I was asked, “How can you explain that a realtor in Detroit gets paid 5% to sell a $12,000 dump, and you get paid the same 5% to sell an $800,000 house?”
I can explain it in one word.
BOUNTY
You are offering a reward for an agent to bring you a top-dollar sale.
The commission dollars look ridiculous if you try to justify the pay as a regular hourly wage or salary job.
Consider it as offering an incentive.
If you offer $400, it won’t raise an eyebrow. If you offer $4,000, a couple of agents might start looking around for their flip-flops.
But if you offer $40,000, every agent will drop everything, go pick up their buyer and coming running over – and that’s the type of response that causes a top-dollar sale.
Then I added, “Recently I sold a house for more than 10% over list price in a carefully-orchestrated bidding war – do you think I earned the 5%?”
I will pay for myself – promise!
u get what you pay for. An unexperienced realtor can cost you more money that you would have paid them in commission.
we are talking about selling a house folks, not a used car.
There are a lot of variables to consider such as neighborhood, schools, structural soundness of home, financing, market conditions, connections etc.
trying to save a buck could really backfire on you.
It used to cost you a couple percent of the transaction to buy and sell stocks. Now you can buy or sell a million dollars of APPL for $10 and a click of the button. Great Realtors are still worth the commission in most cases. An inexperienced buyer, an emotional seller probably still need the helping hand of a good Realtor.
The hedge fund investor, the all cash buyer, and experienced buyer/seller probably would benefit from a lower cost electronic exchange option. If you’re a large investor looking to sell 100 properties you don’t really want to pay 5-6% in transaction fees. The investors will probably be the ones that eventually drive commissions lower. That’s what their good at. They’ll hire someone at $15-20 hour to show the house and develop an automated system to pick an offer. They’ll even probably sell buyer/seller protection insurance.
Jim, when you state 5% commission, is this the total commission, including buyer’s and listing’s agent commissions?
While it’s true that a Realtor’s value comes from their knowledge and experience about a great many things, let me be so bold as to suggest that this “incentive” logic fails under other scenarios.
Say you’re in a market that turned hot. What sold at top dollar for $500K 12 months ago now sells at top dollar for $600K. Your commish is 20% higher. But did you really work 20% harder than last year to sell those properties?
Or conversely, did you provide 17% less service to your $500K customer last year? Me-thinks JtR isn’t a person who’d accept a customer and then be incentivized to throttle back services based on the LP.
avgjoe, you are assuming all agents are top players in their respective field in terms of expertise and knowledge of local areas and contract details. So, its all relative.
Not many successful ‘career’ agents like JtR I have to say that are on the forefront of providing information and proven track record.
As far as the compensation structure, I think it really depends on the local market and the buyers expectations in that area.
I am sure there are some homes that sell themselves or may take less effort than others. This should also be taken int consideration.
Jim, when you state 5% commission, is this the total commission, including buyer’s and listing’s agent commissions?
Yes, typically split 2.5% to each agent.
The usual argument you’ll hear from a realtor is that the 2.5% is split between the broker and agent, and both incur several business expenses while serving you.
If a seller asks for a discount, then the list of services is produced, and the agent asks, “If we lower the commission, then we’ll have to provide less service – which one of these do you want to delete?”
If the seller points to a couple, the agent replies, “Oh, we can’t do without those – they are critical to our success.”
This goes on until the seller wears down and pays the full pop.
But did you really work 20% harder than last year to sell those properties?
When people try to relate the commission amount to the work done, there will always be argument.
It’s why I suggest that you just call it a bounty, and accept that it is what it is today.
I don’t like it any more than you do.
Sometimes I get paid $1,000 per hour, other times $5 per hour, and sometimes zero.
I worked on a case this year where I invested 50+ hours of my time plus paid my own expenses, and got paid nothing. I don’t like that.
Specifically, I think it is harder work this year than last, and much less predictable.
The analytical folks, which I tend to attract, are really struggling to apply logic to the prices people are paying. But many times there is absolutely no relation to recent sales prices.
I saw one this week where a buyer paid $500,000 more than any sale in the zip code, and his agent had closed three sales in his life.
How do you make sense of that? Is that now a real comp? Not in my book, but the naive will think it is real – and that’s where the good agents make the difference.
Putting aside any comparison of one agent’s value against another, but just looking at one agent selling properties at various price points at the same commission rate…
What I take from the above suspend-the-logic point of view is that the seller should be content in the knowledge that s/he’s paying full commish on an expensive home because for the *Realtor*, it balances out the times you barely get paid.
But then a seller’s perceptive – which I would submit is correct – is that the money (commission) paid is unrelated to services rendered. And who wants to shell out more $$$ and get nothing more in return?? Because it’s a “bounty”? Because we should suspend analysis of how we spend our money?
You can see how people might look at you funny.
But alas, the NAR has a stranglehold on this suspend-the-logic method in which our society compensates our Realtors.
You can twist it around however you want, I am used to it.
