Home Sweet Commission: Navigating the Murky Waters of Real Estate Broker Fees

Home Sweet Commission: Navigating the Murky Waters of Real Estate Broker Fees - The Buyer Usually Pays

When it comes to real estate commissions, there's an important thing to remember - the buyer usually pays. This may seem counterintuitive, since it's the seller who actually hires and enters into an agreement with the broker. However, commissions are almost always baked into the sale price of the home. So while the seller technically cuts the commission check, the buyer is the one footing the bill through their purchase price.

This has big implications when negotiating your agent's commission. Since the fee comes out of the sale proceeds, many sellers aim for the highest price possible to maximize their profit. They have less incentive to lower the commission, even if it earns them more in the end. As a buyer, you're more motivated to get the best deal and keep costs down.

That's why it's key to remember you have more leverage to negotiate commissions as a buyer. Your agent still has a fiduciary duty to represent your interests, even though commissions are standardized. Don't be afraid to ask them to lower their fee so you can submit a stronger offer. With housing inventory still tight in many markets, they want to keep you happy so you'll work with them again.

Of course, there's a limit - most full-service brokers won't go below 2 or 2.5%. But in my experience, you can often negotiate them down 0.5-1%. Over a $500k purchase, that's saving thousands. And your agent wants your business and referral. So approach them with reasonable expectations, but know you can likely get some discount.

Home Sweet Commission: Navigating the Murky Waters of Real Estate Broker Fees - Understanding Commission Splits

While the total commission rate on a home sale is usually somewhere between 5-6%, that doesn't all go straight into your agent's pocket. Real estate brokerages split commissions between the listing agent and buyer's agent. Understanding how that split works can give you more leverage when negotiating.

The most common arrangement is a 50/50 split, where half the commission goes to the seller's agent and half to the buyer's. On a $500,000 home with a 5% commission, each agent would get $12,500. Of course, they then have to split their portion with their brokerage, often 80/20.

So out of that $12,500, the individual agent only takes home $2,500. Still not bad for one transaction! But it shows the incentive for agents to increase the sale price - more commission for them. As the buyer though, your priority is getting the best deal.

In some cases, listing agents offer a higher split to buyer's agents - like 60/40 - to entice them to bring offers. They're giving up some of their commission, but likely to earn more from a quick sale at a higher price.

As the buyer, this split doesn't impact you directly. But it's useful knowledge when negotiating with your agent. Since buyer's agents earn the same no matter the sale price, you have more leverage to ask them to lower their split.

For example, you could request they reduce their split by 0.5%. On that $500k home, that's only $125 less for them. But it makes your offer stronger by reducing the total commission. Most full-service brokers won't go below 2%. But you'd be surprised how often they'll agree to shave a quarter or half point if you ask.

Redfin and other discounters offer lower total commissions, like 1-1.5% for buyers. But you lose the experience of a traditional agent. For savvy buyers, negotiating a reduced split with a qualified full-service broker is the best of both worlds.

Home Sweet Commission: Navigating the Murky Waters of Real Estate Broker Fees - Negotiating a Lower Commission

When it comes to negotiating real estate commissions, buyers have more leverage than they realize. Though sellers technically hire the agents, buyers foot the bill through the purchase price. And with inventory still tight in many housing markets, agents are eager to keep clients happy so you'll use them again and refer friends.

Don’t be afraid to speak up and request a lower commission rate. As the buyer, the agent still represents your interests, even if commissions are standardized. Aim for reasonable expectations - most full-service brokers won't go below 2-2.5%. But you can often negotiate them down 0.5-1% on a $500K+ home, saving you thousands.

Start by understanding how commissions are split between listing and buyer's agents. Typically it's 50/50. On a $500K home at 5% commission, each agent gets $12,500. Of that, they split it 80/20 with their brokerage, so the agent pockets $2,500 per sale.

While the split doesn't impact you directly, it shows the incentive for agents to increase sale prices. More commission for them, but not for you as the buyer looking for the best deal. Use this to negotiate - suggest your agent reduces their split by just 0.25-0.5%. That's only $125-250 less for them but strengthens your offer by lowering the total commission.

Ask during your initial consultation, not as you're preparing an offer. Say you've done research and think a reasonable commission on this sale would be 4.5%, given the market. Then ask what they can do to get closer to that rate. Can they reduce their split? Waive some fees? Most want to earn your business.

You can also request a lower commission once your offer is negotiated and accepted. Write an addendum stating you want just 2% commission and ask the seller to agree to amend the listing terms. Many will if it means the sale goes through.

A final option is to negotiate a rebate outside of closing. Your agent refunds 1% of the purchase price directly to you after the transaction. This way they still get the full commission payout, but you see savings.

Home Sweet Commission: Navigating the Murky Waters of Real Estate Broker Fees - Redfin and Other Discounters

Redfin made waves in the real estate industry when it debuted its salaried agent model in 2006. By paying agents a flat salary instead of commissions, it allowed Redfin to offer significantly lower listing commissions. This appealed to sellers looking to maximize sale proceeds.

For buyers, Redfin refunds a portion of the buyer's agent commission. On a $500K home at 2.5% total commission, a 1% Redfin refund would equal $5,000 back in the buyer's pocket. This innovative model earned Redfin buzz as a discounter in the commission-driven brokerage world.

However, Redfin still employs licensed, full-service agents. The tradeoff for lower fees is less personalized service. Agents juggle more clients and rely on digital tools. For savvier buyers and sellers, the discount is worth the reduction in hand-holding. But others value agent expertise guiding every step.

Beyond Redfin, truly low-cost options exist like Flatfee MLS listings. Sellers pay a flat rate like $500 to list on the MLS. But they forgo professional photography, staging, and promotion by a brokerage. The listing agent may never even see the home in person or conduct an open house. This stripped-down service works for motivated sellers with little need for agent marketing. But most sellers need more to effectively sell their largest asset.

On the buy-side, some brokerages now offer commission rebates to buyer clients. The agent earns the typical 2.5%-3% from the sale, but refunds 1% or so back to the buyer post-closing. This way the agent still collects the seller's commission, while the buyer sees cash back. For savvy buyers who can self-guide much of the process, this nets savings with less sacrifice in service.

Discount brokerages remain a small portion of the market. Majority of buyers and sellers still opt for traditional full-service, despite the higher cost. For an infrequent transaction like buying or selling a home, many see value in personalized expertise guiding the complexity. But for disciplined buyers and sellers, discounts can yield big savings.