One of the discussions that came up with my real estate agent and I is the commission rate. At first, he wanted 6% until I told him point blankly, “No way in hell you silly goose!” We ultimately agreed on 5%, which is split 2.5% to him and 2.5% to the agent who represents the buyers.
5% is still a ridiculous commission rate to charge for selling something so expensive in my opinion. A $2 million dollar house does not require $90,000 more effort to sell than a $200,000 house. In fact, selling a $200,000 house might require more effort given the demographic of the buyer!
Instead, there should be a flat fee based on several tiers. Perhaps $5,000 for houses up to $300,000, and $1,000 more for every $100,000 in house value i.e. $1,000,000 house costs $12,000 to sell, and not $50,000! Sounds pretty logical and fair don’t you think?
At any rate, I begrudgingly signed the selling agreement with my real estate agent for 5%. He said his company isn’t allowed to go less than 5%, but he agrees to refund me back X amount of his commissions if sold. The effective commission cost to me will be closer to 4%, a more digestible amount.
STILL NOT TOO HAPPY ABOUT HIS LACK OF VISION
I’ve learned that some of the most difficult customers are the real estate agents representing their clients, and NOT the clients themselves! When commissions are too low, the real estate agent will simply refuse to highlight the house to their client! Can you believe this bullshit? What happened to the fiduciary duty of a real estate agent to provide the best interest to their client, and not to themselves? I guess this is why Realtors get upset when the public uses the words Realtors and Real Estate Agent interchangeably. Realtors have to go through another level of tests.
My real estate agent has never sold in the price point where my house currently resides. This is a mistake on my part to go with him given his connections are all at price points 30-50% lower. What I should have done was choose a real estate agent who averages a similar if not higher price point of my house. Alas, I’m too bullish on the internet and the efficient market theory to believe the market will set the price, no matter how big of a knucklehead the listing agent is so long as s/he is professional and responsible.
During our negotiations of trying to get the commission price below 5%, I told him that listing my house at a 100% higher price point than his average listings will open doors to a new set of clientele and boost his resume. Even if he accepted 0% commission, it would be good for his career long term. I wasn’t asking him to accept 0%, but he seemed to take my suggestion literally and became extremely defensive.
My real estate agent could not see past his 5% commission for my house, whereas I know other agents would. All he could see was dollar signs now, rather than a wave of dollar signs in the future if he made me feel like I was getting a good deal. I already told him clearly that I think 5% is still a big time rip off.
Let’s say I am an ecstatic client because of his service and price. I will not only use him to buy my next place, but also refer him to all my friends for free. Because I am neither impressed with his service, and feel like I’m overpaying on commissions, I will do neither.
Let’s do the math on his lost payout:
* Refusal to agree on a 4% commission rather than a 5% commission. Let’s say house sells for $1 million. My real estate agent makes $10,000 more than if he agreed on a 4% commission.
* I decide to buy a $1.2 million place and not go through him. 2.5% (his cut of a 5% commission) X $1.2 million = $30,000 commission lost.
* I have six friends who currently are looking to buy property in the Bay Area, and can easily convince three of them to go through my agent. The average place of purchase is around $1.3 million. 4 X $1.3 million = $5.2 million X 2.5% = $130,000.
Conclusion: He made $10,000 more from me but will lose out on $160,000 for a net loss of $150,000!
WHY CAN’T PEOPLE LOOK LONGER TERM?
I don’t know about you, but $150,000 is a good chunk of money. Everything snowballs after a while and the more transactions you execute, the more transactions will come your way.
I’m fiercely loyal to everybody who shows goodwill and helps me out. In fact, I try and help out the person who has helped me out even more so.
My real estate agent’s attitude perplexes me. Perhaps he’s just dumb not to understand the benefits of long term goodwill? Perhaps the reason why he’s not a top producer and transacts in his current range is because he’s not good at cultivating relationships.
Whatever the case may be, I highly suggest all of you avoid the allure of short term profits at the expense of long term gains.
Readers, why do you think some folks are so short-sighted? What other examples do you know of where the temptation of short term profits often trumps long term gains?
Photo: Cherry Picking. Someone had to have the foresight of planting the trees years ago and opening a business for the public to pick cherries on their own and charge them $2.5 a pound for the privilege! SD
Regards,
Sam
Be careful with the even split. Last time I did a sale, my realtor took a 1% deduction since I had used him previously. When I asked why he didn’t split the discount with the buyer agent, he said that this was bad practice, because if a buyer agent sees that there’s a 2.5% commission and they’re used to 3%, they will likely steer their clients elsewhere, which makes sense from their perspective since they’ll stand to get the extra 0.5%.
One would think that on the high-end commissions as a percentage should drop considerably. Most costs should be fixed. So, efficient market says the agent’s cut should be smaller. Then again, there is the monopoly factor: MLS.
I think sales people are almost always short-term thinkers, and that’s probably more true in the B2C side than in the B2B side. Especially on high-dollar deals (cars and homes, just for an example) if you don’t get the sale the first time around you won’t get it the second. Maybe the short-term thinking of customers translates into the salesman’s actions?
Is he that busy that it doesn’t make sense to do deals at 4% when the remainder are at 5%?
He’s not that busy at all. Agents are willing to starve and make a pittance rather than give up on a 5% commission. It’s ludicrous. I’d just price at 4% and CRUSH the competition instead!!
Sorry to hear your selling situation has been so frustrating. Sounds like lack of experience and lack of confidence are causing your agent to be so closed minded and stubborn.
I don’t know what exactly causes some people to get too caught up in the short term and not be able to see the big picture. I see that all the time with colleagues of mine.
