How to Negotiate Real Estate Commissions

how to run a real estate brokerage

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Only licensed real estate brokers can receive a commission. Brokers have written agreements employing agents and, in turn, pay the agents, typically as independent contractors. Commissions paid by a seller are divided with about half going to the listing side and the rest to the selling side; it's not always a 50/50 division.

Typical Net Profit

Let's say Mary's buyer purchases a $150,000 home. The total commission paid is 7%, with 4% to the listing broker and 3% to the selling broker. Mary's broker is paid $4,500.

Mary's entitled to 50% less an 8% franchise fee. Mary receives $2,070. From that, Mary pays her overhead expenses of 22% and puts away 30% into savings to hold for payment of social security, federal and state income taxes. Mary has made $993.60 net profit.

If Mary closes only one transaction a month and works a typical 40-hour week, that makes her net hourly wage about $5.78 for the month. If she closes two deals a month, then Mary makes about the same as the aisle clerks at The Home Depot .

Selling & Buying With the Same Agent

It's considered permissible to ask Mary if she will discount part of her commission if she represents you to sell your home and also represents you to buy a home, but an agent might not agree.

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The theory works on the premise that two birds in the bush are better than one in the hand. In other words, if Mary is your listing agent. she'll earn the listing side of the commission. Plus, by helping you to buy another home, she will earn the selling side of that transaction. One person. Two deals.

There are agents who will offer you a discount if you sell and buy a home through their agency. Real estate agents who refuse to discount fees likely believe the two transactions are separate from each other, which they are. They entail the same amount of work, whether the seller and buyer are the same person or two different and unrelated individuals. If Mary discounts her listing commission for you in order to do twice the work and earn less than twice the money, she might also be hit on the selling side of the commission since she has no control over the fees another agent negotiates. To persuade Mary to "give you a break," you might have to offer Mary another incentive such as referrals, sending her more business down the road.

When the Same Agent Represents You and the Buyer

This is called dual agency. and it's not even legal in some states. But where it is legal, Mary would earn both sides of the commission, the listing and the selling fees. It's called double-ending a transaction. Same property but two separate parties with separate interests and separate abilities to sue. Mary now has increased liability.

It's sometimes a common tactic used by sellers in certain parts of the country to ask a listing agent if she will agree to lower her commission if she ends up representing both the seller and the buyer. You have the option of negotiating this when you sign the listing agreement or when you receive an offer, but it's better if you discuss this scenario upfront, at the listing's inception.

Bear in mind that this negotiation might backfire. It could reduce the listing agent's eagerness or motivation to sell your home to her own buyer. Apart from her legal fiduciary responsibility to market your home to all available buyers, what is her incentive to induce a buyer to purchase your home when her fee will be reduced? Especially if she stands to sell this buyer of hers someone else's listing and get paid more. But go ahead and ask. Many agents agree to "variable commission" when asked because they suspect the odds are they won't represent both sides, so they're not giving up anything.

Multiple Listings, Same Seller

Reducing commissions in exchange for a number of exclusive listings from the same seller depends on:

  • Dollar volume
  • Ease of sale
  • Market mobility

If all three of those variables are in the agent's favor, it's a no-brainer to negotiate and probably the easiest negotiation to win.

Agents Who Control Neighborhoods

Agents who do a ton of business every year in specific areas typically discount a point here and there. These are agents who might ask for a higher commission but quickly agree to lower fees if there is competition from another agent. If you like an agent who has quoted you a higher commission but interviewed a second who agreed to do the job for less, call back the first agent and offer the second agent's fee. Explain why. Bear in mind, too, that the adage: you get what you pay for is very often true. Don't get so hung up on commissions that you lose sight of hiring the very best agent you can possibly find.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

Source: homebuying.about.com

Category: Forex

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