Why Does the Seller Have to Pay the Buyer’s Agent’s Commission?

Why does the seller pay have to pay the buyer’s agent’s

commission? The short answer is the seller doesn’t. Like

much in life, the reality is more complicated and

unsatisfying for both buyers and sellers. From a

technical standpoint, the seller’s agent or broker, also

known as, the listing agent or listing broker, offers to

pay the buyer’s agent/broker whose client successfully

purchases the listed real estate for sale. The listing

agreement is between the seller and the listing broker so

and specifies typically 4-5-6 percent commission. The

listing agent then shares a portion of that commission

they receive from the seller when the home closes

escrow and officially sells. But since you are smart,

obviously seeing as how you are reading this smart

article now.. You are probably saying well yeah

technically the listing agent is paying but really the seller

is paying the listing broker the commission out of the

proceeds of the sale of their home and they are certainly

factoring that commission into how much they expect to

net after other closing costs, taxes, mortgage, repairs,

etc.. And you would be right to think that.. Sort of..

So the cost of the commission let’s dig into that now.

While there is no standard listing fee (see here for more on legal issues ​https://tinyurl.com/y2b8lft3​ ), the nationwide average listing commission charged in 2018

was 5.1%. This is down from 6% which has miraculously

been the average commission most of the second half of

last century. Until recently in the last decade really,

commissions have started to tick down on average with

the rise of discount brokerages, technology

advancements, the internet, and consumer websites

loaded with information. These factors have leveled the

playing field for consumers to access housing data,

neighborhood statistics, pictures of homes, tax data and

most importantly, multiple listing service (MLS) property

listings. Consumer sites such as Zillow show properties

for sale in multiple listing services which were formerly

only accessible by real estate brokers. Trulia and others

are unlocking information once held as near state secrets

by real estate brokerages. In fact early in the history of

online IDX websites such as Zillow, the National

Association of Realtors (NAR) filed suit against these

companies to try and block the information from being

syndicated. In the end it didn’t work and now there is no

going back, the genie is out of the bottle, the information

is a click or a swipe away. In the beginning some of

these services were not as accurate as MLS info. It used

to be true, I said it myself many times to lead prospects

who would call on a property they saw on zillow only to

reach me telling them that it actually sold two weeks

ago. Now that is not the case. Any of the most

reputable consumer sites update near instantaneously

and automatically when changes in the MLS happen.

Errors you see on these sites were likely errors in the

MLS themselves and not an issue with the consumer site.

Many buyers in today's market, over 90% of whom are

searching for properties online before ever contacting an

agent, often are identifying the neighborhoods, and/or a

few houses in a specific neighborhood, and/or

researching online down to the exact home they want to

buy all on their own without ever contacting an agent.

The latter isn’t common at all as most buyers need to see

at least a few homes before committing to purchase what

many will be the largest purchase in their lifetime. The

point is that buyers now and in the future will be doing

more and more online before deciding to work with an

agent.

So am I saying that 4 or 5 or 6% commission is too much

to charge? In a word yes. I will be the first to say that

the life of the average realtor is far from easy and is a

world away from the Million dollar agents on reality TV

shows selling one high-rise condo in NYC or a house in the

OC and making enough to buy a new Bentley. Selling

real estate is a difficult occupation in a brutal and hyper

competitive environment As with most sales, it is filled

with uncertainty as the work is contingent on a sale and

may take months before a client buys/sells and the agent

has expenses in the meantime. Many agents work hard

for a modest living, the median income being just over in 40k a year in Illinois ( ​https://tinyurl.com/y2wmjqb9​ ). In the Chicagoland area that is not exactly a glamorous

lifestyle.. Then of course there are the agents that make

hundreds of thousands and have teams working for

them each making a good living. These agents work

hard no doubt and more power to them, this is America

after all!

