that an agent makes no money unless they make a sale.

Loyalty from a client is not something an agent should assume or ever take for granted. Clients need to be completely aware of how our business works. It is too easy for a buyer to look at houses with an agent one weekend and then meet with someone else the following weekend. With proper education this should not happen unless you have provided poor service.

Explaining how the business works should also lead into a discussion on exactly how you get paid. Good Real Estate agents should point out what they get expect to get paid for providing services in a sale. In other words an agent should set a minimum percentage they expect to get paid.

They should discuss with a buyer up front that if a seller is offering less than the minimum percentage they expect the buyer will make up the difference. This should be done in what is known as a buyers agent contract. The agent and buyer client should be on the same page from day one with each having a certain expectation. The real estate agent finds the buyer their dream home and the agent gets compensated with what they feel is appropriate.

This way there is never a thought to not putting the buyer clients interest first and the agent also gets paid what they feel is an appropriate commission. The buyer in fact doesn’t really have to pay the difference if that amount is deducted from what they are willing to offer on the home. This creates a win-win for both the buyer and the agent.

Consumers should also understand there are distinct skill differences between real estate agents who work with buyers and sellers. Some real estate agents are set up to work with sellers and others enjoy working with buyers. This is why the interview process is critical when selling a home or buying a home. You want an agent that has a particular skill set. For example when selling your home do you really want an agent who is focused on aggressively marketing your home or is always out on the road showing homes? It is really hard to do both well!

The Double Mistake

Desperate Realtor Offers Discount CommissionHow many exceptional doctors do you know that discount their rates? How about the local lawyer? The Dentist? If anyone of these people are worth hiring I am quite sure they don’t have a placard on the door saying they are offering discounts. Why? They don’t have to! Those that are outstanding in their field DO NOT DISCOUNT because there is no need to do so! People want to work with them because of their fantastic skill set and abilities.

When you hire a real estate agent who is willing to discount their fees at the drop of a hat do you really think you are getting one of the best? The answer is clearly NO! Over the years I have seen so many consumers not give a second thought to the real estate agent they hire. These people think we all do the same things to sell homes. How wrong they are! Sometimes it is so clear why there is so much dissatisfaction within the industry.

More often than not when you choose an agent because of their willingness to discount a commission you have not made one mistake but two. You have a lousy agent and a commission rate that is going to turn off those that should be your greatest allies. The third common denominator with this kind of agent is someone who will not think twice about overpricing your home. This of course is a recipe for disaster. So when you ask yourself does choosing a top producing Realtor matter the answer is a resounding yes!

Being a real estate agent for nearly thirty years, I can tell your there are some outstanding agents. There are also those that should not be in our industry. Lousy real estate agents are easy to spot – they do almost anything to land a listing, whether it’s agreeing to overprice or getting paid less than the going rate. This is not what you want!

Agents May Steer Clear Of Your Home

The problem of discounted commissions has become widespread enough that it has made the news, with real estate agents talking openly about how some listings are avoided due to a bad commission split. Discussions between Realtors and interviews with them have exposed the hard realities of the real estate industry, and the sometimes complicated way that Realtor standards and ethics meet up with the real world need to get paid for the work you do.

There are always good and bad examples in every industry, and real estate is no exception. Judging from what some Realtors are saying, when the commission split is bad enough, some agents will avoid a home altogether. They just won’t show the home to their clients.

As previously mentioned, other Realtors may show the home, but they will talk poorly about the house, playing up the negative aspects of the property in hopes of encouraging their client to look elsewhere – at homes where they can expect a decent commission.

A lot of work goes into being a good Realtor. A quality agent can easily spend 50 to 60 hours a week serving his or her clients. While the numbers provided above may not seem drastic at first glance, that half a percentage point comes out to 20% of the total commission for the agent, commission that may be split among several agents. More importantly, the figures listed above were just for demonstration purposes. Often the split can be even more drastically skewed, leaving the agent working for half pay or worse.

Ideally, all agents should show all houses available. But in the real world, people work so they get paid. There may be several other houses that will work just as well for the buyer’s client. Why choose the one that pays so little? So the next time you are wondering whether a real estate commission matters hopefully you understand that is does!

Final Thoughts

Do real estate agents get paid well – yes they sure do! Real Estate can be a very lucrative career if you are good at it. The problem with the real estate industry as a whole is the low barrier to entry. Take a test, pass it and get hired – you are now a real estate agent. It should not be this easy when you are talking about representing many peoples largest asset. This is the reality.

What many fail to understand is that the average real estate agent makes a poverty level income. This is because 94% of the business is done by 6% of the agents. You have two ends of the spectrum and not so much in between. Everyone knows a Realtor because there are so many of us!

The commission structure as it now exists has been in place for decades. There are many who say it needs a complete overhaul. While some real estate agents may disagree, there is not much difference in work selling a $300,000 home vs a $600,000 home. Yet the more expensive home will often times pay double the amount in commission. This is obviously not chump change.

