Cutting sales commission may backfire on home seller

A few days ago I received an e-mail from a very smart reader.I know he is smart because his e-mail address says”post.harvard.edu,” which presumably means he graduated fromprestigious Harvard University.

He asked if real estate listing agents would reduce theircustomary sales commission rate for expensive homes. Then he gave an example ofa $1 million house sale, which, he says, doesn’t include much more work for thelisting agent than selling a less expensive home.

Purchase Bob Bruss reports online.

My reply noted some successful realty agents would reducetheir sales commissions on expensive homes. But the big drawback of reducingthe commission rate, I hastened to add, is many local multiple listing service(MLS) buyer agent members will choose to show a home with a low commission ratelast to their prospective buyers.

According to the respected “Real Trends” Web site,the national home sales commission rate is now about 5.1 percent. However, thissurvey was taken during the recent home-sale boom during which virtually anyrealistically priced home sold easily. Today, with a glut of new home listingsin most communities, the situation is rapidly changing.

WHEN HIGHER SALES COMMISSIONS PAY OFF.

During a recent Midwest trip, I encountered a longtime, verysuccessful real estate sales agent friend. As I usually do, I asked her,”How’s the home sales market?”

She then informed me she currently has too many listings andnot enough buyers.

“So I had to increase my sales commission rate,”she said, shocking me.

By that, she meant she now encourages her home sellers tooffer 7 percent sales commissions rather than the 6 percent rate, which iscustomary in her community. The result is, she reports, buyer’s agents show herlistings first because of the higher commission.

“When I really get desperate to sell a listing beforeit expires,” she revealed, she includes an incentive trip to Hawaii fortwo to the buyer’s agent who sells the home.

“A trip to the Caribbean or Mexico just doesn’t workany more,” she added.

DRAWBACKS OF REDUCING SALES COMMISSIONS.

Except in a very “hot market” where there is ashortage of home-sale listings, most home sellers don’t understand the bigdrawbacks of getting their listing agent to reduce the sales commission.

Yes, there are a few successful “discount brokers”who offer reduced sales commissions from the customary local sales commissionrate. But the big problem for home sellers listing with discount brokers isthese lower sales commissions don’t encourage cooperation from buyer’s agentswho are often reluctant to show low commission listings unless there is nothingelse to show to their buyers.

HOW HOME SALES COMMISSIONS ARE SPLIT.

Most home sellers don’t fully understand how home-salelisting commissions are split. But they think real estate agents are grosslyoverpaid for very little work, especially if the home sells quickly within afew days because it was realistically listed at its market value.

In a typical home sale, four parties split the salescommission. They are the listing broker, the listing sales agent who works forthat broker, the selling broker, and the “buyer’s agent,” who worksfor that selling broker.

Although each situation is different, depending on thelisting terms, each of the four parties will usually receive 25 percent of thegross commission.

For example, suppose a condo sells for $100,000 with a 6percent sales commission of $6,000. That commission is usually split 50-50between the listing brokerage and the selling brokerage. However, this splitmight be 4 percent to the listing agent and 2 percent to the selling agent, orvice versa, depending on local market conditions.

Presuming a 50-50 split, the listing brokerage receives$3,000 and the selling brokerage earns $3,000. Of those amounts, the brokeragethen splits its share with the listing or selling agent. The lowest split ishalf to the listing or selling agent, but often higher. That means the listingor selling agent earns at least $1,500 in this example.

Most home sellers (and buyers) don’t understand their agentmight take home as little as 1.5 percent of a typical 6 percent gross salescommission.

THE ONLY TWO TIMES HOME SELLERS SHOULD NEGOTIATE SALESCOMMISSIONS.

Based on my 39 years as a real estate broker, there are onlytwo times a home seller should consider negotiating a reduced sales commissionfrom the customary local “going rate.”

The first circumstance occurs when the home’s market valueis far above typical home sale prices in the community. To illustrate, if youare selling a $1 million house in a town where the average home sells for$300,000, the successful realty agents you interview about listing your homefor sale should offer a reduced sales commission without your even asking.

In other words, the higher the home-sale market value, themore negotiable the sales commission becomes.

The second circumstance occurs after you interview severalsuccessful local realty sales agents, and list with the best agent at theasking price suggested by that agent. However, after exposure to the local homesales market at least 30 days, if that agent produces a purchase offer substantiallybelow the recommended asking price, that is the time to discuss a”commission reduction” if you accept the buyer’s offer.

BEWARE OF “ADD-ON ADMINISTRATIVE FEE.” Homesellers should watch out for any unexpected “add-on” fees hidden inthe fine print of the listing contract. To raise their net earnings, some realestate brokerages have resorted to adding a $100 to $500 “administrativefee,” “transaction fee” or other unnecessary “junkfee” to their charges.

These add-on fees go to the brokerage, not to the listingagent, so home sellers should be reluctant to agree to such charges unlessclearly disclosed at the time of signing the listing contract.

CONCLUSION: Real estate sales commissionsare negotiable between the home seller and listing agent. But home sellers whonegotiate an up-front, reduced sales commission with their listing agent oftencut the vital incentive for buyer’s agents to show and sell their home. Forthis reason, home sellers should be extremely cautious about reducing buyer’sagent incentives at the time of listing their home for sale.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2006 Inman News

To search and research real estate data for more than 130 million properties nationwide, sign up for a FREE trial to RealtyTrac.

For the latest real estate news and trends get a FREE issue of our award-winning real estate newsletter, the Housing News Report.

Related Posts

Leave a Reply

Copyright © 2016 Renwood RealtyTrac LLC - All rights reserved