Real Estate Commissions Smaller than You Think
While the pie seems big, sometimes it ends up in lots of little pieces.
May 1, 2008 – Palm Coast, FL – I cannot count the number of times people have remarked to me that they believe that real estate commissions are too high. After all, why should someone pay 6% of the selling price of their property when the sales agent may have spent less than 20 hours dealing with the listing? Six percent of $200,000 is $12,000. For 20 hours of work, that’s $600 per hour.
From the seller’s perspective, the commission amount seems huge. But real estate transactions involve several people, each of whom gets a piece of the pie. Let’s look at the commission from that end.
Under Florida’s real estate law, licensed real estate Sales Associates (agents) must work under the direction of a Licensed Real Estate Broker. Typically, agents are independent contractors, not employees of the broker. Still, the broker is ultimately responsible (and liable) for the agent’s actions. Any listing agreement is between the property owner and the broker (not the agent) even though the agent secured the listing.
Sales commission distributed at closing is paid directly to the brokers. Sales agents cannot receive commission directly. The Broker, in turn, splits the commission with their agent on a negotiated percentage specified in an agreement between the broker and the agent. There is no set rule for the split, but the agent usually receives between 50% and 75% of the commission paid to the broker. Several factors determine the percentage:
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Some brokers provide support services such as office space, desk, phone, office supplies, stationary, advertising, clerical assistance, administrative assistance through the closing process, computer work stations, etc. They may also subsidize some of the agent’s related expenses such as E&O (Errors and Omissions) Insurance, postage or copying expenses. Such brokers usually keep a bigger slice of the pie.
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Others provide little support. Some even charge a desk fee or a transaction charge for each sale. But these brokers usually give agents a larger split.
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Some agents are more experienced and/or have a large stable of clients and proven track record. They typically can negotiate a better split arrangement with their broker.
Most listing brokers agree to cooperate with participating brokers, usually offering half the listing commission to the broker who’s agent brings a buyer to the table. This practice helps expose the seller’s property to the maximum number of potential buyers.
Let’s take a simple example. Assume the selling price is $200,000 and the negotiated commission rate is 6%. In this example, the agent for the listing broker shares in 50% of the broker commission while the agent for the buyer’s broker receives 70%.
|
Total Commission |
$12,000 |
|
|
|
Seller Broker @ 50% |
|
$6,000 |
|
|
Buyer Broker @ 50% |
|
$6,000 |
|
|
Seller Broker @ 50% |
|
|
$3,000 |
|
Seller Agent @ 50% |
|
|
$3,000 |
|
Buyer Broker @ 30% |
|
|
$1,800 |
|
Buyer Agent @ 70% |
|
|
$4,200 |
|
Totals |
$12,000 |
$12,000 |
$12,000 |
Now let’s add a twist. The buyers did not make the initial contact with the buyer agent. As often happens, the buyer was referred to the agent by another agent (a referring agent). In that case, the referring agent’s broker and the buyer agent’s broker agree on a referral fee (another commission split). Although individually negotiated, the most common referral fee is 25%. That means that if the referral results in a completed sale, the buyer broker pays 25% of the commission received to the referring broker. Each, in turn, split their share with their respective agents (buyer agent and referral agent) based on their respective commission split agreements.
Take the same example above but add the referral to the buyer’s broker. The referring broker gives the referring agent 60% of any commissions. Here’s what happens.
|
Total Commission |
$12,000 |
|
|
|
|
Seller Broker @ 50% |
|
$6,000 |
|
|
|
Buyer Broker @ 50% |
|
$6,000 |
|
|
|
Seller Broker @ 50% |
|
|
$3,000 |
|
|
Seller Agent @ 50% |
|
|
$3,000 |
|
|
Buyer Broker @ 75% |
|
|
$4,500 |
|
|
Referral Broker @ 25% |
|
|
$1,500 |
|
|
Seller Broker @50% |
|
|
|
$3,000 |
|
Seller Agent @50% |
|
|
|
$3,000 |
|
Buyer Broker @ 30% |
|
|
|
$1,350 |
|
Buyer Agent @ 70% |
|
|
|
$3,150 |
|
Referral Broker @40% |
|
|
|
$600 |
|
Referral Agent @ 60% |
|
|
|
$900 |
|
Total |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
It can get even more complex. Sometimes different referral brokers and agents are involved with each end of the sale, the listing and selling end. Worse yet is the situation where the buyer announces at the time they are about to sign the sales contract that they are a licensed real estate professional and they want a piece of the commission. Sometimes another agent is injected into the process to cover for the regular agent (who may be sick of out of the office). The assisting agent may feel that they contributed to the sale and should receive some compensation. Need I say more? And then there’s the lender willing to approve a short sale only if the overall commission rate can be renegotiated to a lower level. Or the seller who wants the broker to absorb some of price his/her price concession.
And then there are the expenses, including but not limited to the following:
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Local association dues – $336 annually
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National association dues – $545 annually
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Health Insurance – My premiums and co-pays average more than $1,100 per month as an individual (yes, I’m older than average)
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Advertising and business cards
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Postage – a 1500 piece mailing costs approximately $1500 including stationary, envelope, and postage (exclusive of labor)
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Stationary and office supplies
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Computers and software
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Automobile expenses (including gas, insurance, maintenance, etc.)
