Pros and cons of negotiating real estate sales commissions

By: Robert J. Bruss

Listing agents need an incentive to sell your home.

Spring is the best time of the year to list your house or condo for sale. The obvious reasons are this is the season when there is the largest number of prospective home buyers in the market place and it is the traditional time of year when most home sales take place.
This year is an especially good time to sell your home because (1) mortgage interest rates are still affordable for most buyers and (2) in many communities there is a shortage of houses and condos listed for sale. Despite the listing shortage, recent statistics from the National Association of Realtors and the National Association of Home Builders show home sales continue at a near-record pace nationwide.
Smart home sellers, even those who think they can sell their homes alone without a professional realty agent, know they should interview at least three successful local agents to learn the details involved in a home sale and the probable sales price for their home.
Among the many questions to ask each agent you interview for your listing is, "How much is your sales commission?"
As a home seller, do you realize sales commissions are negotiable? Most states now require listing agreements to say, "Real estate sales commissions are negotiable" or similar wording. But most home sellers don't understand the pros and cons of sales commission negotiations.

HOW HOME SALES COMMISSIONS ARE SPLIT. Most home sellers have no clue how home sales listing commissions are divided when a sale occurs. But they are sure realty agents are grossly overpaid for very little work, especially when a home sells within a few days of being listed for sale.
Regardless of the commission rate, there are usually four parties involved. They are the listing broker, the listing agent who represents that broker, the selling broker, and the selling agent who represents that broker.
For example, suppose you have a $100,000 condo to sell and you agree in the listing to pay a 6 percent sales commission. A buyer offers to purchase for the full $100,000 asking price. When the sale closes, that $6,000 sales commission will go $3,000 to the listing brokerage and $3,000 to the selling brokerage. Of these amounts, the listing agent will receive $1,500 (or more depending on the agent's commission split with the broker) and the selling brokerage will receive $3,000 with the selling agent receiving $1,500 (possibly more, depending on that agent's commission split with the brokerage).
In other words, of the 6 percent gross sales commission, 3 percent goes to the listing office and 3 percent to the selling office. Those amounts are then divided with the individual agents, according to their commission split agreements with their brokerage office.
But most home sellers and buyers don't understand their agent might take home as little as 1.5 percent of the gross 6 percent sales commission in our example.
Of course, the agents can agree to alter the commission split, such as 2 percent to the listing office and 4 percent to the selling office.
However, if either the listing agent or the selling agent works as an independent real estate broker, he or she would be entitled to keep the entire 3 percent listing or selling share in our example. Or, if the listing agent also finds a buyer (called a dual agency), then the sales commission is split between the listing agent and the brokerage.

HOME BUYERS SHOULD NOT NEGOTIATE SALES COMMISSIONS. If you are a home buyer, because sales commissions are paid by home sellers, it is not your job to negotiate sales commissions.
But you should understand what is going on, behind the scenes, with your money paid to the seller. For this reason, be sure to make a purchase offer that includes enough cash for the seller to pay their realty agent's sales commission.

WHEN HOME SELLERS SHOULD NEGOTIATE SALES COMMISSIONS. As a real estate broker for 38 years, I fully understand the economics of home sales commissions. But sellers should be aware that as home sales prices rise, the average sales commission rates are falling.
According to a recent nationwide survey by Real Trends, a highly respected real estate research firm, the average home sales commission rate has fallen to 5.1 percent of the sales price.
This result shows sales commissions really are negotiable. Traditionally, home sales commissions were 6 or even 7 percent of the gross sales price and many agents refused to negotiate.
If you have a modest-priced house or condo to sell, perhaps below $200,000, don't expect your listing agent to be very flexible about reducing the traditional 6 percent sales commission. However, if you are selling your $500,000 or higher priced home, that's the time to talk about "adjusting" the sales commission.

FLAT-FEE SALES AGENTS. In some communities there are so-called "flat fee listing agents" who will sell your home for a standard fee regardless of its sales price. However, some of these agents offer less than full service, such as expecting the seller to host weekend open houses and then phone the listing agent when a serious buyer wants to make a purchase offer.
A big drawback of these flat-fee agents sometimes occurs when a prospective buyer is represented by a "buyer's agent." Such agents will be reluctant to show such a "flat fee" home if the selling agent will receive less than the customary 3 percent of the sales price.
However, many flat-fee sales agents offer full services, including the ultra-important local multiple listing service (MLS) access with display at the popular Internet site www.realtor.com where many prospective home buyers begin their searches.

DISADVANTAGES OF LOW SALES COMMISSIONS. As a home seller, if you think it would be smart to reduce the traditional 6 percent sales commission to 5 percent or 4 percent at the time of listing your home for sale, think carefully.
When your listing shows up in the local multiple listing service with only a 2 percent sales commission to the selling agent, do you think many agents representing buyers will show your home when similar homes offering a 3 percent commission split to the selling agent are available? Of course not.
Statistics show most home sales involve both a listing agent from one brokerage and selling agent from another brokerage. The sale is usually a result of the local MLS, the most powerful sales tool available to home sellers and their listing agents.
Another disadvantage, if you can convince your listing agent to accept a reduced sales commission is your listing agent might not be enthusiastic about selling your home. If your listing agent has other homes listed for sale at 6 and 5 percent commissions, but your home is listed at only 4 percent commission, he or she might not put as much time or effort into selling your low commission home.

THE HIGHER THE HOME SALES PRICE, THE MORE NEGOTIABLE THE SALES COMMISSION. If you are selling a "low end" house or condo, don't expect to negotiate much on the sales commission. The reason is the listing agent has to do just as much to work to sell your inexpensive home as to sell a higher-priced home.
However, if you are selling a "high end" home over $500,000 or $1 million, most real estate listing agents are willing to negotiate on the sales commission.
But beware some brokerages have strict sales commission rules for their sales agents. For example, I recently learned about a "famous name" nationwide brokerage that has a rule its sales agents cannot accept home listings less than 5 percent.
If I were selling my multizillion-dollar home and a representative of that brokerage wouldn't reduce the sales commission, I would just move on to another successful broker who will accept a reduced commission rate.
However, home sellers should remember the big pitfall of reducing the listing sales commission too low because it reduces the incentive for local agents representing prospective buyers to show your home. In fact, if your home is not selling, the solution might be to raise the sales commission above the local customary rate.

WATCH FOR "ADMINISTRATIVE FEES." In addition to the sales commission, some listing brokerages add an "administrative fee," typically $200 to $500, for handling all the office paperwork. As a home seller, look for this in the listing agreement.
If you don't want to pay that charge on top of the sales commission, most listing agents will still accept your listing if you cross that fee out. But the agent then usually has to pay it out of his or her pocket to the brokerage for office services.

SUMMARY: Real estate sales commissions are fully negotiable. However, home sellers who reduce their commission often cut the listing agent's incentive and, more important, the incentive of other local agents representing buyers to show and sell their homes.