Negotiating a Real Estate Commission
Some Considerations When Asking Your Agent to Reduce Their Pay
Many that are entering the market to buy or sell a home do not know that real estate commissions are negotiable. Regardless of local customs, real estate fees are generally not set in stone. Agents have an expectation of being negotiated with, and some might agree to a fee reduction right off the bat.
However, you should be prepared for the fact that some agents will not negotiate a commission with you—because some agents don't have to. Some have enough business to justify not negotiating, some have to pay higher percentages to their brokers, and others just might not want to reduce their commission.
How Real Estate Agents Are Paid
Commission percentage splits vary among brokers, depending on the 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 employ agents and generally pay them as independent contractors.
Commissions paid by a seller are usually split between the listing side and the selling side; however, agents are not always paid a 50/50 split. A growing trend is one where listing agents are paid more than the buyer's agent.
Why Don't Agents All Charge the Same Commission?
For the most part, agents are paid according to local customs and rates. Bear in mind also that agents operate differently and have different services. You should try not to pick an agent based solely on commission, but rather on the services they provide along with the commission.
Generally speaking, more expensive agents offer services and profit models for their sellers that less expensive agents may not. Agents typically are paid what they are worth, which means it is worth it to shop around and find one that fits your needs and budget.
Typical Net Profit
As an example of an agent's commission, assume a buyer purchases a $150,000 home. The total commission paid is 7%, with 4% going to the listing broker and 3% to the buyer's broker. The buyer's broker is paid $4,500. The agent is entitled to 50% less an 8% franchise fee, bringing that agent's share to $2,070.
From that, the agent pays their overhead expenses of 22% and puts 30% into savings to hold for payment of social security, federal and state income taxes. The agent brings home $993.60.
If this agent were to close only one transaction a month and work a typical 40-hour week, their hourly wage would be close to $12.94 for the month (before withholding and taxes). If the agent closes two deals a month at $150,000, they would make around $25.86 an hour (two payments of $2,70), or around $2,900 per month after withholding.
Real estate agents work today for the possibility of pay two months later. If your agent seems frazzled or stressed at times, they are probably trying to set up income for the following few months.
However, the national average for closing on a home is close to 50 days. If an agent closes on two homes a month, it's likely they have been working those two homes for quite some time. An agent is likely to close on four homes in one week, but not have had any income in the last few months. In this situation, they may not want to negotiate their commission.
Selling and Buying With the Same Agent
Sometimes agents will represent you when selling your old home and buying a new one home. You may be able to negotiate a reduced commission, but they might not agree. If your agent is your listing and buying agent, they'll earn both commissions.
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. Each side of the transaction entails separate work, whether the seller and buyer are the same person or two different and unrelated individuals.
Agents may not discount their listing commission for you while doing twice the work for less than twice the money. You might be able to negotiate a lower commission based on referrals you could send to your agent in the future.
When the Same Agent Represents You and the Buyer
This is called dual agency, and it's not legal in some states. But where it is legal, an agent would earn both sides of the commission—the listing and selling fees. It's called double-ending a transaction. Your agent accepts an increased liability when they become a dual agent—they are dealing with the same property, two separate parties, with separate interests, and separate abilities to sue if something is not handled correctly.
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 they will agree to lower their commission if they end 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.
Dual agency comes with its own problems. While some agents are honorable in their actions others might work to get the highest commissions from both parties, or not work at all to sell your house if they can get more on another transaction.
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 a fiduciary responsibility to market your home to all available buyers, what is the incentive to induce a buyer to purchase your home if the fees will be reduced?
Some agents will agree to a variable commission. In this type of agreement, if your listing broker were to sell your home they would receive a different commission than another broker who sold your home.
Multiple Listings With the 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 easier to negotiate with an agent. Still, if your agent is a top producer, with a strong income stream, they may not budge.
Agents Who Control Neighborhoods
Agents who do much of their business in specific areas will 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 the first agent and offer the second agent's fee. Explain why.
However, try not to get so hung up on commissions that you lose sight of hiring the very best agent you can find and afford—after all, you are paying them to help you find a home you will love and keep for as long as you can.