In the real estate business most agents , including me, charge a percentage of the sale price of the property they are listing as their fee, or commission for selling it. 6% seems to be a popular number around the metro area these days, although I have to say 5% may be the new 6%, and 6% is becoming the new 7%.
As a business person I incur costs finding business and then marketing costs when I put a home on the market. I need to make a profit or I can not stay in business. With all of the technology I use my marketing costs have gone down. Some of my other costs are rising. Most notably the amount of money that I spend on gasoline.
It doesn’t makes sense to charge the same percentage for a 800,000 home as I would charge for a 200,000 home. 
I have to pay out 2.7% of the sale price of homes I list to the agent who represents the buyer in the transaction. Fair enough buyers agents do much of the work. Most real estate transactions involve two agents which is a good thing for the consumer because each gets representation. It is also a good thing to have thousands of agents competing with each other to sell your home.
At 6% the difference between an $800,000 dollar home and a $200,000 home comes out to $19,800, my marketing costs are higher on the more expensive home but nothing close to $20,000 dollars, instead my profits go way up.
There is a mystique about listing more expensive homes. We are taught that things need to be done differently. The services I provide on a $200,000 home rival those provided by other agents on $800,000 dollar homes.
The buyers I have worked with who buy $800,000 dollar homes are pretty much the same as those who buy $200,000 homes as far as the type of service and expertise that they need from a buyers agent. They all ask the same questions and have the same concerns. They seem to surf the same internet and I can reach either group through the internet.
Not all home sellers understand what it takes to sell a home. They still make reference to this real estate company or the other one, not understanding that it is the agent who sells the home. Real estate companies do not sell homes and most agents are independent contractors. We are taught to market the real estate company that we are associated with. It is good for the company and for all of the agents so we tend to want to promote it.
Does it make me a discount broker if I can provide full service at a lower commission rate on more expensive homes? Who thought up this business model any way? I suppose if someone wanted me to list a $100,000 dollar home I would have to charge 10% to make it work or charge less and cut back on some of the services I provide.
It is the same when I represent the buyers. the services I provide on the $200,000 dollar home for a commission of $5,400 are the same services that I provide the buyers of an $800,000 dollar home for a commission of $21,600 Often my own expenses are higher when I work with buyers who purchase modestly priced homes because they are more likely to be first time home buyers and need more of my time and resources. The first time home buyers are also the most rewarding part of my job.
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where are you going with this?
Edyn – if that is your real name.
I am just putting it out there. I have had this conversations with clients and thought I would share. I am a child of the 60′s and I question everything. I have to trust people over thirty . . . .
Johnsons – thanks for stopping by.
T,
I think that comment is spam, I got the exact same message on a couple of my blog posts. Looks like someone wanting links back to their site.
Not spam. T, knows who I am and trying to call me out before I can be.
T,
I applaud you for bring this up. A few of us were just discussing this yesterday actually. The system is flawed but we couldn’t come up with anything solid that was better.
What the seller is really doing in paying for their commission and the commission that was lost before them. An agent spends the money, time, effort and expense upfront without a guarantee and at times gets burned for it.
We bounced around a ton of ideas and since you were brave enough to go here with this topic maybe I will post some of brainstorm alternative models we came up with on the gardyn.
PS. You are the best.
Dave is referring to the ‘comment’ from ‘Johnsons’. They are making the rounds of real estate blogs with their ‘praise’ (link spam).
Edyn – I won’t call you out my friend.
I could of course delete the Johnson’s. 
As for the commission structure you are correct the good ones make up for the bad and it does cost a ton of money to be in the business. I am looking at this from a consumer point of view. it really isn’t there problem.
