Commision Structure
According to data by the U.S. Census Bureau, the median sales price of a home for about 40 years did not go above $200,000. The sales price dipped during the great recession but picked back up soon after. They then exploded during the Covid pandemic to above $400,000. In a span of about 15 years, the median sales price of a home doubled.
For about 40 years the average commission on the sale of a home was about $12,000. That means each brokerage got $6,000. Each broker has a different percentage they take from their agents but let's just say they split that. So, the agent takes home $3,000. This doesn't cover the cost of the agent's licenses, continuing education for licensing, MLS fees, local board of REALTOR® fees and the list goes on and on. It costs quite a bit of money just to continue to be a real estate agent before they even make a take home pay.
Now fast forward to today, to where the average sales price of a home is about $420,000. The average commission at 6% would be $25,200. Each brokerage gets $12,600 and the agent would end up with $6,300. The reason why it seems like it's so much, is how fast home prices climbed during a 15-year period. There is ample evidence to suggest that agents have been a large part of that increase in sales price. So, it would only make sense that the agents also get a share proportionate to the value that they bring.
And this is where people get hung up, they don't understand the value that agents bring. I hear all the time that I just open doors and pass paper along, such an easy job. And while that's far from the truth, I take pride in the fact that's all the stress my clients feel during the process. It's a value they can't really see or feel until it's not there. It's the absence of a good real estate agent that goes unnoticed until they have dealt with a bad one. If that makes any sense. I don't hear people complain about the price of a good lawyer. So, then why when it comes to a real estate agent that makes sure you are protected when making one of the biggest purchases of your life?
Let me ask you this, let's say in another reality, agents don't exist. A seller sells their house for $400,000 and it sits on the market for 6 months. Then somehow, a buyer finds the seller's house and falls in love with it. They then spend three months of going back and forth negotiating, getting paperwork ready and the seller eventually settles for a price much lower than they were asking because they just need to get rid of it. They settle on a $220,000 price. These individuals wouldn't have any idea of the value a real estate agent brings because they don't exist.
Let's add the agents into the picture. The seller and their agent discuss the market and how to price it to sell. They eventually set a starting price about $20,000 above the market (room for negotiating) at $280,000. The agent lists the house and markets it. It sits on the market for about a month until an agent brings a buyer that falls in love with the house. After some offers and counteroffers, they agree on a $270,000 selling price after about a week. They close the house about a month later.
In this scenario, the buyer had a hard time selling their home because they didn't have the resources to market their home like agents do. They also didn't really understand the value of their home and priced it $40,000 above market value. The reason why it sat so long was because of its initial price being so high and the buyers didn't know the home was for sale. There is no central listing component to list it on. On top of that, they sold for much lower than the market value because it had sat on the market for so long and the buyer was able to take advantage of that. At this point, the agents brought not only an increase of $50,000 in the sales price but saved them months of back and forth and stress. What is the value produced worth to you? Even if the seller had to pay the whole average commission, it would be $16,800. So, the seller would net an extra $33,200 and loads of time saved. If you want to speak in investing terms, the seller invested $16,800 and made a profit of $33,200. That's almost double the investment. Any investor would be crazy not to make that investment.
But of course, this is hypothetical and sometimes it doesn't work out this way. We just came out of one of the craziest times to be in real estate. So crazy that homes were being sold without inspections being done on them. That's how competitive the market was because of supply shortages. By no means is that the norm and nor should it ever be. An agent must always advise you to get your home inspected but if that was the deal breaker... ultimately it's up to my clients. That market isn't coming back anytime soon. And rates also will never fall again to as low as they were. Homes are now sitting on the market for longer than a couple weeks (back to the norm) coupled with home prices crashes in many areas and supply issues being corrected. A buyer's agents is now just as important as ever to not only protect the buyer but also bring value to the seller.
No matter if you are a buyer or a seller, we can always have an honest and fair discussion about commission. I am certain that whatever that percentage is, I will exceed your expectations of value I bring to the table. At the end of the day, a higher home price may pay a bit more, but if the client isn't 100% happy with that property, the thought of having a client of mine be less than 100% satisfied, pushes me towards what is right for them and not what pays me more. My reputation as a REALTOR® is one of the most important things to me after my family.
