First - this post is dedicated to Jennifer Allen and Mollie Wasserman who conducted an outstanding seminar yesterday. They were addressing an issue that I have been meaning to discuss for some time.. But I just hadn't gotten around to putting it in writing.
This is an issue that is brought up by sellers all the time. Usually the question is asked far more politely…and goes something like this:
“I know you work hard at what you do, but these are hard times and I am barely breaking even. Is there anything you can do about the commission?”
Sometimes there is no room!
Now, a great deal depends on the price range of the home involved. There are cooperatives and condos in our area where there really is no wiggle room with respect to commission. Gone are the days when an agent can take a couple photos, slap it on the MLS and sit back. Marketing is necessary and it is not inexpensive. So at the entry level I can easily find myself working nearly pro bono and sometimes find myself with a net loss.
How can a $10,000 gross commission check possibly result in a loss?
It is helpful to outline where the money goes in the sales process. In general the gross commission looks something like the national debt – particularly on a high priced property.
The outline below is very basic but it provides a starting point for sellers to understand how the commission check is divided. In a simple transaction, the commission is divided between the listing agents brokerage and the buyers agents brokerage. Note I say the “brokerage” – the agent doesn’t walk away with that check and plop it in the bank. Unless the agent owns their own brokerage, their portion of the commission is split with their broker.
The listing contract determines how much goes to each brokerage. How much each agent gets from their broker depends on their contract with their broker. At the end of the day – the agent that listed your home could see less than $2500 of a $10,000 gross commission. From that $2500 – you have to subtract taxes, marketing expenses, office expenses, insurance and the like. Bottom line – its not a lot of money once you break it down.
There are often more fingers in the pie than what is indicated. If the buyer was referred by another agent fees of 25-35% for said referral is not uncommon. Lead generation sites – 30%. Relocation companies sometimes charge close to 40% of the gross commission. Since real estate is high touch and low volume, these referral fees can take meat cleaver to an agent income. It’s pretty obvious that unless the commission is very substantial there is not much left under those conditions.
For the rest – its all about risk mitigation:
It seems insanely expensive at times… I grant you that . But what exactly the rationale for the high price tag. For the most part – the high sticker price is for risk mitigation. Now sellers are starting to scratch their heads. They ask “what is risky about listing a house or working with a buyer?” This is where HGTV has done agents a bad turn. It’s not the least bit like what you see on House Hunters or Selling New York. As a former salaried employee – I had a hard time wrapping my mind around this concept when i first started.
However, deals fall apart all the time, buyers spin your wheels – literally – and agents can literally spend hundreds of hours on a transaction only to have the whole deal fall through at the closing table. For example – in this type of market there are a lot of buyers, but many never decide to pull the trigger. Agents are spending hours upon hours with buyers who will chug three tanks of gasoline and about 40 hours of their time before merrily walking away. For me that’s about $100 in gasoline – and time wise – what would be a full work week for a salaried employee. High risk, high reward.
When you list your home with me – the outlay in terms of time and money begins immediately. Depending on the property it can add up to four figures very early in the game and time -wise there is a lot of front loading – between photos, promotional materials – I’m into it about 20- 30 hours the first 10 days – with no guarantee of payment. In this case there is also a major monetary risk. Should there be no sale – I’m out that money and that time. High risk, high reward.
This is not just some convoluted scheme to make more money either. This is necessary compensation for taking on a major quantity of monetary risk as well as time and effort. The saying that “time is money” is very, very real to those working on commission. If a listing doesn’t sell, or a buyer doesn’t buy – an agent can never reclaim that time that could have been spent working on a transaction that would have closed.
When working on contingency – other professions have a similar structure:
Let me explain it another way – although we aren’t lawyers – lets use their method of compensation as an example. A lawyer agrees to take on a malpractice suit on contingency or through a retainer. On contingency – I believe the fee is generally about 30% of the settlement. That is probably far and away above what they could ever earn if they charged by the hour. Why so much money? Said attorney is using his office and staff and time for FREE until there is a settlement. That’s very high risk for the attorney . High risk, high reward.
Why not change the system to a retainer system?
If it is in fact the amount of work that agents have typically done for free that drive up the tab at the closing table – why not change it? But…but….whenever I mention that a seller could save money by giving me a retainer and paying for their own marketing – sellers back off. As of now, both sellers and buyers seem to prefer working on the low risk side of the equation. When a seller asks why the commission is so high – I have – at times suggested a retainer system. Then they ask me “but what if my house doesn’t sell?”
At the end of the day – the public has options – but they are risk averse. For all the angst about cost – which is a very real issue – the current system remains in place because it is the one that the public chooses when push comes to shove.
© 2011 – Ruthmarie G. Hicks – http://thewestchesterview.com All rights reserved.