I really want to encourage ALL of you to learn how you are worth a full commission. Let me give you three quick examples–1) On a $800,000 purchase with a 80 percent loan, if you were following the mortgage news (which most of you do), you would have locked your clients rate last week. The rates increased by 1/2 percent–that’s a $80,000 savings over the course of the loan. 2)I ran the training program for 4000 agents inside of Prudential California–our company got sued all the time. If your client can afford a $800,000 house, you can bet they can also afford a pricey attorney. The cost of going to court–$50,000 to prep, $50,000 in trial expenses, not to mention the judgments or the huge hours of time it drains from your life and your business. 3) Despite that study from Madison WI (They could only find evidence in one little town???), I’ve interviewed hundreds of brokers who net their clients more than their competitors and can show it! It’s a matter of tracking your business. On a $800,000 purchase, excluding my ability to help my client negotiate more on the price, I may have saved them $180,000–isn’t that worth it?
Bernice Ross, http://www.RealEstateCoach.com
Bernice – as far as how much I am worth my family would say that I am priceless. I do see your point and I do track my business. I know that I save my clients money in all price ranges. I also know that some require more service than others and the price of the home doesn’t seem to be a factor.
Bernice,
This isn’t about discounting, it is about what is equitable. Real Estate coaches and Guru’s like yourself like to compare us to lawyers and doctors and you did in your comment. Tell me how saving a person money on a $800,000 home is different than saving a person money on a $250,000 home, from your own example. Because I saved the person with a more expensive home, I should get more of their money? Really?
What if I’m in lawn care? One home has beautiful, custom, just put in lawn, another home has the same shabby grass it always has. Do I get to charge more because the grass I’m cutting is more expensive? I’m doing the same job I always do.
Should my year be made off of one sale?
Should I as an agent be allowed to get rich? yes. Off of one deal. I don’t think it’s fair and equitable. I can see how you are all right with this Bernice. You are at a different level than myself. You probably provide unbelievable value during a transaction. I’m just not there. You would probably blow me out of the water, if we went head to head in a listing presentation.
Bernice’s point is well taken. If I remember correctly, E&O has about a $5000 deductible. As a business person, I should be certified loony to do work on a transaction that doesn’t even cover my E&O deductible. After splits, that indicates I need to net $7000 to bring home any bacon. $7000/3% = $233000 (no rebates or discounts). Guess what? Our avg sales price here is $180000.
I don’t have an answer, but my gut tells me that until we can eliminate the contingency aspect of our compensation, nothing will change.
I would be happy to execute a buyer’s rep agreement for a $ million home for ten grand plus expenses/hourly fee – 5 grand retainer and 5 grand at close plus expenses. That’s 66% off the going rate! Any takers? I thought so.
On the listing side how about my costs plus $50/hour invoiced and payable weekly? Any takers? I thought so.
As long as the consumer doesn’t write us a check, they feel like we are free. There is no logic to it, but the consumer is really not banging the table for a change in Realtor compensation. They prefer having us retain all the risk of the transaction and are obviously willing to pay for performance.
As service professionals, all we have to sell is our time and expertise. The looker that wastes a weekend and doesn’t buy the 4 appropriate homes you have selected or the seller who refuses to keep the home in top condition are stealing our inventory, just like a shoplifter.
The issue is that the consumer wants us to keep all the risk of the transaction, and except for The NY Times, it appears they don’t mind paying a high price for that risk offset. Otherwise, there would be a huge market for some form of a la carte real estate services with less dollar compensation, but a more certain payout for the Realtor. I always look at the cost of every transaction in terms of the clients that would not be served if I am engaged elsewhere with time shoplifters.
There are only 24 hours in the day and if you are in business, I do not see how you can look at it holistically. I do not practice Real Estate as a charity. There are many other worthy endeavors which need volunteers. As they say in the Sopranos, “This ain’t personal, it’s business.”
My only angst with your logic is that sometimes we work forever with someone (whether buyer or seller) and that deal never comes to fruition and we never get paid. Some money is hard earned, other (way too far and few between) seem to be easy. So I tend to NOT look at it on a per transaction basis, and tend to look at it more wholistically as money earned for jobs well done.
Thanks for always making me think!
I think my post was mis-understood — I don’t practice real estate for charity either, but you certainly can’t tell me that you’ve never been doinked… I’m just saying that rather than discount for a larger house sale, I earn the percentage that I earn, house by house the same each time and consider the total income to hopefully offset some of the other more hard-earned dollars… jmho…
I think my post was mis-understood — I don’t practice real estate for charity either, but you certainly can’t tell me that you’ve never been doinked… I’m just saying that rather than discount for a larger house sale, I earn the percentage that I earn, house by house the same each time and consider the total income to hopefully offset some of the other more hard-earned dollars… jmho…
In Texas, we call it something else. Of course, we hang horse thieves, too.
