There seems to be a bit of mystery surrounding how exactly Realtors are compensated for their services. Everyone knows that when you use a Realtor to sell your house, you pay a commission. Beyond that, things get a little hazy. Your Realtor may work independently, or may be an agent within a bigger company. Big companies have to make money too. Do they pay your agent’s salary? Does she pay them for the privilege of being associated with them? What about the agent that brought the buyer? He can’t possibly be doing this just for the fun of it, can he? When you break it all down, it’s not tremendously complicated. However, when a professional is paid on a strictly percentage-based sales commission, it can sometimes tell you a little bit about their motivation, and about for whom they are really working.
The real estate commission fee is usually the largest debit to the seller’s net proceeds from a home sale. The sticker shock for some sellers may be relieved once they understand how this amount is distributed amongst the parties responsible for facilitating the sale-the listing agent and the selling agent. First of all, all commissions are negotiable and can vary from company to company. To suggest otherwise is a violation of anti-trust laws. If you ever hear an agent refer to a “standard commission” in your market area, divorce yourself from that agent and find one that is knowledgeable of the law. To avoid these issues in this article, I will use flat dollar amounts and make no mention of a percentage-based commission.
Your home is on the market, and you’ve just accepted an offer from a qualified buyer. It’s a little below your asking price, but it’s clean with no contingencies. They want you to pay a few thousand to cover their closing costs, but you are taking your new appliances with you when you move, so you want to be fair to them. After all, it won’t be cheap for them to properly outfit your modern kitchen with new stuff. All is well. Your agent is going over what your final costs and proceeds will be, and she comes to the commission fee: $12,000. For a brief moment you think to yourself, “Wow! When I was younger, I didn’t make that much in a year, and the house took only two weeks to sell. Our Realtor is making bank!” Reserve judgment momentarily on your agent, and let me explain what she will be walking away with after the closing. It was another agent from another company that brought the buyer. That agent has showed home after home to the buyer, doing proper due diligence for his clients, and has worked very hard to see that they are financially and emotionally ready, willing and able to commit to this purchase. Besides, he counseled the buyers to write a decent offer that both sides can be pleased with. He has earned his share.
In the essence of fairness, it is your agent’s company’s policy to give the cooperating selling broker half of the commission you pay to them as listing broker, in this case, $6,000. But isn’t that still a lot of money for just two weeks worth of work? If both agents are associates of larger companies, or work beneath another brokered individual, they will be sharing a pre-determined amount of their half of the commission with that broker/company, anywhere from half to ten percent. If your agent works for a company whose policy it is to compensate their agents at a 60/40 split (60 to agent, 40 to broker), your Realtor will have earned $3,600. As an independent contractor, your agent does not have taxes deducted from her paychecks, so she has to take another 25% of that amount to put into savings for her quarterly estimated tax payments. Her take-home pay, not including any office supplies, licensing fees, board dues, MLS subscriptions or marketing material she will pay for out of that commission, is now $2,700. But, you rationalize to yourself; she is a good agent that your friend highly recommended. She always seems busy and competent, so she can’t be doing too badly, right? Then you remember seeing her name on a for sale sign in the yard of a house across from that abandoned lot near downtown. You do live in one the nicest neighborhoods in the city, but times are tough. Home prices are down, and there are many more less expensive homes than yours in the local market. How many smaller, less expensive homes would she have to sell to make what she earned from the sale of your home?
Now you start to begrudge her broker, who must be a greedy fiend for taking 40% of her hard-earned commission, and you’ve never even met him or her! What nerve! Stop yourself here, and think about the overhead of running a real estate office. Lease or mortgage on the office building, phone and internet service, utilities, cleaning service, insurance, office support staff, paper and ink, copier, printer, fax machine, desks and chairs, not to mention advertising. All the tools your agent needed to use to help you meet your ultimate goal of a sold home are provided to her through these resources. The same thing goes for the buyer’s agent and broker.
Even if your agent is an independent broker, an army of one, working diligently and effectively out of her home office, she has a need for all these tools as well. She may get to keep the whole $6000, but her bills are similar to those of a small office with multiple agents-yet she is the only source of income to keep it running.
What if your initial contact with her came through a referral from another agent. She most likely will be paying another percentage to that person in exchange for the opportunity to represent you, maybe as much as a third of what you paid to her broker/company. Do that math: 30% of $6000 is $1800 leaving $4200 to split between agent and broker. Remember the 60/40? Her cut is now $2520.
Why am I telling you all this in such detail? I am certainly not seeking pity for all the Realtors out there not making ends meet. You have to run your business like a business, not a part-time hobby. Anybody in the business is there by choice, and made the decision to attempt to make a living on commission-based pay. I guess I just want people to know how it works. If I answer the phone because you called to check the price of property listed by my company, I don’t get paid for that. If I meet you at an open house, show you three more homes and then never hear from again because your mom reminded you that your second cousin is a licensed Realtor too, I don’t get paid for that. If I am dumb enough to work for 2 days on a beautiful and informative market report without so much as at least a handshake commitment that you will even consider listing your house with me and you don’t, I don’t get paid for that. If I list your home, market it for two weeks, bring a buyer and the financing falls apart the day before closing, I don’t get paid for that (and of course, neither do you). My point is, I will only ever earn what I earn by culminating all my hard work into one thing: closing the deal.
I know this still doesn’t make you care about me. That’s fine. Here’s what you should care about, though. If you’ve done your homework, and really hired the right agent for the job, and actually read the market statistics and listened to her about pricing recommendations-your house will sell…eventually. If it doesn’t, you haven’t spent a penny out of your pocket for newspaper ads, yard signs, websites, fliers…any of the tools that your agent has at her disposal were all provided free to you up until the sale is finalized and you and your agent both walk away from the closing table with paychecks in hand.
If you are a buyer, your agent gets paid out of the seller’s proceeds the same way the listing agent does. But who usually writes the check at closing? YOU! None of this would be possible had you not decided to buy the property in the first place. This make is just as important for you to hire the right agent too. You should be seeing the same market statistics that were presented to the seller when he or she priced the home for sale. How else are you going to make sure you didn’t pay too much for this property?
But guess what? You get to the closing table, and realize that your agent didn’t do the work. No market stats ever presented. No data ever communicated. How many homes did he show me, again? How many open houses did she hold? How did I even end up here? Yet here you sit, signing document after document to complete one of the biggest transactions of your life and all you can think in the back of your mind is…what did my agent really do for me? At that point, it doesn’t matter…he or she is still getting paid…
So now you know how your Realtor gets paid. But ending this post this way is not making me feel good. If you’ve read to this point, I can only ask that you come back for the next post addressing how to pick the agent that’s right for you. Here are a few hints: it might not be the flashiest agent in the market area, and it might not be the agent your parents have used for every home they’ve ever bought and sold.
Don’t forget to let me know what else you’d like to read about-just comment, email or call with the topics and issues on your mind! Thanks for reading and Happy New Year! Till next time…
Kate Sager, Realtor www.KateSager.com
New Age Real Estate www.NewAgeRealEstate.biz
1106 Camanche Avenue
Clinton, IA 52732
Personal Customer Service Line: 903.88.4KATE
Mobile: 563.593.7567
Office: 563.242.7848
Email: katesagerhomes@gmail.com
Fax: 563.243.0564
Licensed in Iowa and Illinois to better serve you!
