Having been the agent, with over 30 years experience, who brought the buyer to the sale of Mr. Vaden’s home this summer I felt particularly motivated, and also qualified, to respond to his commentary (CHN, nando.com/274) about the way that real estate agents are paid.
Point 1: Why do real estate agents still charge a commission?
No one would be happier than me if I could charge an hourly rate, just like attorneys, accountants and other professionals. I spend a great deal of time with lovely people who for one reason or another don’t end up in a successful sale. There is a great deal of good will that is generated by these hours, but no financial compensation.
The commission model operates like a contingency fee in a lawsuit. If we prevail and the house sells at an acceptable price, I am paid a percentage. If the house does not sell, I do not get paid. If my buyer finds a home they love I am paid – if they decide not to move I am not paid.
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Point 2: Why is the percentage the same regardless of sales price?
Under the contingency fee, the percentage is the same regardless of the settlement. Under the commission model I take the risk whether your home takes one day to sell or two years. I have never met a seller who, given the option to pay me on an hourly basis and reimburse for expenses, chose that option over the percentage commission paid at closing.
There are many options out there these days, and there is no “implied” standard commission. Sellers can post their own listing in Zillow and work directly with buyers if they can find one who doesn’t want a buyer agent. They can pay a $500 fee to enter a home in the MLS to attract buyer agents. There are other companies with a variety of limited service plans.
Point 3: Why are commissions to the agent for the buyer paid by the seller?
When sellers pay costs on behalf of the buyer they are factored into the selling price, and the buyer agent fee is one of those costs if this agreement is made in your listing agreement.
When your agent lists your home in the Multiple Listing Service an agreement is made with the agent representing the buyers: “If you sell this listing I will share my commission with you.” You are paying a negotiated amount to your listing agent.
Point 4: The “due diligence” period is unfair to sellers.
I agree, but we are required to use it.
Point 5: In the UK the commission is only 1.8 percent.
Actually, seller-paid fees in the UK range from 0.75 percent to 3.5 percent depending upon the company and the specific agent. Until recently there was no custom in the UK of agents working with buyers. Sellers pay a service tax (VAT) of 20 percent of the fee. Unlike North Carolina where real estate agents typically negotiate and write purchase contracts, in the UK your legal costs will add another 0.5 percent, making that average fee in the UK 2.66 percent which is more than the 2.5 percent average listing fee in the US.
If you buy a home in the UK without your own agent your legal fees will be about 0.5 percent of the sales price, and there is a “stamp duty” (transfer tax) which is about 5 percent. As you can see, the costs of buying and selling a home in the US is a relative bargain.
It’s easy to look at those big commissions and forget the long hours that a successful real estate agent works, negotiating into the night and through family vacations. Assuming an agent works an average of 50 hours a week, or 2,500 hours in a 50-week year. A top producer selling $5 million, with an average 2.7 percent commission, will bring in $135,000. If you do the math, this works out to $54 an hour BEFORE overhead expenses are deducted (overhead expenses generally run 25-35 percent of our total income). This is not much more than you pay your handyman, and far less than you pay your decorator much less your accountant.
The perception of real estate agents not being worth what they are paid is because of the uniformity created by the commission model. No matter how well you serve your clients, you are paid the same as other agents who may truly not be worth what they are paid. In other fields you find that experienced practitioners with excellent reputations are paid more than others who lack those attributes, but that is not the case in real estate.
Lynn Hayes is the owner/broker at Lynn Hayes Properties in Carrboro.