- Nicholas Bailey
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.