That said, I think there is a distortion in the market that

accounts for the reason the perception both consumers

and aspiring real estate professionals, of agents making

lots of money when 90% are not actually making good

money at all, especially given the working conditions of

always being on call, never having a day off, and facing

ever rising advertising costs. This distortion comes from

the reality shows for a decade conditioning the public to

see huge commissions in part, but mostly it comes from

individuals sitting at the closing table and seeing line

items for commissions to their agent’s brokerage for

5-10-25k and more. That's a lot if you are having them

a couple times a week but many agents hope to have a

couple a month, and then there are the desk fee or

broker fee is usually a percentage of that line item

amount, anywhere usually from 10-40% the individual

agent gives up for the privilege to work as a licensed

brokerage. Then there are the marketing, advertising

costs, not to mention car, phone, tech expenses that

independent contractors typically have. So unless you

are a big time agent you really aren’t making an above

average living, certainly not in competitive environments

such as the Chicagoland market. In this landscape

advertising on Zillow or Facebook, which I have done and

do still, initially was a great equalizer allowing newer

agents to reach large audiences and break into markets,

has become more and more expensive for less quantity

and arguably less quality leads. These ad services allow

those agents who can afford to plunk down tens of

thousands on advertising to continue to do so, paying

increasing amounts easily or easier than agents with

shallow pockets. The resulting market distortion leaves

the few earning crazy amounts of return on advertising

and the rest left with small slivers of the market, less

lead prospects, at ever higher costs.

I started with Trulia advertising and it worked decently

although often I would get a call, immediately answer no

matter what I was doing, only to have the prospective

purchaser say they just talked with a realtor and were all

set… how this is possible defies the laws of time and

space but I digress. In the beginning I thought it was a

little pricey but to get into the biz it was worth it and the

first couple years had a return on investment of 4-5

times. So naturally I spent more and tried out Zillow and

Realtor.com but over time realized I was getting smaller

and smaller number of impressions or ad views but I kept

paying more. Or my exclusive zipcode was now shared

with 3 other agents and then more. Fortunately I was

able to build some loyal clientele who have been

wonderful allowing me to work mostly by referral because

if I had to start in the biz today as a new agent I

wouldn’t. The barriers are too high, the costs to

advertise to great.

I work very hard for a living, and sometimes work for

months with a client for free when they end up staying

put and not buying because they couldn’t find something

or were outbid and got discouraged, or maybe it was a

job loss, or other life situation. Fortunately that doesn’t

happen often, but it can be very stressful and

disheartening. But that is the name of the game when

you are all commission and I knew that going into it. Not

looking to complain because hey there is the other side of

things, when a client calls me to sell their desirable place

in a hot neighborhood, in a hot market.. because they

just identified the home of their dreams and want to buy

that one.. With me as their trusted representative! Love

that when it happens!.. And it has, but not often, so it all

evens out. And besides what can be done about it

anyway, no point in complaining so that had been the

end of it from my perspective until recently when a client

of mine were having a discussion about all this as we had

in the past. In discussing how I have noticed how

sophisticated buyers are becoming, with loads of

information in their iphone, many of whom know the local

market of the neighborhood very well, and have been

pre-approved on their phone while waiting in line at

starbucks. And these buyers, the serious ones, don’t

need to see 10-20 houses to make a decision because

they have already looked at hundreds of homes online

and watched hours of you name the real estate show.

We came to the conclusion that the scales have tipped

where often times the buyers agent (and the listing agent

who we’ll get to in a second) are, in some markets

making an absolute killing showing buyers places they

already found online. They are helping negotiate and

assisting in other crucial elements of the sales process

and to be sure I’m not advocating buying without an

agent, but at the risk of losing some friends in the

business, I am saying that when I show a million dollar

house, even if I showed the buyer 10 homes over a

month or two, receiving a 20-25,000 commission at

closing is a bit much. And those commission are

concentrated in the pockets of a relative few agents as I

stated earlier, who then can afford to pay for most of the

ever increasing ad spends on the various social media

and consumer home searching platforms.

The listing agent of the past was absolutely essential and

integral to find or sell a home in the right neighborhood,

but I would argue (sorry to my listing specialist friends

out there) those days are gone. As technology has

advanced on the one hand providing agents with all in

one lead generation and client relationship management

suites to automate marketing with the click of a button,

smart lockboxes and online automated scheduling --all of

which result in reducing time spent on an individual

listing. On the other tech has leveled the information

playing field for consumers giving them inside access to

the real estate market once held under lock and key,

literally in a book published once a month and only

available to brokers at their brokerage office. Now this

MLS inventory is updated continuously and available to

the informed consumer 24/7/265.. For free. Now when

the listing information of a property is uploaded to the

mls, it automatically syndicates to 100s of websites.. But

the broker does have to manually add the info to those

websites right? Nope, it happens automatically through

our MLS. Zero extra time. Potentially hundreds of

thousands or millions of extra eyeballs seeing an agent’s

listing once it is syndicated.. And remember that listing

getting all that exposure.. Is your house mr and mrs

seller!!