We are all moaning about the same issue. The consumer wants us to assume all the risk and seemingly does not mind paying through the nose for our services, as long as they can pay us on the HUD-1, and not write a check for services rendered. It’s like a trial lawyer taking up to half the award in a contingent lawsuit. Like the trial attorney, we must be careful which cases we elect to take, otherwise we are the “doinkee” and not the “doinker”. The NYTimes and it’s poster child, R*df*n seem to think that traditionally compensated REALTORS should assume all the risk and just be happy cheerful doinkees.
Back to Teresa’s post. How much is too much? It’s negotiable. In the luxury property world, the clients don’t change their own oil, either. They pay about five times the jiffy lube price at the dealership. Around here, a super duper property demands super duper real estate services. If I can save the buyer of a $ million property over $50,000, have I earned a $30,000 fee? Just asking. Our value to different clients appears in multitudinous forms for each transaction. Sometimes just getting the deal closed is worth multiples of our fee. We are all shortchanging our value if we start this 30 grand for 4 hours work stuff, because it’s just not true.
There was a Realtor who was on his way to a very important listing appointment and his car started to rattle and clang. He pulled into a little garage and the fellow there offered to take a look at it. He opened the hood and looked and went to his toolbox, pulled out a big wrench, and just hit the engine with that big wrench and the car started purring like a kitten. The Realtor was amazed and delighted and asked how much he owed the man. The fellow replied, “$20.00″. The Realtor said that that seemed like alot of money for a little tap with a huge wrench. The mechanic replied that the tap only cost $2.00, but knowing where to tap the engine with the big wrench cost $18.00.
In this business, we tend to underestimate the value of our “taps with a big wrench” to our clients.
Interesting thread…
I’m not sure I understand what Bernice’s point is, because she save one client 180k, all client must pay the same?
Teresa’s post is interesting in that she touches on the real heart of the matter “Risk”. The agent assumes much of the risk in a transaction and therefore should reap a greater reward. I would say that when you sell an 800k house, there is a smaller pool of potential buyers, therefore there is greater risk involved in time, marketing and potential liability? The seller is not mitigating your risk upfront, so why lower your commission to the amount you receive for a 200k house?
When there are big differences in price, I don’t see the point of lowering your %. However, if your selling one house down the street for 300k and the other for 400k are you really assuming 6-7k more in risk? probably not. Giving the consumer the benefit of the doubt is much more appropriate.
I talk about the risk/reward model in my series “the commission paradox” http://www.agentscoreboard.com/blog/2007/06/14/the-commission-paradox-part-2/
Mike – Agent Scoreboard, I have no intention of lowering my commissions to the same level as I would get for a 200K house. I was just questioning the idea of charging by percentage of the property value. Charging by risk makes more sense. – - thanks so much for your comment.
Teresa & Folks, Commission structure harkens back to the day when the logic was, if I bring to you a buyer and his big stack of cash, would you, Mr. Seller, pay me a percentage as commission? I’m offering to bring you something you didn’t have before, and you don’t have to pay me if I don’t bring you what want. Exclusive agency, commission splits, cooperative arrangements through the MLS all evolved later. But the payment premise has stayed the same. Mind you, other arrangements have been tried, and some alternate schemes are more popular than ever, but if any one way of selling Real Estate ever emerged as vastly superior, the system would have already changed. The system of agency – namely: I stand for you – has been tried and true for representing sellers since the Middle Ages in England. Of course if you break out each individual technique you apply to your listing, the price per activity seems out-of-whack. The benefit is that you’re the person eating, drinking & sleeping Real Estate Marketing on behalf of your sellers 365 days a year. This is the essence that adds the value – not the individual tasks.
Right On, Robert!
Tap pricing: $2.00 for the tap, $18.00 for knowing where to tap…