Understanding Real Estate Commission
Understanding real estate commission is vital in helping sellers get comfortable with paying their agents. “Discount Real Estate Agents” is one of the top keyword searches on Google, and we’re here to explain why that shouldn’t be in your search history.
Your Realtors’ commission is usually the largest amount cut from the profit on a house’s sale. 8% of home sales are FSBO, an acronym for “For Sale By Owner.” The National Association of Realtors (NAR) shows that in 2019 63% of FSBO sellers chose to sell their own home because they didn’t want to pay a real estate agent commission.
Selling your own home may seem like an easy solution; however, FSBO homes typically sell for significantly less than similar homes represented by agents. Homes sold for even a few percentage points more can account for the money you would have spent on commissions and then some.
You should avoid going down a path paved with your assumptions about commissions. Cutting out an agent can leave you neck-deep in legal contracts, leave money on the table, and bring you more stress than you bargained for.
There’s so much more to selling a home than you think; make sure you have your facts straight going into it.
Fact #1: Your Agent Doesn’t Get The Whole Commission
Initial calculations can help you estimate how much an agent’s commission can cost you, and it can look expensive. For example, on average, an agent’s commission is 6% of the home sale. So a home selling for $250,000 will cost you around $15,000 in commission.
To begin with, your agent doesn’t get that full 6% commission. The commission will actually be split, with 50% going to the seller’s agent and 50% going to the buyer’s agent. So receiving a 3% commission on a $250,000 home sale, will leave your agent with $7,500, right?
Technically, no. Not all of that money goes into the agent’s pocket.
To legally practice real estate, an agent must be sponsored by a real estate broker. For every home sale transaction, an agent requires a licensed real estate broker, who also needs to be paid. Of your agent’s 3% seller’s commission, 10-60% of their 3% goes to the broker — which means they’ll pay between $750 to $4500 to the broker.
After the broker receives their cut of the commission, your agent pays their overhead expenses. These expenses include membership dues to real estate institutions such as NAR and the MLS, plus technology expenses required to run their business. Then you have to expense the money spent to market and sell your specific home. Including but not limited to photos, video, 3-D virtual tours, brochures, digital ads, etc.. It’s important to note that agents don’t get paid until, or unless, your home sells. While selling your home, your agent will organize and pay for professional photographs, a custom yard sign, digital marketing, direct mail marketing, and so much more. All of this comes straight out of their pocket.
When you subtract all of these expenses from an agent’s 3% commission, your agent take-home on your sale ends up being between $1,000 to $3,000 total.
Now, divide that by the number of hours your agent worked for you. It usually ends up being an average of around $28 per hour.
Fact #2: Agents Work For Their Commission Behind The Scenes
Wait a minute. If my agent is making $28 an hour, does that mean they’re spending 35-100 hours working to sell my house?
You may only spend a dozen hours or so face-to-face with your agent throughout the home sale, but they’re putting in tons of work behind-the-scenes to sell your home. The agent is doing most of the leg work for you — without you.
Even before being formally hired for the job, your agent and maybe support staff compile a comparative market analysis (CMA) for your home and put together a seller’s presentation.
An agent begins working before you even agree to hire them to represent you. They’ll create a CMA and gather the information needed to bring to your first meeting. This initial meeting will be to discuss pricing strategies, necessary improvements or repairs, and home staging.
Before your agent even lists your home in the MLS, they will have already invested a considerable amount of work. Once you sign the paperwork to work exclusively with your Realtor, they’ll spend time (and money) marketing your home, networking to find buyers, following up with buyer’s agents to acquire feedback after showings, negotiating offers, and so much more.
And the work shouldn’t end once an offer is accepted. The best agents stay on top of contracts, deadlines, closing proceedings, and stay in constant communication with all parties until the deal is fully executed.
Fact #3: You May Not Pay Commission, But You’ll Pay In Stress, Time, And Other Ways
Most people don’t realize how much something is worth until they don’t have it. If you previously had a fantastic experience selling your home, it’s most likely because you had an excellent real estate agent. The amount of work an agent does behind-the-scenes would indeed overwhelm some people.
They often hold deals together that would otherwise fall apart. They also save you from unnecessary fees, and can help you arrange for temporary housing, if needed. Real estate is a stressful and often volatile line of work. The skill and knowledge required to specialize in not just real estate but marketing, advertising, staging, negotiating, counseling, and other areas is more important than you know.
There is so much more to selling your house than you think. Vetting qualified buyers, verifying funding, scheduling inspections, appraisals, and repairs. Coordinating title and the closing alone without guidance and representation would be enough to make some people run.
On top of all that, if you’re selling your home, you’re probably looking to buy another one. Not paying an agent commission may pale in comparison to the money you’ll spend on a 30-year mortgage if you get locked into a high-interest rate and other things if you don’t have the right agent advocating for your best interests.
Fact #4: Good Agents Sell Homes Fast And For More Money
Do you consider it saving money if you sell your home for less than you could’ve gotten for it with the right agent?
And notice we didn’t just say “an agent,” we said, “the right agent.”. One of the perks of a set 6% real estate commission is that whether you choose a new agent with no experience or the best agent in the business, you pay them the same thing. That means that if you choose the right agent, an experienced one, who has a track record for closing deals quickly and getting their clients’ top dollar, you are essentially getting a discount on top-notch, high-end, white-glove service.
The U.S. has over 2 million active real estate agents, thousands in the Houston metroplex alone. You’d be foolish to pay 6% of your home sale profits to an agent who wasn’t the absolute best. But paying a top agent who goes to bat for you with a powerful skill set, gets you the best deal, and does all the hard work for you, actually feels really good.
If you had proof that an agent who knew your neighborhood like the back of their hand could sell your home in fewer days and get you more money for your most significant asset, would you pay the commission?
With all the work agents do to ensure your home sells fast and for the most amount of money — you’ll find them to be worth every penny.
A Consultation Is Free
Remember, a real estate consultation is free. If you have questions regarding commission, buying, selling, or any other real estate related topic, Living Houston is happy to answer them. You can contact our office at 281.915.8100 or email us at email@example.com.