I said that I don’t like the system any more than you do because of times that I get low or no pay. I prefer to get paid every time I go to work, not to have some clients pay for others.
I have offered to work on an hourly scale, or to do net listings where I deliver a net amount to the seller and get to keep whatever I can get above it. But people find those ideas to be unusual – and they want regular.
The zillow guy said it best, in the off-season the consumers complain about it, but when it comes time to do business, they prefer the commission idea.
Sellers don’t analyze how to select a realtor like you might think.
I encourage sellers to hire an agent based on experience and services rendered. They should – if they pay about the same rate no matter who they hire, then those should be the obvious shopping points.
Let’s add the most important one today.
What matters most is who as at the helm once you hit the open market.
When the realtor “teams” have one or more people talking to buyers, another person talking to agents, and a different person fielding the offers, there isn’t a consistent delivery to all that causes a solid bidding war – instead, it is fragmented and disjointed.
If sellers were going to analyze who to hire based on this critical sales moment, they would benefit greatly. But they don’t – it nevers occurs to them that this is a concern. Instead, they select a realtor based on imagery, and assumptions.
P.S. NAR is a lobbying company, they have nothing to do with commission rates.
C’mon, now. It’s not “twisted around”. Throughout the history of mankind, it’s a very natural, common and straight-forward way people think when they pay for any service rendered.
Then you fall back how sellers should compare the value of one agent against another. I thought we set that discussion aside…?
If you’re selling my $1 million property with 5% commission, will I be receiving a greater level of service than your $650K/5% client?? No, I’m paying more because, as you’ve explained (twice), others – through no fault of my own – paid you little or nothing and I’m coerced to make up for your low/no pay transactions.
Comparing agents (and their teams) is a different subject.
Glass half empty/full.
I don’t charge you extra because others didn’t pay. They owe me, not you.
Every agent will say that it costs more to sell the higher-end properties. The common belief is that it takes longer to sell homes at the higher price points, and thus need more/better marketing and attention.
That’s the imagery and assumptions part. The perception is that agents need to spend more money and time marketing the higher-priced homes, so they do.
@NewHorizon
“If you’re selling my $1 million property with 5% commission, will I be receiving a greater level of service than your $650K/5% client?? No, I’m paying more because, as you’ve explained (twice), others – through no fault of my own – paid you little or nothing and I’m coerced to make up for your low/no pay transactions.”
Those are completely different price points that serve totally unrelated market demographics. For the sub-$1 million range the selling agent will be dealing with all kinds of offers with lots of variables (financing, contingencies, etc.). So, the service had better be damn good to separate the wheat from the chaff.
For the over $1 million range, the buyers pool is not as deep so the selling agent better bring their A Game to market and ultimately sell that property.
But then a seller’s perceptive – which I would submit is correct – is that the money (commission) paid is unrelated to services rendered. And who wants to shell out more $$$ and get nothing more in return?? Because it’s a “bounty”? Because we should suspend analysis of how we spend our money?
If sellers paid when services are rendered, then it should be at a regular rate – but they don’t.
It’s because commissions are paid at the end of the transaction and only paid if successful that there should be an extra reward or bounty to compensate.
Shouldn’t there be a bonus?
Haven’t seen the ‘ol realtor commish debate since ’06ish.
Now here’s a hot topic! Make a choice: either hire good help or don’t and use a FSBO approach. We could also do our own tile setting, roofing, etc. Most of us don’t (do these other things) because we don’t do them often enough to be good at them. Same with real estate. As for value, would you hire the cheapest Lasik eye surgeon? No? Why not? Anyway, we all know the construct of the market and it’s a free country.
There’s a FSBO nearby and while I’m sure the guy thinks he’ll be saving big bucks, he’s already had one deal fall through and now gets to start all over. Will he price it correctly, leave money on the table, or will it sit even longer?
Granted, there are plenty of chuckleheads in the RE industry, and I would not be happy if I picked one out of the phone book, paid the vig, and got amateur service.
However, were it me, I’d hire JtR because I don’t do real estate for a living, and having done deals with him before, I know he’ll more than pay for his commission.
Thanks JSG and CB Mark!
I appreciate the debate, there should be more discussion – and some action.
Redfin tried to charge fees for showings, but they dropped it. There doesn’t seem to be a willingness to pay as you go with the uncertainty of how long it will take.
This debate never happens in the down markets where the buyers are few and the upfront cost to sellers is zero while the realtor invests money and time. It’s only in up markets where realtors suddenly become little more than “order takers”. Funny.
It is a bit of a funny model where the seller subsidizes the buyers Realtor costs. It wouldn’t be too hard to come up with a system where the seller pays some amount per showing, some amount for marketing, some amount for drafting paperwork, but how do you compensate the buyer agent in that arrangement. When you’ve got 50 buyers coming to open house and 20 offers rolling the mentality is the buyers agent didn’t do anything why should I pay them. Of course without that subsidy how many buyers would be in the game.
Most first time buyers don’t want commission reform they’re the ones that are getting the benefit. It’s once they become sellers that they don’t like it.