Real estate transactions can be one of the biggest financial transactions of your life. So when selecting an agent, don’t make your decision solely based on price alone.
Consider brands such as Clever that can negotiate competitive commission rates without compromising service, saving you thousands in average. Find out more here.
How it works
Home sellers have long adhered to tradition when it comes to paying real estate commission, typically between 5%-6% of their sales price, to real estate agents who bring buyers for sales. But with housing markets slowing, some industry players have begun challenging this long-held practice and recent legal changes could alter how buyers and sellers pay for real estate services.
Technically, buyers and sellers have always had the ability to negotiate the amount of commission with their agent; indeed, the National Association of Realtors has long stressed this point. But under the former system, buyers had no direct say over how much their agent was paid; sellers set commission rates instead.
Traditional commission structures are under attack due to rising mortgage interest rates and house prices, especially among first-time homebuyers who must also cover real estate agent fees – this would add thousands of dollars in expenses on top of closing costs and initial expenses that come with purchasing property.
As part of an effort to combat this potential issue, some brokers have begun offering reduced broker commissions in order to compete with online property listing services such as Zillow and Redfin. While these reductions haven’t become widespread yet, they could serve as an effective means of drawing in new potential buyers while keeping them engaged throughout the buying process.
Even with lower commission rates, an agent’s overall earnings will still take a significant hit due to federal, state and self-employment taxes plus costs of running a business (such as insurance policies and advertising costs). All this adds up to significant deductions from their overall income.
Before engaging in any negotiations over commissions, both buyers and sellers should first gain an understanding of how commissions operate. Negotiations should take place openly and respectfully while both sides highlight why a reduced commission would benefit their situation specifically.
Negotiation
Real estate agents devote both their time and resources – such as professional photography and marketing expenses – to selling homes quickly. Therefore, agents typically negotiate their commission rates to benefit sellers; but don’t try to save money by offering less value in return – doing so may backfire and appear disingenuous to agents as it suggests you’re not invested in selling your home properly.
Success at negotiating real estate agent commissions depends on many factors, including home price and market conditions as well as agent experience and reputation in your area. Experienced, well-regarded agents may be less inclined to negotiate than novice ones.
Buyers often don’t realize that real estate agent commission is negotiable, yet this should be brought up when interviewing candidates for listing agents. Early conversations about commission can provide an early sense of their comfort level with negotiations and how they might approach this aspect of the job.
Real estate agent commission is typically 5-6% of a property’s final sales price; however, this may differ by state and town. Usually the home seller pays both listing agent and buyer’s agent commissions which will be split at closing.
An ongoing class-action lawsuit against the National Association of Realtors (NAR) and several major real estate brokerages could impact how home sellers pay real estate agents. A federal jury recently ruled that NAR and these brokerages conspired to artificially inflate fees they charged home sellers, inflating fees at least 4x more than what is legally allowable.
No matter if this ruling stands or not, it will have an impact on how homebuyers shop for and purchase their next property. Perhaps most significantly, it could change how buyers are compensated when working with real estate agents; previously sellers chose who they would work with based on commission rates offered.
Contracts
Purchase or sale of a home can seem straightforward, but behind-the-scenes there may be lots of legal paperwork and contracts governing this transaction. One such document is the real estate commission agreement which details compensation between brokers and agents; understanding this document before embarking on any transaction is vital.
Real estate commissions are calculated as percentages of the sales price, usually distributed among three parties: listing agent/broker for seller; buyer’s agent/broker representing buyer and transaction broker if applicable. Their compensations can be individually negotiated depending on factors like their agreement with their sponsoring brokers.
In general, sellers will sign an agreement with their listing agent agreeing to pay a specified commission upon closing of their sale. This contract typically specifies an end date as well as type of representation (exclusive or non-exclusive). Buyer’s agents also typically have contracts with their clients containing provisions prohibiting clients from working with other agents or brokers.
Experts anticipate that the settlement will result in lower commission rates by encouraging buy-side agents to aggressively market their services, leading to what may lead to an “agency war,” reducing overall home purchase costs. Critics of the settlement argue that cutting commission rates will make entry harder for first-time homebuyers while increasing prices due to limited supply of homes available for sale.
Real estate industry stakeholders will likely face long-term implications of this settlement agreement, with some observers believing that its implementation will cause home prices to increase and some agents to exit the business altogether. Others view the agreement as beneficial because it allows consumers to compare products for best possible prices, while also eliminating conflicts of interest by selecting their own buyers’ agents.
Fees
Real estate agents traditionally have been paid solely by commission, making their cost one of the largest expenses when selling or purchasing a home. Unfortunately, consumers and real estate professionals alike often misunderstand these expenses.
Typically, real estate agent commission is between 5-6% of the final sale price. This commission is split among both broker agents (buyer’s broker and seller’s agent), typically via their respective real estate brokerage firms.
In the past, sellers were responsible for paying both agents’ commissions. Many sellers included them in their asking prices to account for these costs; this arrangement remains standard today although new legal changes enable both parties to negotiate their own agreements.
As is true with many professions, much of a real estate agent’s commission goes toward federal and state taxes, licensing fees and operating expenses for their business; on top of which MLS commissions and advertising expenses often take an outsized share from earnings.
Due to these substantial overhead costs, agents have historically been reluctant to negotiate their fees in recent years. With the new rules likely encouraging buyers to shoulder a larger portion of the fee burden, agents may now be more inclined to negotiate on rates and negotiate accordingly.
For example, in New York’s seller-dominated real estate market, your agent might be more inclined to reduce their commission rate in exchange for increased or repeat business. Furthermore, an agent might reduce it as part of an incentive structure to encourage volume.
Finding an experienced and skilled realtor is crucial, but shopping solely on price should never be your primary consideration. Instead, consider the agent’s track record, experience in your market and their reputation when making this important decision – low commission real estate agencies may offer big savings, but may not always provide optimal value.