How to Negotiate a Real Estate Commission (for sellers)
Few consumers know how to negotiate a real estate commission, and most who have done it have made some big mistakes. This short article is intended to provide home sellers with some basic knowledge to help them negotiate that fee and the services that come with it.
1. Only use small brokerage firms. Stay away from large brokerage firms. Big broker firms rarely negotiate their fees. In fact, most big brokerage firms incorporate subtle market manipulations that increase the likelihood that they will collect a double commission. Small brokers often offer far better service, better marketing strategies and they are much more likely to negotiate their fees (especially very small firms). If you pick a broker/agent who does not have to share their fee with their firm, you will have eliminated almost 50% of the fees. Smaller is better and they have access to all the same marketing opportunities.
2. Negotiate both commissions. All real estate commissions are designed to be shared with buyer brokers at other firms. The traditional purpose of Realtor owned MLSs is to facilitate a unilateral offer of compensation to cooperating brokerage firms. That means that there are two commissions. Prior to the MLS, commissions were typically 3%. Now they are often 6%. The commission you agree to pay your listing broker is designed to be split. The commission you pay your listing broker and the commission that gets offered to the buyer’s broker are two separate fees (in the past there was only one fee paid to the listing broker). Negotiate both fees separately. Your listing broker should have no objections to whatever amount you want to offer buyer brokers. It is your choice, not theirs.
Listing broker’s (seller broker’s) compensation. Notice the word change from commission to “compensation.” Price fixing in residential real estate fees has resulted in most consumers believing that the only way to compensate a Realtor is with a percentage of the price. Not true. Traditionally, listing brokers often charge a 6% commission and keep half for themselves. However, the out of pocket advertising costs and time associated with managing a listing do not correspond to this premium “success fee.” Consider paying for costs plus an hourly rate to your broker. Consider discount brokers that only keep 1% for themselves. Consider flat rate brokers who provide a sign, MLS access and an unbundled fee for those services. If you want the so-called “full service” listing broker, consider offering them a flat success fee for their services. Afterall, the level of service really does not change much with the price of the home and there is no reason your Realtor should share in your hard earned equity.
Buyer broker’s compensation. The offer of compensation to cooperating real estate brokerage firms is key to your success in the MLS. MLSs all over the country have facilitated price fixing of buyer brokerage fees at an artificially high fee through their intentionally flawed system. If you offer below the “standard” amount, you will deter buyer brokers from showing your house in the best light. Offer above the standard amount and you are inviting a bribery investigation for secretly providing finanical incentives to your adversary’s trusted agent. Invisible to consumers is the data field in all MLSs in which the listing brokers secretly advertise the amount of compensation payable to buyer brokes who procure a ready, willing and able buyer. Some buyer brokers actually “cherry pick” through the MLS to see who is offering the best “coop fees” before they decide on the list of houses they will show their clients… Until this system is fixed, we suggest offering the price fixed “traditional” amount.
*Offer same compensation to “DO IT YOURSELF” buyers. *FIRST SEEN ON CAARE! Want to attract a lot of highly qualified buyers to your property? Offer the buyer broker compensation to “do it yourself” buyers. Unlike For Sale By Owner sellers, buyers who “do it themselves” rarely receive any value for their hard work. In fact, most unrepresented buyers contact the listing firm forfeiting their and the seller’s right to represention. The listing broker collects a double commission for providing a fraction of the service. If you are willing to pay 3% to buyer brokers, then why not offer that same amount to “do it yourself” buyers and help buyers avoid a common trap? If you really want your property to stand out among all the other listings, make sure your Realtor advertises this amount in Zillow, Trulia, Realtor.com and all the other buyer frequented websites. Your property will be worth 3% more to those buyers. When your listing broker objects to all the extra work that they are going to have to do, counter with the fact that you are paying them to show the house and that they should recommend that the buyer get an attorney to draft the purchase agreement and make their own arrangements to get a lender (there really is not more work for them to do).
3. Junk fees. Read your listing contract carefully. Many brokes include junk fees in the boilerplate of their contracts. No matter what your agent tells you, it is a mistake to pay this.
4. Negotiate the terms of your representation. Controlled business arrangements, home warranties (that pay kickbacks to agents and brokers), dual agency (double commission “hoggers”), arbitration and other traps are all worthy traps that live in these agreements. We have an entire page dedicated to consumer friendly listing clauses to help you along (click here to see it).