I found an interesting question posed on St. Paul Real Estate Blog today. Why does it cost nearly $20K more for a Realtor to sell your $800,ooo home, than to sell a $200,000 home across town? She points out that while the costs of marketing the more expensive homes may be somewhat higher, they do not even begin to approach the tremendous difference in the amout of commission dollars the seller has to pay out. (Please note that Chicago numbers are a little different, because of the difference in average commission rate between Chicago and St. Paul.)
However, this situation is not easy to change, for a variety of reasons.
Commission split
The vast majority of real estate transactions in the Chicago area transpire through the work of two Realtors: the listing agent (representing the seller), and the buyer's agent. The customary 5% commission, paid by the seller, is split, usually in half, between the listing agent and the buyer's agent at the time of closing. Every listing on the MLS states the percentage of commission offered to the buyer's agent. If the listing agent is offering 2% to the buyer's agent, while everyone else if offering 2.5%, guess which home is going to get the fewest showings.
It is not ethical for agents to refuse to show their client a home with a lower commission. However, if there are dozens of similar homes on the market (and right now, there are plenty), the agent can easily choose to show properties with the higher commission first. Some sellers have started offering higher commissions (3% or even 3.5% to the buyer's agent), to encourage more buyers to see their homes in this competitive market.
It's true that some agents listing luxury homes (over a million dollars) are currently offering lower commisions (2%, or 2.5% an the first million and a flat fee thereafter, etc, etc), but the difference between the amount of money each agent pockets on the sale of a high-priced home versus a moderately-priced home is dramatic.
By the way, this creates a disservice to home sellers and buyers on the lower end of the spectrum, as many agents naturally prefer to concentrate on clients that generate more dollars per hour of time invested. The thought is, why spend 20 hours with a $150,000 buyer who will generate a pre-tax income of $2700, when you can spend the same 20 hour with a $350,000 and make over $6000?!
Equitable share
OK, let's say I am listing a $600,000 dollar home, and if that price is fair within the current market, I will sell it within a month. Let's say I feel that I can cover my marketing expenses and make a decent income if I charge the seller $7500 for my end of the sale. However, in order for this listing to be competitive, I still have to be able to offer the buyer's agent 2.5%, or $15,000. I would save my seller 1/4 of the commission. But how does it feel that after successfully marketing the home I made only half of what the other agent made simply for bringing a buyer in the door?
On the flipside, the buyer's agent may have spent hours with that buyer, trying to help him find the perfect home, and she should be compensated at a fair market rate.
Discounters
Discount brokers typically charge a fee for listing a home on the MLS, and allow the seller to offer full 2.5% commission to the buyer's agent. Then they pretty much wash their hands of the seller. No service, no marketing, heck, they won't even hold the buyer's earnest money in escrow once there is an offer.
But am I a "discount broker" if, continuing with the above example, I decide that it's OK for me to make less money than the buyer's agent. After all, if I can cover all my expenses for the full service provided to the seller, generate a profit, and earn what I feel is fair compensation for my efforts, who cares what the other agent makes?
Teresa in St. Paul is right: there is something wrong with this business model.
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