Real Estate Commissions are NOT as Big as You Think

By
Services for Real Estate Pros with Real estate commentator; GoToby.com, Take Action Propertiesi

I cannot count the number of times people have remarked to me that they believe that real estate commissions are too high. After all, why should someone pay 6% of the selling price of their property when the sales agent may have spent less than 20 hours dealing with the listing? Six percent of $200,000 is $12,000. For 20 hours of work, that's $600 per hour.  

From the seller's perspective, the commission amount seems huge. But real estate transactions involve several people, each of whom gets a piece of the pie. While the pie seems big, sometimes it ends up in lots of little pieces. Let's look at the commission from that end.  

Under Florida's real estate law, licensed real estate Sales Associates (agents) must work under the direction of a Licensed Real Estate Broker. Typically, agents are independent contractors, not employees of the broker. Still, the broker is ultimately responsible (and liable) for the agent's actions. Any listing agreement is between the property owner and the broker (not the agent) even though the agent secured the listing.  

Sales commission distributed at closing is paid directly to the brokers. Sales agents cannot receive commission directly. The Broker, in turn, splits the commission with their agent on a negotiated percentage specified in an agreement between the broker and the agent. There is no set rule for the split, but the agent usually receives between 50% and 75% of the commission paid to the broker. Several factors determine the percentage:

  • Some brokers provide support services such as office space, desk, phone, office supplies, stationary, advertising, clerical assistance, administrative assistance through the closing process, computer work stations, etc. They may also subsidize some of the agent's related expenses such as E&O (Errors and Omissions) Insurance, postage or copying expenses. Such brokers usually keep a bigger slice of the pie.
  • Others provide little support. Some even charge a desk fee or a transaction charge for each sale. But these brokers usually give agents a larger split.
  • Some agents are more experienced and/or have a large stable of clients and proven track record. They typically can negotiate a better split arrangement with their broker.

Most listing brokers agree to cooperate with participating brokers, usually offering half the listing commission to the broker who's agent brings a buyer to the table. This practice helps expose the seller's property to the maximum number of potential buyers.  

Let's take a simple example. Assume the selling price is $200,000 and the negotiated commission rate is 6%. In this example, the agent for the listing broker shares in 50% of the broker commission while the agent for the buyer's broker receives 70%.  

Distribution of Real Estate Commissions

Total Commission

$12,000

 

 

Seller Broker @ 50%

 

$6,000

 

Buyer Broker @ 50%

 

$6,000

 

Seller Broker @ 50%

 

 

$3,000

Seller Agent @ 50%

 

 

$3,000

Buyer Broker @ 30%

 

 

$1,800

Buyer Agent @ 70%

 

 

$4,200

Totals

$12,000

$12,000

$12,000

Now let's add a twist. The buyers did not make the initial contact with the buyer agent. As often happens, the buyer was referred to the agent by another agent (a referring agent). In that case, the referring agent's broker and the buyer agent's broker agree on a referral fee (another commission split). Although individually negotiated, the most common referral fee is 25%. That means that if the referral results in a completed sale, the buyer broker pays 25% of the commission received to the referring broker. Each, in turn, split their share with their respective agents (buyer agent and referral agent)  based on their respective commission split agreements.  

Take the same example above but add the referral to the buyer's broker. The referring broker gives the referring agent 60% of any commissions. Here's what happens.  

Effect of Referrals on Commission Distribution

Total Commission

$12,000

 

 

 

Seller Broker @ 50%

 

$6,000

 

 

Buyer Broker @ 50%

 

$6,000

 

 

Seller Broker @ 50%

 

 

$3,000

 

Seller Agent @ 50%

 

 

$3,000

 

Buyer Broker @ 75%

 

 

$4,500

 

Referral Broker @ 25%

 

 

$1,500

 

Seller Broker @50%

 

 

 

$3,000

Seller Agent @50%

 

 

 

$3,000

Buyer Broker @ 30%

 

 

 

$1,350

Buyer Agent @ 70%

 

 

 

$3,150

Referral Broker @40%

 

 

 

$600

Referral Agent @ 60%

 

 

 

$900

Total

$12,000

$12,000

$12,000

$12,000

It can get even more complex. Sometimes different referral brokers and agents are involved with each end of the sale, the listing and selling end. Worse yet is the situation where the buyer announces at the time they are about to sign the sales contract that they are a licensed real estate professional and they want a piece of the commission. Sometimes another agent is injected into the process to cover for the regular agent (who may be sick of out of the office). The assisting agent may feel that they contributed to the sale and should receive some compensation. Need I say more? And then there's the lender willing to approve a short sale only if the overall commission rate can be renegotiated to a lower level. Or the seller who wants the broker to absorb some of price his/her price concession.  

