Are Real Estate Brokerage Fees Too High?
Most Real Estate Brokers are independent contractors employed by a Broker
and compensated for their services with sales commissions.
Real Estate Listing Brokers typically collect 5 to 6 % on the sale price of the home and then share these commissions with the Selling Broker representing the Buyer.
These commissions represent one of the most expensive products purchased by consumers.
In the U.S., home sellers pay an estimated $100 Billion annually in commissions.
Consumer Reports found that most people do not understand how real estate sales commissions work because Brokers do not do a good enough job of explaining them.
Why is a Realtor compensated with a commission instead of a salary or wage?
Most Realtors employed by their Broker as an “independent contractor”.
Independent contractors are not characterized as employees under IRS and State requirements for withholding for income taxes.
Realtors receive a 1099 for tax reporting and are responsible for paying their own income taxes through quarterly estimated tax payments each year.
The Broker reduces their overhead by avoiding the requirement of payroll taxes, unemployment contributions, workmen comp insurance, plus benefits including health care insurance and 401k retirement contributions
What is the structure of a conventional Brokerage Commission?
Let’s identify the parties involved in a real estate sale transaction
- The Listing Broker represents the Seller
- The Selling Broker represents the Buyer
By law, all commissions are negotiable between the Broker and their client. The commission rate is set by the Broker and agreed to by the client.
Local real estate market conditions affect a competitive commission rate. Commission rates are lower in a hot seller’s market with limited supply and high demand. Commission rates are higher in a soft buyer’s market with an oversupply and low demand.
Who Pays the Commission in a real estate sale?
- Usually, the Seller pays the broker commission to the Listing Broker
- The commission is paid to the Listing Broker when the sale is completed,
and the fee is deducted from the Seller’s sale proceeds
- The Listing Broker shares a portion of the commission with the Selling Broker, usually 50% of the total commission
Therefore, in most sales the Buyer does not directly pay the Selling Broker.
If the sale transaction fails to close, does the Realtor receive any compensation?
No, the Realtor is burdened with the risk that after spending months of their time as well as their own money on a transaction could result in a huge loss.
How do other professional service providers structure their compensation agreements?
Let’s explore the contingency fee versus the retainer fee models.
Attorneys before taking on a case and formalizing a client relationship, will analyze the odds of prevailing and receiving compensation for their services.
If the case is challenging and there is a good chance they might not prevail, the attorney will require “retainer fee” agreement to represent you.
The retainer fee compensation is a “pay as you go” plan. You are required to pay an initial fee upfront and periodic recurring payments are paid until the case is settled. The attorney is paid regardless of the outcome of the lawsuit litigation. The retainer fee is a No Risk compensation plan for an attorney.
If the odds of winning are high, the attorney can agree to represent you on a “contingency fee” compensation plan.
The contingency fee compensation is usually a large percentage of a monetary award, as much as 25 to 50% or more of the amount you receive. There are usually no initial or recurring legal fees paid to the attorney by the client. If the lawsuit is won, the attorney is paid only when you prevail.
The contingency fee attorney compensation is a High risk – high reward plan, which is like the real estate broker commission compensation model.
Why might Realtors be getting paid too much to sell a home?
The amount of the commission is a percentage of the final sold price.
As an example, if the total commission to sell a luxury home is 5% of two million dollars, the amount is $100,000.
The Listing Broker and Selling Broker each earn $50k when the commission is shared equally.
If the total commission to sell an entry level condo is 5% of $300,000, the amount is $15,000.
The Listing Broker and Selling Broker each earn $7,500 when the commission is shared equally.
Why should a Broker receive over $42k more for doing the same or less work to complete the sale?
Did the Seller or Buyer receive an equivalent level of service to justify the broker commission compared to the services rendered in a lower priced condo sale?
These are fair questions and the basis for the position that a Broker can be over-compensated for services rendered.
I can assure you that it takes the same amount of time and effort to sell a $300k condo as it is does sell a $2m home.
In fact, selling a condo is often more challenging as there is a homeowner association that must be investigated, and many condo buyers can be marginally qualified for bank financing.
Luxury home buyers are usually well-qualified for bank financing and many buyers pay with all cash and there is no bank to complicate completing the sale.
If a Broker is willing to accept $7500 for services rendered, why then should a Broker need to be paid more for a sale just because the sales price is higher?
Is there a more equitable compensation model to align with services rendered?
Let’s explore Flat Fee versus Commission compensation.
There are some Real Estate Brokers who have a flat fee compensation plan. The flat fee structure requires the Seller to pay a specific amount for services rendered.
The fee amount can vary depending on the level of service provided to sell the home.
As an example, the Flat fee to the Listing Broker representing the Seller to list the home on the MLS is $695 plus 3% of the sales price to the Selling Broker representing the Buyer.