And yet commissions haven’t changed significantly in the

over 60 years since the landmark supreme court case,

The US vs National Associations of Realtors ( ​https://tinyurl.com/y5refsq6​ ) which ruled that there had been violations of the sherman antitrust law with

price fixing and that there could not be any set or

standard commission rate. It was 6% then and the

average hasn’t changed much, currently about 5.1%.

Some agents are still charging 6%.. Or more!!

I’m pushing for real estate to be recognized officially as

America’s 2nd favorite past time! Probably kidding.. but

seriously looking at their neighbors houses on zillow or

dream houses on pinterest or finding out how much I’d

have to put down on this house, or what this house

would look like remodeled are all things consumers

across demographics are doing in large quantities of

time, in addition to the not so niche now genre of reality

realty shows. Serious buyers take it a step further

checking Zillow (by the way Zillow you are welcome and

full disclosure I don’t receive kickbacks from Zillow) on

their phone before they go to bed and it is one of the first

things they look at in the morning. These serious buyers,

the kind sellers want, and listing agents say they can

deliver, justifying the listing fee, are already there.

Unless the home is super super undesirable or distressed,

serious buyers will see it and if it is priced correctly it will

sell in a relatively short amount of time simply by being

placed on the local MLS and syndicated throughout the

internet..

So why don’t people just skip brokers all together and sell by owner? Because that doesn’t work out so good, the statistics (https://tinyurl.com/y3bsvmqx​ ), don’t lie. It will take longer to sell and for a lower price, with all the liability on the seller..

Between mispricing it, the very real danger of emotions boiling over as buyers and

sellers lowball and deride a priceless family built home, thus derailing an otherwise solid sale, and dealing with complexity and nuance of the home inspection process

and negotiations, attorneys, title companies, appraisers, contractors -- all the while packing up and trying to find a new place at the same time is just too much for the

average seller in a typical home sale.

So if sellers shouldn’t revolt en masse and turn to FSBO..

and I stated current average listing commission of 5.1%

is too much, out of proportion with the value received

from listing with an agent.. What the heck is my point?

Glad you asked! The point is simple and most realtors

aren’t going to like what I’m about to say. Ear muff it if

you want to take the red pill and go back to life with

blinders on.. Sorry for the mixed movie reference but

couldn’t resist the opportunity to go Old School Matrix on

you! But I digress..

My point is, Listing fees are going to keep on going down,

but at a much faster rate over the next decade than it

has declined in the previous 50 years. All of these

factors of technology, and access to info and

demographics of younger buyers who have never known

life without smartphones and the internet are going to

force agents to accept lower and lower listing fees and in

turn they will share that decrease with the buyers agents

they offer commission for bringing the buyer. Agents will

always have a place in real estate, and it is my belief that

the economic distortion of slightly higher prices of real

estate and super high earners and way too many agents

struggling having to work second jobs, will be solved as

listing fees drop to lower levels. Reasonable amounts

commensurate with the hard work of running a business

selling real estate, managing the process and the

personalities. The next decade will see fewer agents as

there will be less incentive for people wanting to earn

500k a year, but there will be a whole lot of agents

making enough to just have that one job.

This will be good for real estate in the long run as sellers

will be able to sell more frequently and buyers won’t be

paying an extra 2 or 3 or 4% more for property as they

are now. It’s only a matter of time. And for me the time

is now and that is why I opened 2% Realty Inc. We offer

the same services as the other houses by in large, MLS,

Consumer Website Syndication, Open Houses, Mailers in

local neighborhood, Facebook, Instagram, Zillow,

Realtor.com paid advertising as well as coherent social

media policy. We can sell for 2% total listing fee because

we don’t have huge existing legacy costs, fancy corporate

offices, or veteran agents that need to be kept happy, or

hundreds of underperforming agents chewing away at

our bottomline. We leverage our two greatest assets,

your home and technology, to sell for the best price in as

quick as possible. If the seller is open to suggestions and

collaboration and willing to price the home fair, it will

stand out amongst the competition. Buyer’s agents

might not like it but they will have to show the home

because the buyers, serious buyers, as discussed earlier

are out there. It’s only a matter of time until they find

your home.

When you sell your home, chances are you will have an

agent and indirectly at least, pay the buyer’s agent’s

commission. So why would you pay more when there is

another option 40-60% less expensive!?

It’s your home, make more! List for less! 2% Realty Inc.