Answer: One of the most commonly asked questions for most Realtors is “How much is your commission?” usually followed by, “Will you do it for less?”.
First of all, the typical commission in the Kitchener Waterloo market is 5%. I’d guess that 80% – 85% of all listings fall into this category. Once in a while, there will be a listing with a brokerage for more (6%) but that is very rare, and perhaps about 10%-15% of the time we will see full service brokerage list for less (4%) and discount brokerages will list for even lower (3%). There are brokerages that pretend to list for 1% but that’s misleading. I’ll talk about that later in this post.
It is anti-competitive to say that there is a standard commission. Realtors are free to negotiate their commissions. Some will charge less, some will charge more. Ultimately the market decides commission rates, although the brokerage (where Realtors are employed as agents) have something to say as well.
I could explain here about commission splits, desk fees, insurance and expenses and how brokerages and Realtors deal with each other but I’ll save that for another post. Suffice to say, in my opinion, the whole brokerage system is outdated. However, until we find a better way, it is the system that sells the vast majority of homes in Canada and the US (about 90% of all resale homes).
NOTE: If you’re buying a home and working with an agent to help you find, negotiate for and purchase a home, you don’t pay him anything. The home seller is responsible for his commission.
How Much Room Does your Realtor Have to Negotiate Commissions?
It depends on several things:
1) The brokerage. Full service real estate brokerages are where the Realtors hang their license, get their training and support and process all of their business. Remember, the Realtor is an agent for the brokerage and the brokerage works for you. Rule #14.
2) The price of your home. The average home price in Kitchener Waterloo is now about $330,000, if you’re selling a $660,000 home, I think you have room to negotiate the 5% commission.
3) Where you are going. If your sale is dependent upon your Realtor helping you buy a home, since he’s getting a commission on the buying end, he can probably give you a break on the selling end.
4) Double ending. In most real estate transactions, a cooperating Realtor brings an offer to the listing Realtor. However, sometimes the buyers will wander into an open house or (already) be working with your listing Realtor. If your Realtor “double ends” your listing, he might give you a break.
5) Exclusivity. If you are not having your home listed on the MLS but instead dealing with a single Realtor to list and sell your home, you will get a better rate. It can be argued that discount brokerages are in essence listing your home exclusively.
Commissions should be discussed and agreed to in writing at the time of listing.
When your house sells, the commission goes to the listing brokerage. The listing brokerage then pays the selling or cooperating brokerage. At the brokerage level on both sides the commission is split again between the brokerages and the Realtors. Let say you list your house at 5%. When the house is sold the listing brokerage pays the cooperating brokerage (who brought the buyers) an agreed upon percentage (say 2.5% of the 5%). The brokerages then pay their Realtors their splits (anywhere from 95% to 65% go to the Realtor). Between the brokerages the split does not have to be 50-50. So, in theory you could negotiate to pay your Brokerage 4.25% on the listing and they could pay the cooperating brokerage 2.25% and keep 2% for themselves (or the other way around).
Beware: I’ve heard that some Realtors will advertise, “I will list your house for 2.5%”. That’s very misleading as that is the standard split for the listing side. That’s a foot in the door. The Realtor may then gloss over the fact that 2.5% should also be paid to the cooperating brokerage.
This brings me back to the 1% brokerage. They will list your house for 1% just like their advertising claims. However, they forgot to mention that you are going to have to pay the cooperating brokerage a percentage as well. That percentage is going to have to be competitive in the market – at least 2% – (or it will not attract any buyers working with Realtors.) In essence, what discount brokerages are doing is double ending all of their deals. They get 1% on the listing side and 2% on the selling side.
The Problem with Discount Brokerages
The problem with discount brokerages for regular Realtors is that they do not follow the normal routine of “organized real estate”. For example, they don’t normally have receptionists who help Realtors (and the general public) request showings, get information and communicate in a helpful way. They are almost at difficult as FSBOs to deal with. Their game is played by different rules.
Flat Rates vs. Percentages
You can also negotiate a flat rate with your listing brokerage (say $10,000 commission to sell your house, of which they’ll pay the cooperating brokerage $4,500). You cannot mix flat rates with percentages. You cannot say, “I’ll pay the listing brokerage 2% of the selling price and he can pay the cooperating brokerage $3000.
The Sweet Spot
Your Realtor wants to sell houses. He only gets paid when they sell. He wants your listing (and the cooperating brokerage wants to sell his client a house – maybe yours).
For the listing Realtor, unless he’s part time, brand new or independently wealthy, he has to make money to be in business. You have to pay him enough to keep him interested in selling your house. Furthermore, if he’s willing to roll over on his own commission, how good will he be negotiating on your behalf?
For the cooperating Realtor, if your three bedroom, two bathroom house is almost the same as the one down the street, but the house down the street is paying 1% higher commission, which one will garner more interest?
The FSBO, (for sale by owner) franchises feed home sellers’ innate avarice with the illusion that a homeowner can list, market and sell his home on his own without having to deal with the expensive Realtor commissions. This actually happens about 1% of the time. And even in that 1%, the buyer knows the seller is saving the commission so he’s going to want part of it. If you want to calculate how much you’ll really save, I did the calculations here. The majority of “for sale by owner” homes that actually sell end up dealing with at least one Realtor. If you investigate the for sale by owner literature they suggest that you offer to pay a Realtor who brings a buyer a commission. All in all, with the upfront costs, you’ll likely not save much (if anything.)
There should be a better way. The Internet decimated the travel agency business, the music business, the telephone book business, and the newspaper business. It has leveled the paying field in the car selling business and has given homebuyers and sellers heaps of information about houses and neighborhoods. The problem as I see it is that you cannot buy a house on the Internet. There is too much at stake to do it yourself and the brokerage/Realtor system is so entrenched, it will take a revolution to overthrow it and put the power in the hands of the consumer and that’s too bad, because we could all save a lot of money.
Call To Action
The difference between 4% and 5% to the average commission is about $3000. That is not a lot of money in the whole scheme of things. Sure it’s your money, but what is more important than commission is the negotiation/communication when the offer arrives. That’s when you see the 1% in action. Find out why hiring me won’t save you money but will make you money.
Learn more about real estate and real estate commissions. Read: 365 Rules about Real Estate