In real estate, commissions are how licensed real-estate professionals get paid for providing benefit. Now, if you, like so many millions of people, work for a company, then you likely receive a regular paycheck in exchange for your services. If you provide professional services as a doctor, lawyer, accountant or other, you likely receive a variable fee based on the type and complexity of services rendered. Think about this — real estate is among the few industries for which the compensation is completely contingent, meaning the agent is only paid provided the transaction is completed successfully. Oftentimes, agents will spend their own money for marketing materials and expenses, and add many hours of hard work, only to be paid nothing if the transaction does not complete, which does occur with a frequency of about 10 percent to 20 percent. Sadly, too many people believe that real-estate agents do little more than stick a “for sale” sign in the front yard, only to return at a later time and collect their fat commission check. Commission rates are not fixed or preset. In recent times, while the real-estate market was in a downturn, sellers expected real-estate agents to share in the losses, and as such, often selected an agent based on his or her willingness to cut commissions. In more robust times, it is not uncommon to see commissions moving higher.
If nothing else, do understand that the agent does not grab your fat commission and run down to purchase a new Bentley. The commission is divided first between the cooperating brokers — the listing broker and the selling broker — so simply stated, if the commission is 6 percent, the split to each broker is 3 percent. That 3 percent is then further split between broker and agent, according their agreement.
No matter how you do the math, many people still feel the agent is overpaid, and unfortunately that sentiment emerges from undeserved negative stigmas about the industry. Real-estate agents perform very valuable services and most work very diligently to satisfy their clients.
Keep in mind that the agent is a small business owner — an independent contractor. Like any business, the commission earned is disbursed for direct expenses that benefit the client, and the residual, if any, is used to cover indirect operating expenses to stay active and to properly and professionally serve the needs of the public. Another point worthy of comment — and for sure it will meet with brick wall opposition — is that the gross selling price of your home already includes a built-in presumption for selling commissions. Consider that any product purchased off of the shelf like cereal, lingerie or cars includes a cost factor for manufacturing, wages of workers, advertising, delivery, selling commissions, royalties, profits and more.
Before we close out this article, let’s go back to commission cutting. It is interesting to witness how sellers are more likely to select the agent most willing to reduce their commission rate rather than an agent who has a rock-solid marketing plan to get homes sold fast. This is a classic example of the phrase “penny-wise and pound-foolish.” Your house must sell within the first 30 days, otherwise you risk becoming “day-old bread,” losing a lot more money in the form of future price reductions and monthly homeownership costs to pay for a house you no longer want to live in. Do you really think that your agent will work as hard for a 5 percent commission as they would at a 6 percent commission? Perhaps! But remember that commissions are split four ways between brokers and agents, so the motivation for a buyer’s agent to bring a buyer to the party is likely reduced. Knowledge has great power. Before you make a move in real estate, go back and re-read all our past articles in La Jolla Today, and then cumulatively use the value of that information to help you make more informed decisions. Questions about real estate in San Diego … or just want more valuable information? Send your inquiries to [email protected]. We will respond directly to you, and those questions that have a broader public appeal will be published along with our next column in La Jolla Today.