Special offer

Why does it cost so #$%!ing much to sell a home?

By
Real Estate Agent with Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605

The Cost of Selling your homeFirst - 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.

Where the money goes

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.

Why does it cost so #$%!ing much to sell a home?

 

Comments (8)

Bill Morrow
Keller Williams of Central PA - Mechanicsburg, PA
Bill Morrow, Associate Broker

This is one tremendous explanation of a Realtor fees that is easily understood by anyone.  I am sure it will be used as a part of many presentations, including my own. I  like your analogies of an attorney's fee of contingency vs. retainer. We are continually having to educate the public...thanks for the new tool.

Feb 11, 2011 05:05 AM
Joelle Embres
jsellhomes@live.com - Parkland, FL
Re/Max Advisors

Excellent post. Really well thought out and well written. I will definitely incorporate parts of this into my listing presentation. Have a great weekend!

Feb 11, 2011 06:07 AM
Mollie Wasserman
Your Move Made Simple - Framingham, MA

Good analysis of how agent fees are divied up. One of the consumer issues I believe has been that they don't mind paying for quality services if they could just understand what it is that they are paying for.

When I talk about providing choices to the consumer in how they can pay us, agents get tangled up in what the consumer will choose. The bottom line is it doesn't matter! If you set up your fees correctly, as well as charge a high enough commission to mitigate the risk you shoulder if they go in that direction, then it doesn't matter what the consumer chooses because they choose you - and many times they choose you because you gave them choices. No one wants to feel they are being pidgeon-holed into something. If you give them a choice they feel that they have a say and are much easier clients to deal with.

By being transparent about different options, with the plusses and minusses of each, you build a relationship of trust. You also have a client who values you and what you bring to the table and isn't that what this discussion is all about?

Feb 11, 2011 06:54 AM
Sandy Fenton
Keller Williams NY Realty * Licensed Associate Broker - Mount Kisco, NY
ABR, ASP, CDPE, GRI -Westchester NY - Condos to Luxury Homes

Great post Ruthmarie - as usual.  :-) 

I've explained to people the concept of taking a listing on contingency but I like how you give the example of the lawyer taking a suit on contingency.  The whole "high risk/high rewards" concept. 

I once spoke with a couple and we went over the price, length of agreement, commission etc.  Their issue was not the commission but rather the length of the agreement/price.  They wanted a 3 month listing and I wanted a 9 - I would've compromised at 6.  They wanted to list it slightly higher than I was comfortable with but I could've handled that with a firm plan to lower the price at a certain point.  I explained that with their market taking 9-12 months to sell, I wasn't willing to take the risk because I work on contingency and there really wasn't enough time for me to put out that kind of expense given the circumstances.

I didn't take the listing unless they would reconsider.  She called me the next day and told me that she was going with another agency because "they pay for everything."  Boy, did I laugh at that one.  I saw the "professional" photos that were slapped on the MLS.  PS - the listing expired and was put back on a couple of times with a couple of price reductions.  As of this minute - it has been "withdrawn" for a couple of months.  I suspect the agency where they pay for everything is not releasing them from their agreement.  I could've had that house sold already and they would have move forward with tbeir lives.  They didn't want to take the risk along with me.  Oh well . . . 

I'm going to call her one of these days . . . :-)

Feb 11, 2011 12:20 PM
Brenda Mullen
RE/MAX Associates - San Antonio, TX
Your San Antonio TX Real Estate Agent!!

Great explanation Ruthmarie :)!  It is hard for Sellers to fathom why we charge what we charge.  I had to have seller reduce her price and let her know what her net would be and the inevitable question came up, "do you still get to keep your full commission if I reduce my price?"  Groan....and the explanation has to come up again.  Some times you have to explain and keep explaining why you earn what you earn :)!  

Feb 12, 2011 02:01 AM
Barb Szabo, CRS
RE/MAX Above & Beyond - Cleveland, OH
E-pro Realtor, Cleveland Ohio Homes

I could not push the suggest button fast enough. This is excellent! I only wish the reblog button was working. I'd love your permission to print it for my listing presentations! Thanks!

Feb 12, 2011 03:44 AM
Barb Szabo, CRS
RE/MAX Above & Beyond - Cleveland, OH
E-pro Realtor, Cleveland Ohio Homes

I forgot to add this comment about this line with regard to a retainer:

Then they ask me “but what if my house doesn’t sell?”. A great oppotunity to nicely say,"The same thing that happens to me...I lose the money I have invested."

Feb 12, 2011 03:56 AM
John McCarthy
North Hampton, NH
Realtor - Seacoast NH

Ruthmarie,

I was directed here by Brenda Mullen, who obviously knows a great post when she sees it. I'm so glad you made it "Public" and not "Members Only." I can only hope you get a lot of readers from "out there." As with Brenda, I suggest many more people take the opportunity to read it. Thank you

Feb 12, 2011 04:19 AM