June 13, 2007
Real Estate Commission Structure
In the real estate business most agents , including me, charge a percentage of the sale price of the property they are listing as their fee, or commission for selling it. 6% seems to be a popular number around the area these days. As a business person I incur costs finding business and then marketing costs when I put a home on the market. I need to make a profit or I can not stay in business. With all of the technology I use my marketing costs have gone down. Some of my other costs are rising. Most notably the amount of money that I spend on gasoline.
It doesn't makes sense to charge the same percentage for a 800,000 home as I would charge for a 200,000 home.
I have to pay out 2.7% of the sale price of homes I list to the agent who represents the buyer in the transaction. Fair enough buyers agents do much of the work. Most real estate transactions involve two agents which is a good thing for the consumer because each gets representation. It is also a good thing to have thousands of agents competing with each other to sell your home.
At 6% the difference between an $800,000 dollar home and a $200,000 home comes out to $19,800, my marketing costs are higher on the more expensive home but nothing close to $20,000 dollars, instead my profits go way up.
There is a mystique about listing more expensive homes. We are taught that things need to be done differently. The services I provide on a $200,000 home rival those provided by other agents on $800,000 dollar homes.
The buyers I have worked with who buy $800,000 dollar homes are pretty much the same as those who buy $200,000 homes as far as the type of service and expertise that they need from a buyers agent. They all ask the same questions and have the same concerns. They seem to surf the same internet and I can reach either group through the internet.
Not all home sellers understand what it takes to sell a home. They still make reference to this real estate company or the other one, not understanding that it is the agent who sells the home. Real estate companies do not sell homes and most agents are independent contractors. We are taught to market the real estate company that we are associated with. It is good for the company and for all of the agents so we tend to want to promote it.
Does it make me a discount broker if I can provide full service at a lower commission rate on more expensive homes? Who thought up this business model any way? I suppose if someone wanted me to list a $100,000 dollar home I would have to charge 10% to make it work or charge less and cut back on some of the services I provide.
It is the same when I represent the buyers. the services I provide on the $200,000 dollar home for a commission of $5,400 are the same services that I provide the buyers of an $800,000 dollar home for a commission of $21,600 Often my own expenses are higher when I work with buyers who purchase modestly priced homes because they are more likely to be first time home buyers and need more of my time and resources. The first time home buyers are also the most rewarding part of my job!