Understanding the Real Cost of Commissions

Everyone wants the best value for their dollar, and with the cost of living going up, gas prices soaring, and home prices rising, everyone is doing their best to stretch their dollar and save money. The last thing home sellers want to pay is a high commission to an agent.

But, let me ask you this question - What is the price you would pay for your freedom?

Although it sounds like a political or militaristic question, the truth is freedom of time, freedom of stress, financial freedom, and peace of mind are all freedoms we take for granted and often don't think about, until it is taken away or lost.

Last year, at the age of 51, I was hospitalized with COVID-19 after spending several days at home, attempting everything I knew to regain my health and defeat this horrible virus. Despite all my experience, overall good health, and best intentions, my home remedies and over-the-counter drugs did nothing. I still ended up hospitalized for 6 days, in a near-death experience!

Months later, I learned that those 6 days amounted to a big bill totally nearly $200,000!

Thankfully, I had medical insurance that covered the majority of those bills. Yet, had I not had medical insurance, my peace, time, health, and financial freedom would have quickly evaporated as I try to pay for the horrific experience! It would have cost me far more than the years of insurance premiums, co-pays, and deductibles I have paid!

The same holds true for lawyers. They are not cheap! The average fee most lawyers charge, today, is anywhere from $300-$500+ per hour! And they charge you for every email, phone call, or letter they mail. But, if you were facing a hefty lawsuit, wouldn't a great lawyer be worth hiring to represent you in a court of law? No matter how much they charge - because you lack the expertise, legal knowledge, and time to commit to the case - you would be willing to hire an attorney to give you the best possible advantage of winning. Why do you want to win? To avoid the stress, financial strain, amount of time, etc. it would cost you in the long-run - the loss of freedom in these areas.

Why then do so many sellers immediately resort to asking how much an agent's commission is and start trying to negotiate the price?

The answer is simple. Sellers don't understand the value, and fear they are going to lose money in the transaction.

Although sellers have every right to sell their homes on their own in a "For Sale by Owner" situation, in an attempt to bypass paying commissions to an agent, to do so could cost you far more than the money you are trying to save.

However, understanding the value of paying an agent and paying the commission will help you understand how you can actually save money by hiring an agent!

But, let's start with the basics.

Who Pays the Commission?

The commission is the price for services, charged by the broker to represent the seller or buyer in the transaction. Although you, the client, may not work directly with the broker, by caveat, you are working with the broker through his/her "agent," who represents not only you in the transaction, but also the broker he or she works for.

Typically, sellers pay the full commission to the broker who represents them in the transaction. This is usually 5-6% of the sales price for a single transaction (or "side" as it is often referred to in the industry). Normally, the broker and agent set their commission price, which is agreed upon when a seller signs a listing agreement with the agent, giving him/her permission to represent you, the seller, in the transaction, and work on your behalf in negotiating with buyers and advocating for your position.

Once the transaction is closed - meaning the home is sold and the transfer of ownership to the new owner is done - the commission is paid to the seller's broker. In some cases the buyer will pay the commission or a portion of it, but this is rare and unusual.

Just like you, as the seller or buyer, have an agreement with the broker (listing agreement), which outlines the commission percentage, the broker and agent also have an agreement that outlines the broker split - meaning the amount of the commission that goes to the broker and the amount that goes to the agent. In most cases this is a 80/20, 70/30, or 60/40 split, meaning the agent gets the larger portion and the broker gets the smaller.

Additionally, the seller's broker typically sets a cooperative agreement with the buyer's broker (a/k/a "co-broke"), which is usually around 50/50. In some rare cases, the seller's broker may only offer a smaller co-broke split or none at all, and the buyer's agent may charge his/her client (the buyer), the difference between what their normal fee is and what the seller's broker is willing to pay.

For example, Sally hired Melanie, an agent with ABC Realty, to represent her in the sale of her home, and agreed to pay a 6% commission. Jacob with XYZ Realty, represented the buyer and submitted an offer to pay Sally $400,000 for her home. Sally accepted the offer and about 45 days later, the transaction closed. The closing agent, working for the title company, sent the full 6% ($24,000) to ABC Realty.

ABC Realty offered a co-broker split of 50/50, and since XYZ Realty represents the buyer, ABC Realty send $12,000 (50% of the commission received) to XYZ Realty. It is then XYZ Realty's responsibility to pay their agent, Jacob, who represented the buyer in the transaction.

ABC Realty has an 80/20 split agreement between themselves, the broker, and Melanie, their agent. So ABC Realty pays Melanie 80% of the $12,000 net commission (after the co-broker split), which equals $9,600 going to Melanie and ABC Realty keeping $2,400.

Although $24,000 is a lot of money being paid by the seller, the truth is the value for the services provided far exceeds the amount paid.

What does the Real Estate Commission Cover?

Commissions cover all the work put into buying and selling a property. A great agent knows what they are doing and does a lot to help you buy or sell a house! A seller's agent will help you prepare your home for listing or showing, including staging (setting the stage) for your home, having professional photographs taken so your home is marketed in the best possible light, market research to determine what other comparable homes are selling for in your neighborhood so you price it right, and they market your home to tens of thousands of prospective buyers, agents, and investors via the MLS, social media, print material, direct mailings, and online advertising - that they pay for and don't typically charge the client.

Plus, they network and promote your listing through their personal and professional connections, because at the end of the day, their job is to get you the highest price and sell your home within an appropriate timeframe. Meanwhile, buyer's agents are showing your home to tons of buyers (if it's priced right), arranging home inspections, working with the lender to help secure financing, overseeing necessary repairs required by the insurance provider, and making contract adjustments as needed. While sellers often think they are only employing the services of their agent, in essence they are employing the services of the buyer's agent, as well, because without either a seller or buyer, there is no sale!

And that's all on top of the mountains of paperwork, negotiations, and protection the agent/broker provides you, as the seller, without additional cost. Experienced agents help you avoid rookie mistakes and handles daily tasks related to your transaction. The National Association of Realtors conducted a study and showed that sellers who employed an agent sold their homes for $60K - 90K more than if they would have sold it themselves. And around 71% of all real estate lawsuits each year are FSBOs (For Sale by Owners). And that's why only 9% of home sales are done by owners without agent representation. The risk is too high and too costly!

So, you see, paying 6% commission is a discount compared to the amount of money you would lose if you try to sell your home without an agent or end up in a civil court over a lawsuit!

And, at Lions Crest Group at Canzell Realty, do things differently. We put you in the driver's seat by offering more seller and buyer options than most other brokerages. Check out our Menu of Seller Services to learn more, then give us a call to set up a NO COST, NO Obligation Consultation to discuss your options.

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