Understanding Your Realtor's Commission

Editor's note: This blog post has been revised from its original version.

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“I still say realtors should be tarred and feathered (6-7 percent for what)?” -- Ronald

Last week on Odenton Patch, I wrote an article about a new housing development coming to Waugh Chapel Road. The article generated a wide array of comments, including the one from “Ronald” above.

Reviewing the comments, I wondered: Are realtors really so heinous they deserve to be tarred and feathered?

In my opinion, no. Some realtors, perhaps. But certainly not all.

Realtors earn scorn in part because they often do a poor job explaining why they deserve compensation – and a certain minimal level of compensation -- for their work. So here’s a stab at clarifying why realtors request a certain commission rate on sales, and why I believe that rate usually is fair, and in the seller’s best interest.

Case Study: A $300,000 House

First, let’s pull apart the 6 percent commission Ronald mentions. As an example, let’s consider a home selling for $300,000. The total commission paid on the sale of the home would be $18,000 ($300,000 x 6 percent).

Does the agent who sells the home get that amount? No. Normally, half the total commission, in this case $9,000, goes to the buyer’s broker. That leaves the selling agent’s broker with $9,000.

Of that amount, $3,000 (1 percent of the home’s sale price) might go to the agent’s broker. This amount compensates the broker for allowing the agent to work under the broker’s banner, using his facilities, administrative support, supplies, etc. That leaves the selling agent with $6,000 of the $18,000 total commission on the home sale – roughly 2 percent of the purchase price.

So what does the agent do with that 2 percent? Depending on the quality and marketability of the property being sold, and how the agent conducts business, the agent might spend roughly half of that amount – 1 percent of the total compensation for the sale – on marketing the property and completing other tasks associated with the sale.

These expenses vary, but they include things like:

-        email marketing;

-        direct mail marketing (including postage);

-        web marketing;

-        printing flyers, home books, comment cards and marketing packages;

-        purchasing and installing signs & directionals;

-        listing the property on the MLS;

-        installing lockboxes and enlisting entry card services;

-        hiring an automated showing service;

-        conducting and marketing open houses; and

-        creating virtual video tours.

So after paying these (and related) expenses, realtors might end up with roughly 1 percent of the home’s sale price.

But not so fast. Out of this 1 percent realtors still must pay their membership and licensing fees, errors and omissions insurance, transportation and other costs directly associated with their work. Thus, in the case of the $300,000 home in the example, the realtor may earn around $1,500 for an estimated 25-50 hours of work. The $1,500 is the net income he earns -- what he uses to put food on the table for his family.

What Commission Percentage is Proper?

Real estate brokers are not permitted to fix the commission rates they charge. Thus, agents can charge varying rates for selling homes.

It’s common for home sellers to choose a listing agent based on whether the agent charges a higher or lower commission – say, for example, 5 percent or 6 percent. While there’s nothing inherently wrong with this, it’s important that homeowners understand the possible consequences of going the cheaper route.

For example, the 1 percent savings a homeowner might seek in choosing a “5 percent agent” over a “6 percent agent” can actually make the home much harder to sell. The savings can also extend the time the home sits on the market and lower the final sale price. There are two main reasons for this.

First, if the agent working at the lower rate -- because he’s getting less commission -- is forced to choose between cutting his own pay or cutting the property’s marketing budget, which do you think he’ll choose? And second, if a buyer is choosing between two virtually identical homes, but one seller is paying a lower commission while the other seller is paying a higher commission, which home might the buyer’s agent like best? The home paying more commission, of course.

Such practices are totally unethical, but in the real world, there are buyer agents who attempt to steer their clients to homes that pay more commission. Where this happens, sellers who pay the smaller commission sometimes can be at a disadvantage.

Tar & Feathers?

Of course, all of the commission numbers discussed above are theoretical, and no two agents work the same way or have the same arrangements with their broker. Some agents enjoy much more financial success than others, and different agents face different kinds of costs, depending on the way they conduct their business.

Still, on the whole, very few agents get rich in today’s environment. In fact, I’ve seen it reported that nine out of 10 new agents are out of the business within two years, most for financial reasons.

Do some “fat cat” agents sit back, rest on their laurels and collect big commissions for doing very little work? Yes. But that doesn’t mean all agents do, or that all agents should be tarred and feathered.

Jerry Kline is a Realtor with the Odenton, Md., office of Keller Williams Flagship Realty (1216 Annapolis Rd., Odenton.) For more information on the local real estate market, contact him at (443) 924-7418, or visit his blog (www.JerryKlineRealtor.wordpress.com) or website (www.JerryKline.kwrealty.com).