Why Does it Cost Six Percent to Sell a Home?

It's only natural that people want to save money. As average home prices steadily increase in the nation and here in the Katy area, more and more homeowners are balking at the commission involved in the sale of their home. Many say the problem is that we, as an industry, have not done a very good job in explaining the value of our services. We hope that my Seller's pages effectively covered the services we offer and underlined the value of those services to you.

Many consumers, when surveyed, have no problem paying a premium price for premium product... Sales of luxury vehicles are on the rise as are sales at luxury, high-end retailers and sales of high-end vacation packages. And yet, when it comes to hiring a real estate agent, people fail to see the value in their services and thus, their fee. Perhaps this is because it's a service they believe that could technically do for themselves.

What Makes a Realtor?

When you hire a real estate agent, you are hiring that agent to market your home. There's much more to marketing than simply placing a "For Sale" sign in the front yard. Remember, our role as your agent covers far more than marketing - it covers advocacy and representation. Also, much of our services to you occur away from you, behind the scenes.

Much of our work is done on the phone, the internet, at our office, in our cars, at home, at all hours of the day and night. You can't stand by and observe a REALTOR® in action as you can a plumber who's fixing your pipes or a HVAC repairman working on your heat pump so it's hard to really know what we do all day long.

Our expertise lies in our connections, our ability to expose your home, not only locally, but regionally and nationally. A For Sale By Owner (FSBO) traditionally pokes a For Sale by Owner sign in their yard and places an ad in the local paper. For some, this is all they need. A potential buyer combing the paper or driving by might see it and buy it. It does happen. More often than not, however, the right buyers will never see that yard sign and may not see the ad in the local paper. In addition, the majority of relocations are arranged through Realtors who are directing their clients to homes listed on the MLS. This is where our skills and our connections can prove invaluable.

But once again, let me remind you, our role is not limited to simply marketing your home and finding you a buyer. It's about representing you and acting as your advocate in the actual sales transaction that is to follow. This is where our expertise, knowledge, professionalism, communication skills and experience come to play. This is something not easily replicated, imitated or replaced. The funny thing about hiring a Realtor® is that you pay nothing up front.

The agent spends his own money to market your home and it can get pretty expensive depending on the level of marketing you require. In the end, however, if that agent fails to sell your home in the time period allotted within your contract, you can hire someone else and you don't pay the first agent a dime. The agent takes a loss for the marketing costs and you have lost nothing but a little time.

The Dirty Word of Real Estate: Commission

Most homeowners think of commission as a dirty word. And it can be... but not for the reasons you're thinking. Here's how commission works:

Most Realtors® are Independent Contractors. As such, they work for themselves, but by law, must be affiliated with a Brokerage Company, who holds their license and gets a cut of their earnings in exchange for services they provide, such as office space, company advertisement, use of office equipment, Errors & Omission Insurance, etc.

The Agent is responsible for all other expenses, including computers & supporting technologies, cell phones, software, stationary, postage, mileage, office supplies, printing etc., etc., as well as costs of annual national, state, and local board dues and fees, educational costs and a host of other expenses including health insurance, FICA and Federal and State Income Taxes.

The general public has this notion that Real Estate Agents make huge sums of money at the Buyer's and Seller's expense and are laughing all the way to bank, making millions of dollars every year. Take a look at how commission really works and judge for yourself if your agent is over-paid.

A Common Commission Scenario

Agent Brown with XYZ Realty lists a home for $154,000 and agrees upon a 6% commission with his seller as set by his company. Agent Brown places this listing on the MLS and offers any agent 50% of this agreed upon commission to any agent who can help sell this property. In the meantime, he places advertisements for this property on his web-site, in the local paper, a monthly home magazine and also in the local real estate cable channel, as well as holds Open Houses, does a mass postal mailing and shows the property at least a dozen times.

Agent Green with ABC Properties represents a Buyer. Her buyer offers $150,000 for this property. The Seller accepts. At closing, the total commission the Seller must pay is $9,000. The escrow officer cuts a check to XYZ Realty for $4,500 and another check to ABC Properties for $4,500. Each agent returns to his/her office and submits the checks to his/her respective Brokers. XYZ Realty's policy is that they split commissions 70/30 with their agents.

So XYZ pays Agent Brown $3,150. Out of this $3,150, Agent Brown is responsible for this own Federal and State Income taxes and FICA withholdings. His CPA recommends that he set aside at least 25% out of each of his earnings towards taxes. He is now looking at $2,362 after taxes. Agent Brown then must deduct any marketing expenses he incurred to get true net earnings on this transaction. Real Estate Agents must pay for marketing expenses of homes out of their own pocket so anything he does to market the property is money he must re-coup if he wants an accurate accounting of his earnings.

If he spent $600 over 6 weeks in marketing this property in the form of advertising in different media such as newspaper, magazines, television and internet as well as gas, printing costs, postage, etc., his net is now $1,762. The amount netted can be less for properties that have been marketed heavily over a long period of time and can often reduce the net earnings to $0 or below if not careful. So while the general assumption of most people would be that Agent Brown sold the home for $150,000, he made $9,000 (or 6%). Those with a little more knowledge on the details would then assume he made $4,500 (or 3%).

In truth, he grossed $3,150; only 2% of the sales price.
He netted even less, $1,762 or 1% of the sales price after taxes and expenses.

If the home were on the market for 6 weeks and it took another 4 weeks until closing, during those ten weeks, if Agent Brown were to calculate how many hours he spent on activities related to that property, i.e. phone calls, creating & mailing fliers, sending & responding to e-mails, updating his website, holding open houses, showing the property, presenting offers, negotiating offers, assisting with closing details, attending closing et al, he may discover that he spent over 150 hours on this transaction.

At 150 hours, he netted only $11.74 per hour on this transaction, less than what some retail sales associates earn, only Agent Brown isn't simply selling some article of clothing or bath towel sets, he is coordinating the sale of one of the largest investments in a person's life.

The High Costs of Lower Commissions

Every homeowner, at one point or another will eventually ask, "Will you lower your commission?" and follow it up with "Another agent said he'd do it for a full percent less than you."

Warning to the wise:

Some agents are so eager to take your listing that they will immediately cave and agree to lower their commission. Great, you think! Well, consider this... if an agent is so eager to get your listing and negate the worth of his own expertise and services, what do you suppose he will do with your home and your needs? If he can't effectively negotiate his own price and fight for the value of his own services, how do you suppose he will fight for you and the value of your property?

Take another look at the chart above of how commissions really break down. If the agent is working for cut-rate fees, you must ask yourself: Will I be getting the full services and benefits that I deserve to effectively market my home and get it closed? Is the Agent agreeing to cut his fee in a desperate attempt to simply add your property to his listing inventory to attract more potential buyers? Question his motive, methods and integrity. Don't let the desire to save a few bucks cause you to make bad choices in real estate. There's a lot at stake! Think about what this means for you and always make informed decisions.