How to Avoid Over Paying on Commissions
Are you a homeowner, or are you thinking about buying or selling a home? This article is for you! In fact, it may be the most important topic I've addressed yet. Commissions can be a complex topic, so I hope this article can serve as a transparent guide to help you make informed decisions about who you choose to work with in the world of real estate...it's worth careful consideration. Before we jump into how to avoid over-paying commissions, let's talk about why it's an important conversation.
At R+K, here are some of our core beliefs:
- Real estate commissions are negotiable and should be negotiated.
- The real estate industry has done a poor job with transparency around issues regarding commission.
- At almost every price point, a "traditional" 6% listing is a massive over-payment in commissions.
- Transparency and effective negotiation helps both buyers and sellers navigate a more fair and open market.
- The common practice of charging "transaction fees" or other fees charged to buyers and sellers over and above the commission is deeply flawed, unfair, unjustified and immoral. I would invite legislation that outlaws them entirely.
- There is room in the marketplace for all business models. Consumers (home buyers & sellers) benefit from having access to those models. Any attempt to deny this or thwart the marketplace is an anti-competitive act and, as such, risks drawing the scrutiny of trial lawyers, consumer protection advocates, and officials within the United States Department of Justice.
- Without a doubt, there is value in hiring a good, experienced real estate agent to buy or sell. The exact cost of that value is to be determined by the market.
- Sellers interested in negotiating less commission to a buyer agent are often just as interested in giving a better purchase price to the buyer.
- Downward pressure on real estate commissions helps address issues of housing affordability.
To illustrate the concerns of my position, it takes a simple Google search of "anti trust litigation and real estate" to see the ever-increasing amount of lawsuits piling up. I won't spend much time here evaluating those lawsuits. One of the big ones made its way through the court system last fall right next door in Kansas City. To the surprise of many in the real estate industry (but not to this author) the jury quickly rendered a verdict in favor of the plaintiffs. The judgment? Trebled damages in the amount of $5.7B against the NAR and several high profile franchises. Ouch.
The immediacy of the issue continues to escalate. Recently the Consumer Federation of America, a watchdog group, made a series of scathing claims about industry practices that they feel requires further scrutiny. That scrutiny could come via the United States Department of Justice. As we speak, the DOJ is laying the groundwork to force the real estate industry to "de-couple" cooperation among brokers and the offer of compensation to buyer agents. Every day there is another news media article baring its teeth in a reckoning for Realtors.
Here's just a few recent headlines (some behind pay walls):
Powerful Realtors Group Loses Its Grip on the Industry
Reckoning for America's Realtors?
DOJ CALLS FOR “DECOUPLED” COMMISSIONS IN REBUKE OF LAWSUIT SETTLEMENT
‘The end of the evil real estate empire’: Lawsuit targets artificially inflated fees
NAR president warns of DOJ threat
I could go on and on with headlines like this. Google it. It's a warning I've been making to the industry for years. Without delving too far into doomsaying, these actions represent an existential crisis for Realtor organizations and for many agents themselves. Surviving the coming tidal wave of change may be beyond the ability of many of this country's 1.5 million Realtors. Change is coming to the industry, whether Realtors want it or not.
So how can you avoid over paying in commission? The following are suggestions from an experienced real estate broker to help guide you:
- Interview multiple agents. Let each know you're interviewing multiple agents. If you are interviewing an agent who is either unable or unwilling to negotiate their commission, move on to the next interview. No matter the market, competition drives cost down.
- Be knowledgeable about current events in the real estate world. In light of the recent anti-trust suits, there are increasing reports of sellers quizzing their agents on the fees they charge. In a competitive market like here in Lawrence, there are fewer listings to go around. When it comes to either losing the listing or negotiating commission, smart agents will do what they claim to be good at: negotiate.
- If you aren't already knowledgeable about agency, learn what you can. I'm always impressed when a client already knows exactly what a buyer agent, a seller agent, and a transaction broker do. Should a transaction broker charge the same fee as a seller agent? If you don't know the difference, you might end up with regret. To learn more about agency, read up here.
- Never agree to a "transaction fee." I've gotten heat for saying this in the past and I don't care. No buyer or seller should ever agree to this nonsense. Read your listing agreement or buyer agency agreement to make sure it does not include any additional or hidden fees.
- Go with a local agent. Out of town Realtors rarely know the local market, its quirks, its micro-locations, its customs, or its contracts and forms. By hiring an out of area Realtor you're getting less expertise for the cost.
- Avoid "Discount brokers" or pay-to-play MLS-only prepaid packages. These can be very deceptive and promise more than what they deliver. They often come without any help from the agent. You pay the fee and they put your home on the MLS. After that, you're on your own. And they can include hidden fees at closing. Make sure you're getting what you want and what you're paying for.
- Find an agent that offers more value for the same cost. For example, some agents will offer to stage your home for the same commission fee that other agents charge for agency/listing services alone. This is what's called a value-add. Staging can cost several thousand dollars. If an agent offers 6% listings but they include staging, that's a commission reduction.
- Employ skepticism with agents who over-sell their own private listing networks. There is NO WAY any agent, anywhere has a database of clients that rivals the MLS. The main online aggregators for exposure to buyers are Zillow, Realtor.com, and Homes.com. If any Realtor insists their personal network rivals the reach of those websites, they are over-promising and are in violation of the Realtor Code of Ethics.
- Make your agent prove their value to you. No matter what they charge, they should be able to articulate their value and experience. They should be able to tell you their plan for marketing. They should know the market and speak to it without aid. They should be able to account for every dollar they charge. At 6% a $1M home sale results in $60K in commission. If you feel you're getting $60,000 worth of value, have at it.
- Understand what an "offer of compensation" for a buyer agent means. It's an offer. It's not set-in-stone. Just like a seller offering their home for sale at an asking price. Similarly, a buyer may offer a seller the asking price, or they may offer another price as a negotiation. Until it's agreed to by both sides, it's an offer. Even some Realtors seem to misunderstand this. They should consider re-taking their pre-exam license course.
- Use caution when considering hiring a large "team". Teams are a group of agents working together for one client. At least, that's what they do in theory. But if you think about it, your commission split amongst a group of agents instead of a single agent is a form of commission reduction. Make sure you understand the structure and duties and responsibilities of the team members before you sign any agreement. If you find yourself shuffled down to an inexperienced team member, you may come to find you're not getting the level of service you were promised. To this day, I've yet to find a team that able to provide anything more than a good and experienced single agent backed by a good brokerage.
- Google your agent. You should be able to find their photo online. They should have a Realtor.com and/or Zillow profile with sales history. You should be able to confirm their social media presence and easily find their website. Online reviews can come in handy. Don't pay an amateur the same amount you would pay a professional. Hire someone who actually works in real estate. Avoid hobby agents.
- And lastly, if you're planning to buy or sell in the Lawrence area, call R+K Real Estate! Our company was established on the concept of negotiating commission while providing full service real estate. Every buyer and seller should at least hear what we have to say!
R+K Real Estate is a small brokerage. We have 3 agents including myself. We fully understand that not everyone is going to hire us for their real estate journey. That's OK. If they did, we'd have to hire a whole bunch of agents and that's not in our immediate plans for the future! But, every potential home seller or buyer should hear what I have to say. It's important they know there's a company out there that's looking to the future of real estate and aggressively advocating for them. We believe no one should pay more commission than they choose to. If you agree, we hope you'll that you share this news with everyone you care about!