Or if the services provided differ:
$349 for Basic Listing Broker services plus the fee paid to a Selling Broker
$699 for Premium Listing Broker Services plus the fee paid to a Selling Broker
The flat fee amount can vary depending on the sold price of the home:
As an example:
a flat listing fee of $4k for homes under $140k
$6k for homes between $140k and $300k
$8k for homes above $300k
Real Estate Brokers offering only a commission compensation plan will characterize a Broker that offers a flat fee plan as a Discount Broker.
Is it fair to claim the flat fee plan is a discount? Or is it more accurate to claim the flat fee to be fair compensation for services rendered?
The value proposition depends on the broker and the client. Many brokers offering a flat fee plan provide limited services commensurate with their lower fees.
Flat Fee Brokers have been around for a long time and They provide access to the MLS for homeowners
with limited resources or equity for broker fees.
What other compensation plans are available?
Let’s explore the “pay as you go” compensation model.
If it is fair and reasonable for a retainer compensation plan to an attorney or architect for professional services rendered, then why not compensate a real estate broker the same way?
What if a home seller could save a substantial amount of money to sell their home if the Listing Broker was willing to charge less but was paid for their time and costs on a periodic recurring basis until the home was sold or until the Listing Agreement expired?
As an example, if the home sells for $500k with a traditional 5% broker commission, the seller pays the Listing Broker $25,000 for services rendered. The Listing Broker shares 50% with the Selling Broker and retains $12,500 for representing the Seller.
With a pay as you go plan, the Listing Broker receives a retainer fee of $5,000 upon signing the Listing Agreement with the Seller. The Seller agrees to pay the Listing Broker $1,000 monthly until the house is sold or the listing expires.
There is a cap on the total commission paid to the Listing Broker, a maximum of 2.5% of the sale price which equals $12,500. The Selling Broker representing the Buyer receives 2.5% of the sales price which is $12,500.
If the house sells and the sale is completed in 3 months, the total fee earned by the Listing Broker is $8,000.
The Seller saves $4,500 in broker fees paid to the Listing Broker to sell the house.
I like this compensation model because the Broker agrees to accept a lower fee in exchange for certainty and the seller has the potential to save money.
Another reason I like this model is the Seller is sharing some of the risk by paying the Broker during the marketing and sale of their house.
The pay as you go plan will weed out the Sellers who want to “test the market” with nothing to lose if the house does not sell under a traditional “all or nothing” commission plan.
Remember, the Seller has the ultimate control over the odds of the house selling. The Seller sets the list price and has control over how the property is presented with cosmetic and repair improvements.
If the Seller is unwilling to set a fair asking price based on the condition of the home and current real estate market trend conditions the house will not sell no matter what the Broker does to market the home.
I would be willing to earn less than a full commission amount in exchange for being compensated for my time, effort and cost invested during the marketing of the house.
I view the pay as you go plan as a win-win for the broker and the seller.
And there would be fewer homes on the market owned by unrealistic sellers testing the market and wasting the time of brokers and buyers.
There is a litigation with the National Association of Realtors as the defendant.
- The Plaintiffs allege that current NAR rules create artificially
inflated commission rates and anti-competitiveness
- The lawsuit claims that sellers pay inflated commissions
because the Selling Broker commission,
which is typically shared from the Listing Broker commissions,
is baked into the final sale price of a home, causing the inflated price
- Selling Brokers have access to commission fees posted on the MLS, but the buyers do not.
- Allows Selling Brokers to “steer” clients to homes with better commissions
- NAR says the Current system “ensures greater access for first-time, low-income and many other home buyers who otherwise could not afford a home.”
The Plaintiffs want the sellers to stop paying Selling Broker commissions. If the plaintiffs win this case, how could it change how consumers buy and sell homes?
I hope the plaintiffs prevail. I will force the real estate industry to use Buyer Representation Agreements.
A Buyer Rep Agreement is the equivalent of a Listing Agreement used buy Sellers hiring a Listing Broker.
There are built in protections for a Buyer which are integrated into a Buyer Rep Agreement.
The Buyer Rep Agreement
- Confirms the Compensation to the Selling Broker paid by the Buyer
- Confirms when the Buyer is obligated to pay compensation to their Broker
If anyone other than the buyer compensates Broker for services covered in this agreement, that amount shall be credited toward the buyer obligation to pay compensation.
The commission paid to the Selling Broker can be added to the amount financed or the purchase agreement can be structured for the Seller to credit the Buyer an amount equal to the Selling Broker commission stated in the Buyer Rep Agreement.
Leslie Whitney and Pete Sabine.
We are the Five Star Real Estate Team, and we know how to set the stage for your success.
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