It is no wonder why so many explore getting a discount. The reality, however, is that you will be doing yourself a disservice is you try to beat the system that is currently in place. If you are selling your home make sure you offer a commission structure that is inline with your competition. By not doing so you run the real risk of losing money!

More Helpful Home Selling Articles:

Use these additional resources to make sound business decisions when selling your home.


 

About the author: The above Real Estate information on why a real estate commission split matters was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 28+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

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Comments

  1. Dennis Wooff says

    Most real estate professionals tend to allow the listing agent to determine the value of their sale efforts without objection. In an effort to list, the inefficient and ineffective real estate agent dilutes the sales fees in order to sell themselves to the seller and obtain the listing.

    The discount becomes the reason and the benefit for listing with the agent and not the marketing, professional services, or likely results. To compound and extend the problem, the sales professionals who receive a discounted fee, do not respond by placing those who set the value at less with a reciprocal notice to the ‘discounting’ firm, that they will receive that same value on coop sales.

    Any listing professional that offers a reduced rate should be more than willing to accept the same when selling coop. After all, it is based on their decision on what their value is for a selling agent. As commission are negotiable, every firm has the right to provide notice to another on what their coop rate will be irregardless of an MLS published fee. Unfortunately, this disparity can exist even within the same office. If one is a professional, the last thing one would do is allow another to set their value, especially without any provisions for balance.

    • says

      Dennis you make some good points and this is why I think the commission system that is in place needs an overhaul.

      Most sellers do not understand the value that some real estate agents bring to the table.
      Instead the choose based on personality, commission, the price they get from the agent and other things that are utterly foolish.

  2. John Martelotti says

    Very helpful article on breaking down the nuances of the “commission.” Full disclosure, I will be using these tips in my next presentation.

    Thanks Bill!

  3. Donald Van Dyne says

    Hi Bill,

    How timely I was just having this conversation with an associate this morning. Curious to know why a seller should pay the for the service of a buyer agent? The buyer agent is representing the buyer and not the seller. Therefore the buyer agent owes his/her O.L.D.C.A.R. (obedience, loyalty, disclosure……) to the buyer and not the seller. Further, it’s the buyer’s choice to use an agent. Is it possible the commission real estate model is antiquated? Why would a seller, in 2015, pay for the service rendered to a buyer? Especially if a buyer agent is protected with a Success Fee claim as noted in a standard EBA agreement?

    How would you overhaul the commission system?

    • says

      Don – The commission model as it exists now is broken and I agree with much of what you have said.

      I am sure a lot of Realtors would not want the model to change but stepping out of my Realtors shoes this is what I would suggest.

      The seller pays the listing agent and the buyer pays their buyer agent. This way Realtors could charge based on a fee system that makes sense and not a percentage of the sale price.

      Would this be as lucrative for Realtors? No it would not. This would be better for consumers though because they could assess an agents value much better.

  4. John says

    The current commission system is based on the old way of doing things when every agent was a sub-agent to the listing broker. Buyer Agency is still relatively new to Massachusetts. Any Buyer Agent relying solely on the listing agent’s co-broke is a fool (in my humble opinion). Name me another business where the better you do your job the less money you make? If you do not establish a minumum fee for your service as a buyer agent in the beginning, you risk putting your interest in front of your client’s interest. Set your fee up front, then you don’t have to worry about how much the co-broke is and you can be free to be honest with your client about the value of the property they are interested in.

    I am both an Appraiser and a Broker. You’d be surprised how many times I’ve been called by a buyer’s agent when my appraisal comes in under the contract price. I’m basically telling them their client is over paying, but they’re made because they aren’t going to close and get their commission. I get it when it’s the listing agent, but it baffles me every time when it is the so called buyer’s agent.

    As for your comments on discount brokers, I do disagree to a point. I do not work for a large national brand. I do not have to pay fees to the national headquarters, desk fees, or have to split my portion of the commission with the broker of record. I work for myself as an independent broker. Therefore, I can charge my client less and still provide a quality service and be paid a reasonable amount for my services.

    Your idea of sellers paying selling agents and buyers paying buyers agents is intriguing. I know in the rental arena there are some markets where the tenant pays their agent while in others the listing agent pays the renter’s agent fee. I would fear many buyers choosing not to be represented and going direct to the listing agent. This brings up other issues such as a buyer not being represented could be taken advantage of (especially if they are a first time buyer) or an increase in dual agency. I’m personally not a big fan of dual agency as it limits what you can actually do for your client and you basically become a facilitator. I seller hires you for a reason.

  5. Thomas Phelan says

    Bill,

    Another great article and one that sheds light on an extremely important and controversial subject, a Realtor® commissions.

    Thank you for establishing one basic factor, that a house should be priced on the supportable comps and evidence, i.e. in your example of $500,000. Then any Realtor® commission will be deducted from that figure.

    My reason for replying to your article is because I predict the day will come when the likes of Zillow will offer special services like listing a property for less than $1,000. Zillow would take the position that a Buyer’s Agent should seek his/her commission from the Buyer. This is how it is done in many countries and guess what, it works.

