The 6% commission: Is it the best way to pay agents?
A few weeks ago, I posted a blog item asking about real-estate commissions. Boy, did readers respond. They complained (agents don't do enough...
Seattle Times real-estate editor
A few weeks ago, I posted a blog item asking about real-estate commissions. Boy, did readers respond.
They complained (agents don't do enough work to merit that kind of money), complimented agents (try selling yourself and find out how much work it really is), and asked questions. Some clearly thought a lot about the question before they responded.
Among the comments were suggestions and advice for homebuyers and sellers trying to figure out whether to use an agent, or buy or sell by themselves.
Read on, then add your thoughts to the blog. I'd love to hear whether you think there might be a better compensation system for real-estate agents.
Here's the item I posted:
OK, before every agent in the Seattle area gets all hot and bothered, let me preface this by saying that I've never bought or sold a house without an agent. I've never negotiated a lower commission, just let the closing agent subtract the number from the bottom line.
But I'd like to hear why a home sale is worth a flat 6 percent.
I know the listing agent and broker share 3 percent, and the buyer's agent and broker share the other 3 percent. So why should the seller pay the whole 6 percent?
Some believe that cut-rate agents deserve less money because they do less work and that full-service agents deserve 6 percent commission because they provide full service. But I want to know why a buyer and a seller have to pay the full commission for every full-service agent, regardless of qualifications, experience and service provided.
Here are some of the comments, in no particular order. For more, go to my blog, The Real Estate Deal, at www.seattletimes.com/therealestatedeal and look for the commissions item in the May archives.
Sample comments from the blog
My wife and I used a real-estate lawyer to buy our current home. We knew the neighborhood well and found the house we wanted on our own. We approached the listing agent and explained that we were working with a lawyer, not a real-estate agent and wanted a 3 percent rebate or price reduction since there would be no buyer's fee. We paid our lawyer $385 to write up an offer that we submitted ourselves. This worked really well and saved us a lot of money.
If you take this route, make sure you use a good real-estate lawyer who understands how the business works.
Our lawyer used to be a Realtor/broker, so in addition to understanding the law, he also understands agents. It is also important that you make sure the listing agent is willing to work with you in this manner and that you clearly stipulate your expectations upfront and document them in your offer.
The seller has the money available from the profit of the sale. Many first-time homebuyers do not have the money to pay an additional 3 percent on top of the down payment, closing costs, inspection, appraisal, etc.
No matter what you are buying, 6 percent markup doesn't sound like very much — whether it's insurance, toothpaste, whatever. Especially in a difficult market, agents earn their commissions because most homes are not selling within three weeks; they are sitting for 90 days or more. Agents are spending far more time on marketing and other efforts.
Keep this in mind: If an agent gives up part of his or her commission right up front and this person is supposed to be your skilled negotiator, what is he or she going to give up when negotiating the price for your house, whether you're buying or selling?
After a number of real-estate purchases, sales and leases, I am not universally happy with the performance of full-priced agents. I found that a potential $200,000 commission meant little to an agency that had larger fish to fry. (Lesson: Scale your choice of agent to the size transaction you pursue.)
Commissions are always negotiable. Always.
Sellers should pay listing agents, and buyers should pay buyers' agents, but it can be argued that it all comes out of the price of the house anyway.
Let's look at the math in this example:
Home sells for $400,000.
Sellers owe $300,000.
Gross gain is $100,000.
Agents get $24,000, or 24 percent of the seller's equity. Then the county takes 2 to 2.5 percent so subtract another $8,000, leaving the seller $68,000. If the sellers took out a second mortgage to get repairs done and do some painting or staging for the sale, subtract another $8,000 (roughly), and we're left with $50,000 profit.
So the agents and brokers take home $24,000 in commission while sellers get $50,000 profit — nearly 50 percent of the take.
Agents and their commissions might have made sense in the 1950s for people moving across country who didn't know a thing about neighborhoods, crime, homes or local prices. Now, all of these can be researched online and comps pulled up.
It's a dinosaur industry, and the players are doomed.
