By Melissa Millan
As any home buyer or seller can attest, finding and working with the right real estate agent is vital to a successful transaction. A great agent should provide counsel and advice, assess the value of a house, coach you through the paperwork, and help you navigate due diligence. There are, however, a few “secrets” of the trade that realtors won’t divulge, and understanding these could save you a lot of time, energy, and potentially thousands of dollars.
Secret #1: The commission IS negotiable.
There is no “standard” or set commission rate in real estate. The typical commission a seller pays ranges between 5% and 6% of the sale price of the home. Most sellers pay between 2.5% and 3% to the listing agent, and 2.5% to 3% to the buyer’s agent. According to the Denver Metro Association of Realtors, the current average home price of a residential home in Denver is $561,999. That means that, when sold under a traditional commission structure, roughly $33,000 of your sale income goes into someone else’s pocket.
According to the Denver Metro Association of Realtors, the median time on the MLS for residential homes in Denver in October was just 6 days. When you break that out, a significant amount of a seller’s equity is being lost to commissions in an ultra-competitive seller’s market. The amount of time and effort it takes to sell a home in this seller’s market has actually gone down as commissions have dramatically increased. Many argue it’s time for a change.
What some agents won’t freely share with you is that these fees ARE negotiable. While new agents in large brokerages may have less flexibility to reduce their commissions, independent and experienced agents should be able to work with you.
Companies such as Homie offer sellers a flat fee to sell your home, regardless of the price . Bottom line: do your due diligence and understand how much of your equity will be shared with agents on both sides of the transaction. Negotiate with your agent or choose another brokerage to ensure you retain more of your equity.
Secret #2: It’s not free to hire a buyer’s agent.
Residential real estate agents often advertise their buying services as “free,” but when you dive into the numbers, you’ll find these statements are misleading. In fact, as part of a settlement against the National Association of Realtors, the Department of Justice now requires NAR to repeal and modify its rules to provide greater transparency to home buyers about the commissions of brokers representing home buyers.
While buyer’s agents don’t typically bill the buyer directly for their services, it’s not free to use an agent. That 2.5% to 3% fee to the buyer’s agent is built into the sale price of the home, increasing the amount you will pay and finance over the life of your mortgage. It’s a hidden cost that most buyers don’t understand.
You can—and should—demand transparency and negotiate when vetting potential buyer agents. Ask for your agent to rebate some of their commission to help with closing costs, which essentially lowers total costs associated with purchase.
Bottom line: By knowing that it isn’t free to use a buyer’s agent, you can negotiate a rebate or credit that will effectively reduce the cost of buying. It’s real money, and it’s your money.
Secret #3: Percentage based commissions don’t necessarily provide incentive
No matter what your home sells for, the two agents will still earn the predetermined percentage-based commission. While you might think this would incentivize brokers to get you the highest possible sale price, that isn’t always the case.
Let’s say a home is listed at $600,000 and receives an offer for $570,000 within a few days. Accepting that the seller would receive $28,200 less – after taking into account commissions- this only reduces the agent commission by $900 (based on 3% commission rate).
Data from a study published in Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (Dubner, Levitt) noted that real estate agents keep their own homes on the market for an average of ten days longer and sell for an average of three percent higher. This supports the theory that many agents are inclined to accept early offers on behalf of their clients to lock in their commissions quickly, versus waiting to optimize the sale price of the home… which they often do if the home is in fact their own.
Bottom line: Beware of recommendations to accept a low offer early in the process, particularly in hot markets, like Denver.
Melissa Millan is the General Manager of Homie Colorado.