    As much as I would like to support why a $500,000 listing deserves a 3% commission or $15,000 I cannot, especially today when few Realtors® hold “Open House” or print expensive half page ads in color featuring the home or run radio or TV ads.

    A rare exception to this might be using a Realtor®’s Realtor®/Broker base like Frederick, or Ryan or Louis in the TV show Million Dollar Listing. Typically their marketing is extensive and expensive, e.g. they throw incredible parties to expose the property to their competitors and clients and aggressively follow up.

    But let’s stick to your $500,000 example and see if the following approach can work.

    Let’s say I have scheduled a Listing appointment with the Smiths. My comps and supporting evidence show the house would be fairly priced at $500,000. The Smiths are not under pressure to move but do want to sell and agree $500,000 is the right price. Naturally the subject of, “What will my commission be?” emerges.

    Here is how I handle it. I explain that the majority of Listing commissions are 6% and some 5% and explain that I as the Listing Agent have the power to establish the amount of commissions a Buyer’s Agent will receive.

    Your article cited numerous times when a Listing Agent retains the majority of the agreed to commission many Buyers’ Agents will be discouraged to show the property or even consider it even if ideal for his/her Buyers.

    To overcome this reluctance to show a property because of a low Buyer’s Agent’s commission dynamic I would say to the Smiths that they have several options to choose from. For example:

    List at 6% and Offer a Buyers Agent 3% (the traditional way)

    List at 5% and Offer a Buyers Agent 2.5% (still the traditional way)

    List at 4% and Offer a Buyers Agent 2%
    (save some money but likely discourage Buyers’ Agents)

    Or, how about …

    List at 6% and Offer a Buyers Agent 5%
    (Wow, how many Buyers’ Agents will show this property)

    List at 5% and Offer a Buyers Agent 4% (Seller nets more)

    List at 4% and Offer a Buyers Agent 3% (Seller nets even more)

    Yes, in the latter example the Listing Realtor® only makes a 1% or $5,000 commission based on your hypothetical of $500,000 but I’ll take Listings like this any day of the week.

    I would be crystal clear with the Sellers that because of my drastically reduced commission, e.g. 1%, I would not be spending any serious money advertising the property or holding Open Houses because I am offering up to a 5% Buyer’s Agent commission that should draw like a magnet many more Buyer’s Agents.

    If I were fortunate enough to produce a Buyer, statistics show otherwise, I would offer a portion of the Buyer’s Agent’s commission back to the Seller.

    Exclusive Right To Sell v. Exclusive Agency

    Okay, here is where I really swat the proverbial hornet’s nest.

    I would also offer the Sellers of the $500,000 property a choice between an Exclusive Right To Sell or Exclusive Agency Listing Agreement. Would I prefer to handcuff the Sellers with an Exclusive Right To Sell Agreement? Absolutely, but I cannot condone a Realtor® not informing a prospective Seller that there also exists the Exclusive Agency Agreement that allows them to sell their own property and if successful and I was not the procuring cause, I make zippo or 0% commission.

    Yes, I know there will be many Realtors® that will yelp, “But my expenses, what about all of the money I have invested in marketing this property?”

    My answer to this question is simple, include in the Exclusive Agency Agreement a descriptive list of the of all of the expenses you will incur in specifically marketing the property in question, e.g. Flyers, Post Cards, Door Hangers, extra Signs, cookies and punch served at the Open Houses and obviously all the ads that featured the property etc. Then have a paragraph that states if Seller sells the property without your endeavors the Seller will reimburse you the amount of your expenditures. Most Sellers I know would just at this chance.

    The bottom line is most listed homes will sell through the efforts of a Realtor® and because it was listed on a MLS.

    One last thought. I would like to address one aspect of the article that deals with “Discounts” and cites Doctors, Dentists etc. who do not offer discounts.

    I know many Doctors and Dentists who offer, “Discounts” when cash is paid upon the services being rendered. The logic given to me by these Doctors and Dentists is that by receiving “Cash” a truckload of Governmental and or Insurance Company paperwork is eliminated. Gosh, that sounds to me a lot like not having to hold Open Houses or spend money on advertising a Listing.

    Also, a Doctor and Dentist guarantees his/her work, a Realtor® rarely guarantees the sale of a property.

    You leave a Doctor or Dentist’s office with the desired service being performed, however, all one has to do is look at a MLS to see the long list of expired listings that evidence that the desired service (selling the house) was not performed.

    I know I will offend many Realtors® and that’s okay because I feel strongly that the old ways of 6% just are no longer justified and must come into step with the age of the Internet and Social Media.

    If NAR continues to wear rose-colored glasses and watch the parade go by private enterprise, Zillow for example, will make the corrective surgery and painful adjustments that are sorely needed.

    • says

      Tom, I agree with some of what you are saying but especially your main point about the buyer should be paying the buyer’s agent and the seller paying the seller’s agent. This is really how it should work. I have thought this for many years.

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