Sites like bytheowner.com are making a big impact in Canada, but there’s always the risk element to dealing with the transaction yourself.
I also believe in looking beyond short-term profits for long-term gains, not just when it comes to money but when it comes to everything. It’s a good philosophy if you’re not dying in the next few months.
It’s hard to risk such a large transaction if one has no experience. My hope is that a professional can make up for his/her costs with his/her marketing skills and get a higher dollar than a nonprofessional.
People ask this same question about mortgage lenders and why they won’t simply do more aggressive principle writedowns on home loans. It’s because they have already taken the money they thought they were going to get over 30 years, leveraged it 25 times, then spent all of it.
To normal people, it would seem like a good compromise to knock a $250k loan down to $175k and reduce the payments, and avoiding foreclosure, but that would only make sense in a perfect world.
People have a harder time “losing” money than making it, I think.
Fiduciary responsibilty is a big thing. I see a lot of people who are fiduciareis who don’t have the slightest idea of what responsibility a fiduciary has. For example, I know many people who market life insurance products as so-called “financial planners” they usually sell a product that pays the best commissions rather than sell the client what they really need, which is usually Term Life Insurance. The sad thing is, most of them don’t even know they’re not really providing a good service to their cleints.
The power of the quick buck is too hard to avoid. Money makes the world go round. When I saw anti-debt, anti-credit card bloggers write for credit card companies for money, I knew there was no hope.
I see this everyday with people not realizing the importance of cutting back on the small stuff to save more money in the long run. They think that eating out every weekend is ok, but when you add up all those bills in the year it turns out to be over 5 grand. So they are definitely short sided.
You are describing the retail industry. There is such a thing as the “lifetime customer” that most business models seem to ignore these days. I used to work at an electronics store that would aggressively sell cell phones to everyone who walked in the door, not caring if they ever came back or even if they needed one. Now this retailer is closing down stores and losing customers because of this short-sighted business model. Someone like Nordstrom, on the other hand, realizes the value of the “lifetime customer” and go out of their way to provide exceptional service and even have policies that re-enfore this type of behavior. Consequently, their profits are much higher than other retailers with terrible service because they have invested in the long-term ROI of providing excellent service.
Also, seriously drop that agent if you can, sounds like you have realized he’s not the right choice for your situation.
Ah yes, lifetime customer. This is a good concept that more people, especially in LIFETIME REAL ESTATE should realize. Banking as well.
These posts make me want to get MY real estate license! I get commission too but never on a million bucks!
Do it, and move to SF or Manhattan.
Just know competition is fierce!
It is amazing how short sighted this guy is. I guess he relying on the fact that he knows he will have you but doesn’t know if you’ll actually refer to him or not. Well I guess he screwed up because now you definitely won’t be. I could see similar things happening in the stock market, but I am a dollar cost averager so I don’t see that happening to me.
I definitely won’t be referring him. This was a good learning process though. I’m thankful I don’t have to sell. Otherwise, I’d be really pissed.
Most RE agents are dolts and one level above used cars salespeople. Most sell properties in spite of themselves.
Which is what I am thinking, so hopefully no matter what, a bad real estate agent can’t mess things up. But… maybe!
My brother is in RE and I tried to lower the commission rate on our apt we sold. They denied it because of it being under 500k. I could have gone with someone else but then I cut my brother off for 1 percent. Yes we lost some money on the deal but at least .5% went to my brother.
Sheesh, both of my houses were below the $150k mark, so it’s hard for me to relate to prices in the millions. Sounds like you should have fired your agent before signing the agreement. It is hard to find good agents. Many of them were spoiled in the good days and never learned how to work for the commission. There are a few good ones out there though, and to me they are worth every penny of their commission.
$150,000 for a house is amazing! Where can I get me one of those?
My townhouse was under 100,000 and its a few blocks from the beach. Come on over to Florida :)
Anywhere in the good ol’ Midwest, my friend. We just put an offer on a ranch with finished basement, 2600-ish s.f. of liveable space and about 800 s.f of storage & workshop space. Our accepted price: $225k. Also located on a large pond/small lake. Not too shabby.
btw, our old house in a different market is for sale at $105k and having trouble selling at that price…
The Realtor did not violate his fiduciary duty by negotiating pricing with you. The realtor still has your interest at heart, negotiating on commission is apart of that package. Secondly, the realtor took the 10k bump now because there are too many unknown variables in the scenario of your recommending friends. Heck, maybe he really needed the 10k to eat so he couldn’t chance it.
Love the short term thinking.
I can’t stand not having flat fees as well. I’m glad by broker is family and only makes me pay a little above covering his true costs (like insurance and doc fees). I will say the best advice I received was to throw in an extra $1,000 for the buyer’s agent directly – it provides some extra incentive to get some people looking at your home!
$1,000 bucks? Unfortunately, a lot of agents don’t even get out of bed for an extra $1,000 in SF. If the average SFH in SF costs $1,000,000… that is a $25,000 commission for each agent at 5%.
I have seen real estate commissions discussed for at leat 20 or more years. Funny there has been no lasting changes. The agents say they are negotiable, but lower rates affect the sale. I am fairly sure a $ 10 million dollar home does not pay 6%. I think someone who sells higher end real estate is more used to negotiation and would be better at marketing those properties.
Great points sam – it really sounds like the guys is about to cut off his nose just to spite his face. If he’s a younger guy, this could really mean increased earnings for another 30+ years, which I would trade in an instant for 1% of any commission!
Alas, he is an older guy, in his late 40’s. Perhaps that’s it.. he wants to get out and make his last commission!