Negotiating a Real Estate Commission

Many people who enter the market to buy or sell a home do not know that real estate commissions are negotiable. Regardless of local customs, real estate fees are generally not set in stone. Agents have an expectation of being negotiated with, and some might agree to a fee reduction right off the bat.

You should be prepared for the fact that some agents will not negotiate a commission with you, because some agents don't have to. Some have enough business to justify not negotiating, Some have to pay higher percentages to their brokers, and others just might not want to reduce their commissions.

How Real Estate Agents Are Paid

Commission percentage splits vary among brokers, depending on the company policy and agent production. A top-producing agent who closes 100 transactions a year is typically paid more, a higher split, than an agent who closes one deal every couple of months. Only licensed real estate brokers can receive a commission. Brokers generally pay agents as independent contractors.

Commissions paid by a seller are usually split between the listing side and the selling side.

Why Don't Agents All Charge the Same Commission?

For the most part, agents are paid according to local customs and rates. Bear in mind that agents operate differently and have different services. You should try not to pick an agent based solely on commission but rather on the services they provide along with the commission.

Generally speaking, more expensive agents offer services and profit models for their sellers that less expensive agents may not. Agents typically are paid what they are worth, which means it is worthwhile to shop around and find one who fits your needs and budget.

Typical Net Profit

As an example of an agent's commission, suppose a buyer purchases a $150,000 home. The total commission paid is 7%, with 4% going to the listing broker and 3% to the buyer's broker. The buyer's broker is paid $4,500. The agent is entitled to 50% less an 8% franchise fee, bringing that agent's share to $2,070.

From that, the agent pays their overhead expenses of 22% and puts 30% into savings to hold for payment of Social Security and federal and state income taxes. The agent takes home $993.60.

If this agent were to close only one transaction a month and work a typical 40-hour week, their hourly wage would be close to $12.94 for the month (before withholding and taxes). If the agent were to close two deals a month at $150,000, they would make around $25.86 per hour (two payments of $2,070) or around $2,900 per month after withholding.

However, the national average for closing on a home is close to 50 days. If an agent closes on two homes a month, it's likely they have been working those two homes for quite some time. An agent is likely to close on four homes in one week, but not have had any income in the last few months. In this situation, they may not want to negotiate their commission.

Selling and Buying With the Same Agent

Sometimes agents will represent you when selling your old home and buying a new one home. You may be able to negotiate a reduced commission, but they might not agree. If your agent is your listing and buying agent, they'll earn both commissions.

There are agents who will offer you a discount if you sell and buy a home through their agency. Real estate agents who refuse to discount fees likely believe that the two transactions are separate from each other, which they are. Each side of the transaction entails separate work, whether the seller and buyer are the same person or two different and unrelated individuals.

Agents might not discount their listing commission for you while doing twice the work for less than twice the money. You might be able to negotiate a lower commission based on referrals you could send to your agent in the future.

When the Same Agent Represents You and the Buyer

This is called "dual agency," and it's not legal in some states. But where it is legal, an agent would earn both sides of the commission—the listing and selling fees. It's called "double-ending" a transaction. Your agent accepts an increased liability when they become a dual agent—they are dealing with the same property, two separate parties, with separate interests, and separate abilities to sue if something is not handled correctly.

In some states, dual agents are required to operate as transactional agents, taking nobody's side. They don't offer advice or much assistance except to process paperwork.

One tactic that some sellers in certain parts of the country use is to ask a listing agent whether they will agree to lower their commission if they end up representing both the seller and the buyer. You have the option of negotiating this when you sign the listing agreement or when you receive an offer, but it's better if you discuss this scenario up front—at the listing's inception.

Bear in mind that this negotiation might backfire. It could reduce the listing agent's eagerness or motivation to sell your home to her own buyer. Apart from a fidutciary responsibility to market your home to all available buyers, what is the incentive to induce a buyer to purchase your home if the fees will be reduced?

Some agents will agree to a variable commission. In that type of agreement, if your listing broker were to sell your home, they would receive a different commission from that of another broker who might have sold your home.

Multiple Listings With the Same Seller

Reducing commissions in exchange for a number of exclusive listings from the same seller depends on:

• Dollar volume
• Ease of sale
• Market mobility

If all three of those variables are in the agent's favor, it's easier to negotiate with them. Still, if your agent is a top producer with a strong income stream, they might not budge.

Agents Who Control Neighborhoods

Agents who do much of their business in specific areas will typically discount a point here and there. These are agents who might ask for a higher commission but quickly agree to lower fees if there is competition from another agent.

If you like an agent who has quoted you a higher commission but have interviewed a second one who has agreed to do the job for less, call the first agent and offer the second agent's fee. Explain why.

Try not to get so hung up on commissions that you lose sight of hiring the very best agent you can find and afford—after all, you are paying them to help you find a home you will love and keep for as long as you can.

Frequently Asked Questions (FAQs)