Why are real estate agent commission so high?

We believe that the common complaint of principals (buyers and sellers) is that the real estate agents’ commission is either too high or there is not enough work done for the commission earned. High commissions represent significant overhead on a house sale or purchase. Seller physically loses money on commission; buyer inherits negative equity as soon as he/she purchases a property. This high “closing costs” largely comprised of commissions, make real estate investments unattractive to a large number of people, and often is one of the biggest reasons that cause principals to either lose money or be skeptical of real estate buying or selling.

However, the truth is that yet most agents still cannot make it and go out of business in 1-2 years. There are many reasons behind this

Reason – 1

One of the reasons is that commission is “contingency based” – agents earn only when a transaction closes. Imagine you hire a person who is paid by the hour to represent you on the complexities of buying or selling a house including comp analysis, negotiating contracts, disclosures and other complex documentation and interpreting inspections and other reports in addition to complex marketing strategies and tactics. An average first-time homebuyer before they decide and close upon a home may easily spend almost 150+ hours of real estate “experts” time.

Now imagine a buyer who does not pay any of this and yet does not close the transaction with the agent after spending this or a significant fraction of this – the agent has to eat it and move on and “hope” to recover it from another buyer who actually does close. So given that house sale or purchase represents the largest transaction of a principal’s life– it does not have any more than 50% chance of going through in a successful purchase with a buyer– so for this low a chance, a buyer agent is often compensated at a 2.5% -3% rate if it actually does close.

While a listing agent job is definitely not much less to be appreciated or complex, the chances that listing agent has to close a deal is significantly higher if listing agent gets a listing agreement signed with seller, wherein at the minimum there is some definition and commitment involved compared to a buyer who can constantly change his/her mind or the spec or even the timeframe that they are looking for. And commensurate with that we already see softening in most markets for the listing agent commission, listing commission to be negotiable more than the buyers’ agent commission, already to a factor of 1.5-3% depending on geography, price range, and other factors.

Reason – 2

The commission is also high due to high wastage in real estate industry – Often principals, especially buyers, with unclear goals and expectations and changing spec not seeing the significant effort and not having to pay for the hours but only for the successful sale, liberally spend the time of the agent, as opposed to a situation where if they were to be aware that if they used lesser time – they could indeed benefit by  reduced commissions.

Reason – 3

Not only there is a listing agent and buyers agent, there is most often a listing broker and buyers broker additionally involved which also get a significant cut of the commission. This further overhead is in addition to the referral sources an agent is to pay for to obtain the business so a significant fraction of the commission does not go to the agents anyway.

A commission rate of 2.5-3% for each of  buyer and seller – adding to 5%-6% – has thus been the ”norm” and while there is no law dictating the commissions and it is all negotiable; and as hated this commission structure is by many, the real estate commission has survived the onslaught of many discounts or even technology based brokerages and quite surprisingly and to the dismay of many, in this world of technology has stayed at or above 5% in most markets.

We strongly believe that to solve this – the first thing to make principals realize is that the real estate agents are needed – myths of replacing them badly fails if the buyer and seller were to realize the number of jobs agents have to do.

Agentsdeal.com,  a subsidiary operation of Agentsdeal Inc., a licensed CA real estate broker, is a patent-pending business model to solve technologically through a “service tier” based auction the above problems effectively and summarily and create a much needed breakthrough in real estate industry to lower commission to a true market rate and yet not hurt agents’ pay-rates significantly.

To know how you can Save Real Estate commission rate Click Here