Real Estate Commissions: What are you Paying For?

In the United States, real estate agents traditionally earn a commission of 6 percent of the purchase price of a home. That number is not set in stone, …

In the United States, real estate agents traditionally earn a commission of 6 percent of the purchase price of a home. That number is not set in stone, though; this month’s issue of Consumer Reports includes the results of a questionnaire that found that only 46 percent of sellers tried to negotiate a lower commission for the real estate agent, and that 71 percent of those who tried were successful. No matter what rate they paid—from 3 percent or less to 6 percent or more—more than 80 percent of sellers were satisfied with the service provided by the agent, including a competitive market analysis of the home. “Sellers who paid commission rates 3 percent or lower were just as satisfied with their brokers’ performance as those who paid 6 percent or more, suggesting that haggling can’t hurt,” according to Consumer Reports.

But, whether a commission is 3 percent or 6 percent, where does that  money come from, and what does it cover? Real estate commissions are usually paid directly by the seller, but both buyers and sellers ultimately pay the commission as a part of the overall transaction. Here is a summary of the general benefits that both buyers and sellers gain from hiring experienced real estate agents:

Tour time: The collective activity of every agent that shows a specific property with the intent to persuade a buyer to take action. Tour time gives both buyers and sellers exposure to the market. If a property is shown three times per week over a period of six months, that amounts to 72 to 144 hours per property of tour time. This includes setting appointments, meeting, driving and showing only; it does not include buyer education and preparation.

Buyer education and coaching: Real estate transactions can’t happen if buyers don’t take action. Both buyers and sellers benefit from buyer education that explores the benefits of homeownership and investing. The collective activity of buyer education—and coaching on how to buy, what to buy and the financial preparation required to buy—is invaluable. The average buyer needs data and coaching every week for a period of six months. This can amount to more than 50 hours of communication per buyer, and this time can double in slow markets in which buyers take longer to make purchasing decisions.

Data that can be leveraged: The collective activity of thousands of agents researching and listing properties creates historical data that both buyers and sellers can leverage for their advantage. This information is now available widely on the Internet, but the primary sources of this information are real estate databases which are updated and maintained as each transaction happens and as each bit of data is collected, amounting to hundreds of thousands of hours per day on a global basis.

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Marketing: The cost of marketing a property across various media, including newspapers, the Internet, e-mail campaigns, brochures, letters, signage, displays, websites and flyers.

Skill sets and tactics: The most active real estate agents have the negotiating expertise to gain the advantage in any discussion with an opposing buyer or seller. Different tactics work with different buyers and sellers. This knowledge can only come through years of experience with many different types of deals and personalities.

Representation: Representation can protect investors’ rights against unlawful and unethical real estate agents, and unintentional mistakes. In each state, the concept of buyer and seller representation can vary. Take the time to know what this representation means for the state the real estate transaction will take place in, since it is a valuable benefit that is paid for through a commission. This benefit is generally intended to create peace of mind for investors that that their interests and confidentiality are fully protected, and that all information relative to their interest in the transaction is fully disclosed.

Though the actual rate of the commission can change, the Consumer Reports questionnaire shows that real estate agents tend to prove their own value; 81 percent of those who paid 3 percent or less were satisfied with their agent’s performance, compared to 87 percent of those who paid 6 percent or more. Approval ratings that high show that the price of the commission is almost always worthwhile for those involved in the transaction.

But some investors would rather forgo the services provided by a real estate agent and keep the money they would have spent on the commission. About one in five sellers who had homes on the market between 2004 and 2007 skipped the real estate agent, according to Consumer Reports. Most of these sellers chose to sell the house on their own, while about 1 percent of sellers used a website, such asCraigslist. Owner sales are also known as for sale by owners, or FSBOs.

“Owner sales, which have been around as long as property rights, have always accounted for something less than 20 percent of home sales,” according to the New York Times; the tactic of selling one’s own home decreases during slumps in the housing market, such as this one. In such markets, an agent’s experience can be especially valuable and help a home to sell.

According to a 2007 study by economists from Northwestern University, “roughly 20 percent of FSBO listings end up re-listing in the MLS, which translates into a longer time on the market, roughly 68 more days. Thus, one of the advantages of MLS is a shorter time to sale, which translates into savings (on mortgage, taxes and insurance).” For a fee of a couple hundred dollars, sellers can list their home on the MLS. Also, the study noted that “FSBO sellers ended up with a significantly enhanced net sale price because they didn’t have to pay the brokerage commission that real estate agents charge sellers.”

For those who are on the fence about whether or not to use an agent, U.S. News & World Report posed the question this way: “Do you have the time and energy to take on a part-time job that pays roughly 6 percent of the selling price of your home? If the answer is yes, consider going solo. If not, hire a pro.”

Ultimately, those who used agents in their real estate transaction were overwhelmingly satisfied with the results. Sellers should always keep in mind, though, that the 6 percent commission is not set in stone and that they can still get attentive service even if they negotiate a lower commission.


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