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Other association dues (Chamber of Commerce is $200)
Of the licensed real estate agents in Flagler County, about 1,200 are dues paying members of the local Association of Realtors®, which would classify them as active (at least in a part time sense). During the first four months of 2008, a total of 567 real estate sales transactions (all types of properties) were reported by the Flagler County MLS. The total value of these transactions was $130,733,453. At 6%, these sales would have generated $7.844 million in total commissions. Assuming agents receive, on average, 60% from their brokers, they would have collectively received commissions totaling $4.71 million. Divided equally among the 1,200 agents, each would have received a total of $3,922 in four months. And don’t forget the expenses.
Seldom do people spend more money on an item than when they purchase their home. But few know much about the process and intricacies of buying and selling property; disclosures, contract terminology, inspections, title insurance, legal obligations and liabilities, pro-rating taxes, association fees, escrow, mortgage options, CCRs, deed restrictions, etc. Most also are unaware of how real estate sales people are compensated. They don’t get paid to do a comparable listing analysis of your property, to list your house, to advertise and promote it, or to hold open houses. They don’t get paid to search for and preview property meeting your requriements, schedule showings, or to drive you around to show properties. They only get paid IF a transaction happens.
As in any business, some of the players are not very competent while others are exceptional. Some work 7/24 while others hardly work at all. Take time to learn how to tell the difference. Then treat YOUR real estate professional as you would treat any other trusted business associate. Trust me. They will earn their commission.
I am strictly a referral agent. Whether my readers are buyers or sellers, I help them find that "right" agent. They will take good care of you while I concentrate on GoToby.com. Don’t hesitate to call me (386) 931-7124.
Flat rate
Don, Thanks for the breakdown of the Commission structure.
I am wondering if you feel the Agent is still delivering a justifiable value when the home being sold is ocean view or water side and listed at $1.5 million. Will they work ten times harder closing the deal to earning their $90,000 gross commission?
I truly think there should be a ceiling or even flat rate on commissions. Let\\’s be real the value of the property does not change the process, only the advertising budget.
(Should make a few friends with that comment)
I’ll be calling Toby . . .
I\\’ll be calling Toby for a referral of a great agent. I respect him for his honest and expert reporting on the local real estate happenings. And he appears to be an honest and up-front kind of guy.
Too many real estate agents don\\’t work for the customer and are only looking for that almighty comission. Others are true professionals with the clients interests at the forefront. If you are lucky to have a great referral from someone like Toby who knows the local lay of the land you\\’ll be more likely to get the best deal instead of just. . . a deal. What is the difference between 6% on a $200,000 deal and a $250,000 deal?? It\\’s either $12,000 or $15,000. My experience is that far too many \\\”Real Estate Professionals\\\” are extremely happy in today\\’s market to take $12,000 to the bank. No wonder Buy Owner can afford their monster advertising budget. Bad Agents have pushed too many sellers in their direction.
I recently sought a referral from a friend in the Chicago market to sell a home in South Florida. It was the best call I ever made. Listing to closing in 60 days at $5,000 under listling price. People who know . . . know.
Ken
I can’t thank you enough, Toby….
I’ve been a realtor for 15 years, Toby, mostly representing buyers, though of course we have a transcation brokerage, so you know we have gone thru the whole gamut of real estate ups and downs. We’ve only had about 2.5 years of real estate boom when the bottom fell out of the sellers’ market, and that was fine, because I believed that we need adjustment as it was getting to be so prohibitive for a family to buy a home. I have helped a lot of these people get beautiful homes for a good price. My only concern was they thought I was making loads of money because when they look at their closing statement they see thousands of dollars, and I doubt if they believe me when I say what you’re telling them now. Of course they won’t say I’m lying, but they’d possibly think it.
Nevertheless, as I really work hard, sometimes more than 12/7, to get my deals together, even if I were earning what they think I am, I’m sure I deserve it, but thanks for bringing it out in the open.
You’ve been an asset to the community, not just to your peers, and I salute you!
Josie
I can’t thank you enough, Toby….
I’ve been a realtor for 15 years, Toby, mostly representing buyers, though of course we have a transcation brokerage, so you know we have gone thru the whole gamut of real estate ups and downs. We’ve only had about 2.5 years of real estate boom when the bottom fell out of the sellers’ market, and that was fine, because I believed that we need adjustment as it was getting to be so prohibitive for a family to buy a home. I have helped a lot of these people get beautiful homes for a good price. My only concern was they thought I was making loads of money because when they look at their closing statement they see thousands of dollars, and I doubt if they believe me when I say what you’re telling them now. Of course they won’t say I’m lying, but they’d possibly think it.
Nevertheless, as I really work hard, sometimes more than 12/7, to get my deals together, even if I were earning what they think I am, I’m sure I deserve it, but thanks for bringing it out in the open.
You’ve been an asset to the community, not just to your peers, and I salute you!
Josie