How to Negotiate Real Estate Commissions
How to Ask Your Agent to Reduce a Commission
You know real estate commissions are supposed to be negotiable, right? Regardless of local custom, real estate fees are generally up for discussion. Some agents will agree to a fee reduction right off the bat. Just ask and they'll bend. Others will discuss it. But nobody will feel upset that you asked. It's expected. Although, be prepared for the fact that some agents will not negotiate a commission with you. Because some agents don't have to.
Understand How Agents Are Paid
Commission percentage splits vary among brokers, depending on company policy and agent production. A top-producing agent who closes 100 transactions a year is typically paid more, a higher split, than an agent who closes one deal every couple of months. 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. A growing trend is listing agents are paid more than the agents who represent the buyer.
Why Don't Agents All Charge the Same Commission?
For the most part, they do, according to local custom. Although you will find discount agents, top producer agents, neighborhood specialists, veteran agents, brand new agents, part-time agents, and agents in every type of size and color. Agents are not identical to each other. You should never pick an agent based on commission. You may discover the more expensive agents offer services and profit models for their sellers the less expensive agents do not. Overall, agents generally get paid what they are worth.
They are not all worth the same fee.
Typical Net Profit
Wonder how much agents make? 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. Not every real estate agent makes a killing. Many are barely getting by, partially retired or working a second job.
Selling and 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 Mary might not agree. 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. But it's more nuanced than that.
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 separate amounts 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 resent it. 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 accepted increased liability as a dual agent.
In some states, dual agents are required to operate as transactional agents, taking nobody's side. They don't offer advice or much assistance except to process paperwork.
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. Although, again, not every agent will agree to this. Especially top producers with a strong income stream. If they don't need your listing, offering 5 listings is not a big inducement.
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.
I recall a seller in the city of Elk Grove who tried this tactic. Perhaps he read my article? He asked me to match another agent's commission. When I rejected that notion, he started to cry. But I want YOU, he lamented. He just didn't want to pay my commission. So, he desired my services but only at a discount. I had to tell him best of luck. It doesn't work that way.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.