The Truth about Realtor Commissions: Debunking Falsehoods, Part I

In our internet age, people will put forth things they advance as truth and when you dig a little deeper, you find they are lies. There are a LOT of falsehoods out there about realtor commissions and the majority of what I read/hear is either completely false, a perversion of the truth, or a fraction of the truth. In my book, those equal “falsehoods” and don’t do anyone any good. So let’s get to the truth…

I love my job so much. I had to kiss a LOT of “work frogs” to finally find what I was designed to do. Each and every career change led me to and prepared me for the next. My formal training in Clinical Psychology has been a tremendous help in many ways, but specifically in: 1) research and wrestling to get to the truth (and just because something is in print does NOT mean it’s true–as a rule follower, this one was a toughy for me), 2) confidentiality, and 3) equipping me to not be afraid of tough conversations. And not only that, it has allowed me tangible, hands on experience with the fruit that comes from taking the time to get to the truth, being trustworthy, and having tough conversations. So let’s have one!

Let’s talk about money! Part I in a 2 Part Series.

I’m not sure why the topic of money is so sensitive. Maybe it’s because we tend to think of it as being our security instead of a tool and attach emotional value to it that it was never intended to carry. Or maybe it’s because we guard it in our hearts closer than the actual humans in our lives–who knows, but I like to make sure our clients know we are open and honest about money. Meaning, we are big girls and we can discuss commissions openly and freely and we’ll tell you what we can and cannot do from a business perspective and that either works for you or it doesn’t. No hard feelings. Period.

I have found that most reasonable people are willing to engage in a meaningful conversation and are often surprised to find out the facts about Realtor commissions. So let’s debunk the falsehoods and get to the truth…

Myth # 1: Brokers make too much money.

Every brokerage is set up slightly different, but there are some common threads. For example, the brokerage is made up of a bunch of “agents” who represent the broker of record. People use the words “broker” and “agent” wrong all the time and the ones who use it arrogantly are my favorite–they often inflate their intelligence and they’re actually using some of the most basic terms wrong–it’s hard to keep a straight face.

The majority of the commission goes to the agents, who are sole proprietors (aka small business owners, paying for all their overhead and a high tax rate), and the “house” or broker of record keeps some percentage to cover various insurances, staff to run the documents properly to avoid litigation, usually some form of marketing department that helps, etc. That amount is usually a small percentage, depending on the experience and volume of the agent. The more an agent produces, the more the agent takes home and the less the “house” takes. Again, there are some agencies who have things set up differently, but in general, the less the “house” takes, the fewer resources they usually provide.

So, for example, our firm, Allie Beth Allman & Associates sold over $2 billion in 2018. We have over 300 agents selling under the Allie Beth brokerage and the majority of the commissions go to the agents who made the actual sales. The firm itself, aka “the house,” keeps a very small percentage of that. One of the reasons I adore being at Allie Beth is because they are very agent focused, not necessarily brokerage focused. Meaning, they want to equip you to build your business and in building your business, they build their business. It’s a people centered model and that works for me.

Myth #2: I found the house, so they didn’t do any work!

Yes, the hunt for the house can be very tedious and time consuming. And no one knows what you want like you do, so you should be actively on the hunt. But, the real work begins after an offer is accepted. Are you expertly versed in negotiating all the terms of the contract (price, title, option period, closing date) and repairs? Do you know ways to sweeten the deal in order to be competitive and have a leg up? Can you stay non-emotional about a house you’ve fallen in love with? Did you know that high emotion shuts down your frontal lobes, which is where higher order thinking is? This means that if you are highly emotional about a transaction, you’ve circumvented and shut down the most important part of your brain to make the deal happen.

Do you have access to stellar inspectors ensuring you get a quality “look under the hood”? At a certain point in the transaction you don’t know what you can’t see. Do you know when that is? Do you know what are common repairs in a certain area and what aren’t? Do you have top notch financing and an proven lender? Do you have relationships with excellent title people (let me tell you, a bad title company can make your life a nightmare) to ensure proper title research and a smooth, proper closing? It takes years of hard work and relationship building to build up an excellent network of high level resources in and around a real estate transaction.

There are quite literally a million and one ways a deal can fall apart and an expert in dealing with all the moving parts knows how and when to keep it together OR when to cut it loose because it’s not a good deal.

Myth #3: My house will sell quickly, you won’t have to do much work.

We figured out on one listing that we made $.50 per hour. FIFTY CENTS AN HOUR. And this was a home that the owners thought was impeccable and that someone would pay over asking for it. Truth is, pretty much all sellers have blinders on and attach non-monetary value to their home that the market will not realize or pay for. I’ve had decently smooth transactions, but never an easy transaction. I work my tail off on every.single.deal. Period. I sacrifice time away from my friends and my family for the sake of a deal, that sometimes falls through. Even when a property sells quickly, the paperwork required is massive and usually time is of the essence so there is an expectation of immediacy.

If a seller wants to provide a lower commission percentage, the person taking the biggest hit is the very person you want to sell your house.

For example, a standard commission rate for the seller to pay is 6%. Half goes (3%) to the buyers rep and half (3%) goes to the listing rep. Then that agent splits that 3% with the “house.” Then they pay taxes on a sole proprietor rate, which is high. So that $30,000 check you’re writing covers insurances (on both sides), staff to prevent litigation (on both sides), and an expert to represent you in a very important transaction. And once that $30,000 is paid out, by the time it gets to your agent and after taxes it’s under $10,000. If it takes your house 30 days to sell, and the agent averages 10 hours a week on your home, that’s around $30 per hour. I spend way more than 10 hours a week on most of my homes, but I can be excessive!

In most communities, you don’t want to “penalize” the buyers agent, because they are bringing the buyer. The buyer is arguably the most important person in the transaction because they are willing to pay a certain amount for the product. And you want a good agent representing the buyer in order to get the deal to the finish line.

So, if you want to pay a 4% commission, then 3% goes to the buying agent (many agents won’t show your house if they won’t be compensated properly) and 1% goes to the person you want to sell your house, market it properly and pay for that marketing, pay for pictures, spend time making calls and really fighting for the highest price your house can take. Jesus Himself said a man is worth his hire and doesn’t advocate giving away the farm because He knows the value of working hard and being properly compensated for that hard work. Most reasonable people subscribe to this line of thinking and I have found that when people really start to understand how the industry works, they’re more willing to pay for the service because they know it’s covering a whole host of things like litigation prevention and so on. And who in the WORLD wants to deal with all that headache in the middle of trying to prepare to move?!

Buying and selling real estate is an emotional process and 75% of what we do is coach people through the process and help people keep it together to make the very best decisions based on reality and not emotion. I have found that staunch businessmen can deal all day long in millions of dollars with a cool head and lose their marbles when it comes to selling their house. I find that people are often surprised at the emotions they feel when selling, even if they’re ready for the next phase. 

Stay Tuned for Part 2 in The Truth about Realtor Commissions: Debunking Falsehoods! For more on what a good agent should look like, click HERE. And to see 184 Tasks a Realtor Does for You, click HERE.

 

 

 

 

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