If you're like most people, you'll want to work with a real estate agent when you sell your home. Of course, doing so comes at a price: Sellers typically pay about 6% of the sales price in commissions. On a $270,000 house -- the median price of single-family homes and condos in the third quarter of 2019 -- that's $16,200. Real estate commissions represent one of the most expensive products that many consumers ever buy. Collectively, U.S. home sellers pay an estimated $100 billion in commissions each year.
While 6% is often considered the "going rate," sellers and investors may be able to negotiate a lower real estate agent commission.
How do real estate agents get paid?
A real estate commission can amount to a big chunk of change. But keep in mind that your agent doesn't get the entire commission. Instead, the commission is often shared between many players, including the:
- Listing agent -- the person who took the listing from the seller
- Listing broker -- the broker the listing agent works for
- Buyer's agent -- the person who represents the buyer
- Buyer's broker -- the broker the buyer's agent works for
In many arrangements, the listing broker and buyer's broker each get half of the commission. The brokers then split the commission with their agents. This is commonly a 60/40 split -- 60% to the agent and the broker keeps 40% -- but it could be 50/50 or 70/30 or anything else the broker and agent agree upon.
Most agents don't get paid a salary and instead work on a commission-only basis. And while a commission can be substantial -- even after it's divvied up -- that money is used to cover taxes and the normal costs of doing business. For real estate agents, that includes costs for advertising, MLS fees, insurance, licenses, dues, and other fees.
Are real estate commissions negotiable?
As noted by the National Association of Realtors, "The antitrust prohibition on fixing commission rates means, simply, two or more real estate firms may not agree on the commission rate that each will charge." Doing so would be a violation of federal antitrust laws. As a result, real estate commissions are always negotiable, at least in theory.
Of course, that doesn't mean every agent and broker will be willing to move on their fees. This could be because they already have plenty of business at their "standard" rate, or they're concerned that word will get out -- and they'll have to lower their fees for everyone. Also, it could be that they know your property will be hard to sell, either because the real estate market is slow or because it isn't what buyers are looking for.
When should I negotiate a real estate commission?
Still, there are times when your agent may be more likely to accept a lower commission. For example, you may have luck negotiating if:
- You're selling a property that is high-end, updated, or move-in ready
- The local real estate market is hot, and your property is likely to sell quickly
- Your listing agent is also the buyer's agent (a "dual agent")
- You use the same agent to buy a property at about the same time you sell
- You sell during an off-peak season when the agent would like more business
- You allow a lockbox, so your agent won't have to host every showing
- You're an investor who plans to sell multiple properties
Commissions for real estate investors
Perhaps the best argument for a lower commission is if you’re a “frequent flyer” in the real estate business—and you’re not an agent yourself. If you flip several properties a year, a local real estate agent may be more than willing to cut you a deal in exchange for that repeat business.
Still, don’t expect a real estate agent to take your word for your flipping volume (or prowess). Be prepared to support your claim with your industry reputation and a strong existing portfolio of business.
Of course, keep in mind that if you find the right agent, you could be in business together for a while. It makes sense to negotiate a reasonable commission that works for everyone. Even a 1% savings on commissions could add up to tens of thousands of dollars a year if you buy and sell frequently.
You could save, but at what cost?
When you look for a listing agent to sell your property, be sure to ask about the commission and what goes into that fee. If you feel you have a good reason to negotiate (e.g., your property will probably sell quickly), it doesn't hurt to ask -- but be nice about it. Remember, there are lots of moving parts in a real estate transaction, and your agent is only getting part of that commission.
Also, keep in mind that a good real estate agent may be able to get a higher sales price for your property. You may be able to find an agent that charges only 5%, but that can backfire if they don't find a buyer at (or near) your asking price.
For example, say you're asking $270,000 for your property. You could save $2,700 by going with the agent who charges 5%. But is that savings worth it if your home sells for $10,000 less? Finding the right agent is more important than finding the cheapest one. In many cases, you’ll come out ahead if you look for an experienced, hard-working agent, instead of one who agrees to the lowest fee.
Become A Mogul Today
Real estate is one of the most reliable and powerful ways to grow your wealth - but deciding where to start can be paralyzing.
That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. Mogul members receive investing alerts, tax optimization strategies, and access to exclusive events and webinars. Past alerts have included investments with projected IRRs (internal rates of return) of 16.1%, 19.4%, even 23.9%.
FREE - Guide To Real Estate Investing