"For Sale by Owner" sometimes adorns lawn signs around any given community. Essentially, this conveys one message: the owner does not wish to share any part of the home sale proceeds with a real estate broker or agent. Many can relate to this sentiment -- owners make major investments in their properties over the years and they want to optimize their returns. Observers, though, may notice a broker's sign soon replacing the original. In fact, agents have sales and marketing knowledge that often can move a property faster and command a higher price. How much, though, is this knowledge worth?
Six Percent: Tried and True
Real estate agents are neither salaried employees nor hourly wage earners. Their livelihood is gained through commissions, i.e. a percentage of the final sales price of a house or building. For most this means a take of six percent or, in any event, five percent at a minimum. Of course, though this figure represents standard operating procedure for many years, it is nevertheless not engraved in granite. Flexibility may hinge on whether the agent is part-time or full-time. Local market conditions can also play a role in commissions. Still, six percent continues as a starting point.
What Does That Six Percent Pay For?
Supply and demand are potent variables in terms of how hard a realtor has to work for the compensation. Yet the duties performed are fairly consistent. For one thing, the agent advises the seller on the price range that will attract the most buyers and offers. Secondly, this professional publishes the availability of the house -- with the multiple listing service, on the brokerage website, in social media and other commonly visited venues. Meanwhile, the realtor helps to stage the home for visitation. Just as importantly, he or she helps to negotiate the final price with reference to home values.
Who Pays the Six Percent?
Six percent of the sales price -- which may or may not reflect home values -- quite naturally falls to the seller to pay, generally out of the proceeds of the sale at closing. Still, this is a matter of custom and expectation rather than law. If negotiations come down to the penny, a purchaser may find herself covering part of the realtor's commission in order to get the house. Moreover, if a buyer's agent is employed, both realtors split the commission with each party covering the cost of this line item.
Are There Exceptions to Six Percent?
Just like purchase prices, commissions are subject to negotiation. In fact, realtors are under more pressure to lower their portions with the advent of ibuyer companies that make the "For Sale by Owner" idea more practical in some cases. In other instances, the sales price is large enough to cut the commission rate and still leave the agent with a hefty take. Beyond these scenarios, it is at times in the real estate agent's interest to be flexible with the commission in order to gain future referrals to new customers.
i-Buyer websites are not the only long-term challenge to the current commission rate structure. The development of matching sites likewise threatens the value of agents' services. Technology allows algorithms to do much of the home shopping and price accommodation for both buyers and sellers, bypassing the expertise offered by a licensed realtor. The success and efficacy of matching sites is still to be determined. Furthermore, there is no indication of widespread defection from conventional home selling. It is clear, though, that the five to six percent commission might come under pressure.