And then there are the expenses, including but not limited to the following:

  • Local association dues - $336 annually
  • National association dues - $545 annually
  • Health Insurance - My premiums and co-pays average more than $1,100 per month as an individual (yes, I'm older than average)
  • Advertising and business cards
  • Postage - a 1500 piece mailing costs approximately $1500 including stationary, envelope, and postage (exclusive of labor)
  • Stationary and office supplies
  • Computers and software
  • Automobile expenses (including gas, insurance, maintenance, etc.)
  • Other association dues (Chamber of Commerce is $200)

Of the licensed real estate agents in Flagler County, FL about 1,200 are dues paying members of the local Association of Realtors®, which would classify them as active (at least in a part time sense).  During the first four months of 2008, a total of 567 real estate sales transactions (all types of properties) were reported by the Flagler County MLS. The total value of these transactions was $130,733,453. At 6%, these sales would have generated $7.844 million in total commissions. Assuming agents receive, on average, 60% from their brokers, they would have collectively received commissions totaling $4.71 million. Divided equally among the 1,200 agents, each would have received a total of $3,922 in four months. And don't forget the expenses.  

Seldom do people spend more money on an item than when they purchase their home. But few know much about the process and intricacies of buying and selling property; disclosures, contract terminology, inspections, title insurance, legal obligations and liabilities, pro-rating taxes, association fees, escrow, mortgage options, CCRs, deed restrictions, etc. Most also are unaware of how real estate sales people are compensated. They don't get paid to do a comparable listing analysis of your property, to list your house, to advertise and promote it, or to hold open houses. They don't get paid to search for and preview property meeting your requriements, schedule showings, or to drive you around to show properties. They only get paid IF a transaction happens.  

As in any business, some of the players are not very competent while others are exceptional. Some work 7/24 while others hardly work at all. Take time to learn how to tell the difference. Then treat YOUR real estate professional as you would treat any other trusted business associate. Trust me. They will earn their commission.  

I am strictly a referral agent. Whether my readers are buyers or sellers, I help them find that "right" agent. They will take good care of you while I concentrate on GoToby.com. Don't hesitate to call me (386) 931-7124.

Comments (4)

Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Thank you Toby! As usual, this is an excellent presentation. And all too true. And in this market, I can't imagine ANYONE thinking our commissions are too high. Many REALTORS are starving to death, for lack of a better term. I would think sellers should be happy that there are still REALTORS left to help them.
May 01, 2008 04:12 PM
Anonymous
Jim

Good info, but doesn't this post pose an issue with anti-trust laws?  And shouldn't agents be able to justify their rates by their performance?  Problem is that too many can't.  How many sellers trust an agent to list their house get a bad presentation and never hear from the person again?  Quite a few.  People choose real estate agents because they want them to get the job done.  Most don't really care what your expenses are, what your personal financial situation is, or anything other than the professional providing them with the service they are paying for.  How often do you go in to buy a car and really care about the financials of the dealership?  You don't, you care about getting the best deal with the best service. 

May 18, 2008 10:01 AM
#2
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management

You certainly explained how the money gets chopped up an distributed.  There is no free lunch if you want to sell your property and there is a reason why commission are at that level.   Not to mention that all that work can turn into nothing if the deal falls through.

May 18, 2008 05:30 PM
Toby Tobin
Real estate commentator; GoToby.com, Take Action Propertiesi - Palm Coast, FL

Jim,

The percentages used are for illustration purposes only. All commissions are negotiable. To your larger point, clients should get the best representationi for their money. No one should pay for something they don't receive. But neither should clients abuse the time and efforts of a qualified real estate professional simply because they do not understand how sales agents are paid. Many well meaning people do not understand the real estate commission system. Many assume the sales agent receives some sort of salary. The purpose of this post was to educate. Toby

May 19, 2008 01:46 AM