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Understanding Your Realtor's Commission

Realtors earn scorn in part because they often do a poor job explaining why they deserve their pay.

Editor's note: This blog post has been revised from its original version.

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I still say realtors should be tarred and feathered (6-7 percent for what)?” -- Ronald

Last week on Odenton Patch, I wrote an article about a new housing development coming to Waugh Chapel Road. The article generated a wide array of comments, including the one from “Ronald” above.

Reviewing the comments, I wondered: Are realtors really so heinous they deserve to be tarred and feathered?

In my opinion, no. Some realtors, perhaps. But certainly not all.

Realtors earn scorn in part because they often do a poor job explaining why they deserve compensation – and a certain minimal level of compensation -- for their work. So here’s a stab at clarifying why realtors request a certain commission rate on sales, and why I believe that rate usually is fair, and in the seller’s best interest.

Case Study: A $300,000 House

First, let’s pull apart the 6 percent commission Ronald mentions. As an example, let’s consider a home selling for $300,000. The total commission paid on the sale of the home would be $18,000 ($300,000 x 6 percent).

Does the agent who sells the home get that amount? No. Normally, half the total commission, in this case $9,000, goes to the buyer’s broker. That leaves the selling agent’s broker with $9,000.

Of that amount, $3,000 (1 percent of the home’s sale price) might go to the agent’s broker. This amount compensates the broker for allowing the agent to work under the broker’s banner, using his facilities, administrative support, supplies, etc. That leaves the selling agent with $6,000 of the $18,000 total commission on the home sale – roughly 2 percent of the purchase price.

So what does the agent do with that 2 percent? Depending on the quality and marketability of the property being sold, and how the agent conducts business, the agent might spend roughly half of that amount – 1 percent of the total compensation for the sale – on marketing the property and completing other tasks associated with the sale.

These expenses vary, but they include things like:

-        email marketing;

-        direct mail marketing (including postage);

-        web marketing;

-        printing flyers, home books, comment cards and marketing packages;

-        purchasing and installing signs & directionals;

-        listing the property on the MLS;

-        installing lockboxes and enlisting entry card services;

-        hiring an automated showing service;

-        conducting and marketing open houses; and

-        creating virtual video tours.

 

So after paying these (and related) expenses, realtors might end up with roughly 1 percent of the home’s sale price.

But not so fast. Out of this 1 percent realtors still must pay their membership and licensing fees, errors and omissions insurance, transportation and other costs directly associated with their work. Thus, in the case of the $300,000 home in the example, the realtor may earn around $1,500 for an estimated 25-50 hours of work. The $1,500 is the net income he earns -- what he uses to put food on the table for his family.

What Commission Percentage is Proper?

Real estate brokers are not permitted to fix the commission rates they charge. Thus, agents can charge varying rates for selling homes.

It’s common for home sellers to choose a listing agent based on whether the agent charges a higher or lower commission – say, for example, 5 percent or 6 percent. While there’s nothing inherently wrong with this, it’s important that homeowners understand the possible consequences of going the cheaper route.

For example, the 1 percent savings a homeowner might seek in choosing a “5 percent agent” over a “6 percent agent” can actually make the home much harder to sell. The savings can also extend the time the home sits on the market and lower the final sale price. There are two main reasons for this.

First, if the agent working at the lower rate -- because he’s getting less commission -- is forced to choose between cutting his own pay or cutting the property’s marketing budget, which do you think he’ll choose? And second, if a buyer is choosing between two virtually identical homes, but one seller is paying a lower commission while the other seller is paying a higher commission, which home might the buyer’s agent like best? The home paying more commission, of course.

Such practices are totally unethical, but in the real world, there are buyer agents who attempt to steer their clients to homes that pay more commission. Where this happens, sellers who pay the smaller commission sometimes can be at a disadvantage.

Tar & Feathers?

Of course, all of the commission numbers discussed above are theoretical, and no two agents work the same way or have the same arrangements with their broker. Some agents enjoy much more financial success than others, and different agents face different kinds of costs, depending on the way they conduct their business.

Still, on the whole, very few agents get rich in today’s environment. In fact, I’ve seen it reported that nine out of 10 new agents are out of the business within two years, most for financial reasons.

Do some “fat cat” agents sit back, rest on their laurels and collect big commissions for doing very little work? Yes. But that doesn’t mean all agents do, or that all agents should be tarred and feathered.

Jerry Kline is a Realtor with the Odenton, Md., office of Keller Williams Flagship Realty (1216 Annapolis Rd., Odenton.) For more information on the local real estate market, contact him at (443) 924-7418, or visit his blog (www.JerryKlineRealtor.wordpress.com) or website (www.JerryKline.kwrealty.com).

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Ronald August 17, 2012 at 12:19 AM
Keep up the blogging BUT NOT THE ADVERTISEMENT in the form of a blog. The agenda is clear. I have a lot of respect for realtors - but not for the lack of ethics shown here and I will spread the word to all I know.
Ronald August 17, 2012 at 12:22 AM
I doubt it John. I truly doubt that the same effort goes into the possibility of earning a $14,000 commission verses a $28,000 commission. Divide it up anyway you want - it's still a lot of money to pay in order to recapture the losses on other failed sales. Once again it is one person paying for those that don't.
John August 17, 2012 at 01:33 PM
Ronald, if you find it offensive, don't read it.
Ronald August 19, 2012 at 12:19 PM
I'd rather it just not be printed or that the editor and the PATCH have a little more integrity and label it as an ADVERTISEMENT. B reading it I know who I will not deal with and who I will advertise friends, collegues and clients to take a close look at before dealing with. He may be a great realtor - but let's just call an advertisement and advertisment and nothing more. My personal opinion is that he lost credibility with me by not doing that.
Lee Forbes August 15, 2013 at 11:25 AM
Avoiding professional services is like jumping over a dollar to pick up a penny. IF you are experienced enough to circumvent using an agency to get an offer does not mean that you are prepared to overcome the tribulations of inspection issues, buyers remorse, unspoken negligent disclosures and the thousands of other turbulent potentials between contract and closing! Lee Forbes - Broker/owner in Bradenton, FL http://www.forbespropertygroup.com

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