Traditional commission has been 6 percent for quite a while. Meanwhile, prices for homes have more than doubled in the last five to seven years, effectively doubling commissions. Most do less work because of the Internet tools out there.
I wish my salary doubled in five years for doing less work at the same job.
The top agents are not likely to discount their fees. They don't have to. They are very, very good at what they do.
Agents have a duty to put the client's best interest first, even if that includes advising the client to back out of the deal. A good agent will represent their client's best interest no matter how much or how little the commission.
While unrepresented sellers like to believe they are knowledgeable on pricing, marketing, negotiating, etc., studies indicate that they probably aren't.
If a property is overpriced when listed, it will take longer to sell and sell for less (up to 10 percent less) than if priced, marketed and advertised appropriately from the start. It gets stale and shopworn. New buyers ask, "What is wrong with it?" when it is finally priced appropriately.
Granted, some agents are not worth the commission and many buyers and sellers have completed a transaction with a bad taste in their mouth. I would bet the clients of good agents would say the service based on the agent's skill and knowledge was well worth the compensation.
Who really is the greedy one in a real-estate transaction? The seller.
I don't think the 6 percent should be there anymore. People should just get paid for their time. If one agent is better than another, then the better agent should get a higher rate.
During slow times, more sellers will opt for full-service agents. There have been flat-fee, discount-fee, FSBO companies helping sellers and buyers for more than 30 years. Interesting that none of them have taken much market share anywhere in the country that they work.
Instead of complaining that agents make too much money for too little effort, people should take the time to research their choice of real-estate agents in the first place.
Hire the best. The commission seems high at any percentage you negotiate, but the best agents more than earn their keep. Don't go for the fancy-car guy or gal. Go for the solid, stable one.
Some people sell their own homes and don't pay any commission. Of course, they do all the work and possibly don't get the greatest exposure or highest price. Others pay a discount broker. You get what you pay for. A great agent will be worth the commission and will work hard to get it.
First, the 6 percent commission is a radical overpayment for the two agents involved in a deal, from my observation. My neighbor agent spends a nice portion of each workday in his pajamas or in sweats, doing errands or watching TV. He spends much more time socializing and keeping in contact with all of his past clients (friends) and potential future clients (friends) than he does working for his present clients.
His workload, beyond driving clients to look at houses, is pretty minimal. His benefits as a "real-estate expert and marketer" are minimal in this Internet age. Really, any person with sense and a little intelligence could do it themselves or pay a flat-fee lawyer to do the couple of important things. The paperwork he does is pretty minimal, with the mortgage broker and title company doing all the real work.
Personally, I would like more choice, to choose the level of hand-holding I want and to be able to pick an agent based on price as much as anything else.
We live in a free market and you shouldn't have to be super savvy to know you can negotiate the 6 percent. You also shouldn't have to worry that if you go outside the agent system, you will be stonewalled.
That's exactly why my wife and I sold our first home ourselves to a like-minded couple that didn't want to use an agent, either.
We did for sale by owner through a service that listed our house on the MLS. We created our own fliers, hosted open houses and used a real-estate attorney for a flat fee of $800 to contract and negotiate the sale.
We priced our house right and had a great offer in three weeks after putting it on the market.
We bought the home using an agent, and between his bad attitude and outright dishonesty I said, "Never again will I use an agent to buy/sell a home."
Adequate representation is my main concern. The buyer should carefully determine whether a buyer's agent is needed. I choose not to deal with listing agents not prepared to deal directly with the buyer.
The underlying theme here is that the Internet exists and an introduction between a buyer and a seller simply is no longer worth 6 percent, and likely not even 1 percent in coming years. There are new models emerging in real estate, and ultimately, companies like ChoiceA, Craigslist and maybe Redfin will change things. I think real-estate agents will be gone by 2012. What they provide is simply not worth 6 percent and never will be again.
This material has been edited for print publication.
Cindy Zetts' blog excerpts appear Sundays. Reach her at 206-464-2027 or email@example.com.
Copyright © 2008 The Seattle Times Company
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