Commissions - How do they work?

Commission rates are the single most sensitive subject in the real estate industry. Here is some info that could prove valuable during negotiations.

What do American home sellers and buyers really pay real estate agents in commissions? Though every market and region in the country has its own typically quoted set of norms -- often 6 percent to 7 percent -- most consumers never learn what commission rates actually get paid in their areas.

Commission rates are the single most sensitive subject in the real estate industry. Brokers or agents from competing firms can be charged with antitrust law violations for even whispering about rate structures among themselves. It's the ultimate no-no topic for realty agents.
But there is hard data on what home buyers and sellers pay. There is a national average real estate commission rate. And there is data on average commission rates region by region. It's just that nobody ever tells consumers what the numbers are.

Now you're going to find out: Based on internal financial data supplied by nearly 900 of the largest real estate brokerage firms across the country, the average commission paid by consumers in connection with home sales last year in the United States was (drumroll): 5.06 percent.

The highest average commissions were in the Southeastern and Midwestern states -- 5.38 percent. By far the lowest were paid in the mid-Atlantic states, 4.78 percent. New England consumers paid an average of 5.14 percent. West Coast, Hawaii and Alaska consumers paid an average 5 percent, and Southwest and Mountain region consumers paid 5.26 percent.

The commission data comes from the realty industry's only comprehensive annual survey, where firms voluntarily provide their internal financial data, cost structures, subsidiary income, commission income, sales agent compensation and other corporate data to an independent research firm, Littleton, Colo.,-based REAL Trends, co-founded by Steve Murray.

Murray's annual study accepts only verified financial statements, and promises each contributing firm that its private financial reports never will be shared with anyone or published. Instead the data is used in aggregate form to analyze what's happening in the realty brokerage industry overall, from giant nationwide companies with thousands of sales agents to modest-sized, locally focused real estate offices.

For several years, the survey has documented declining average commission rates, pushed by aggressive competition among realty firms, booming sellers' markets in large swaths of the country, and the rapid spread of discount and limited-service realty listing firms, both online and offline.

Last year, however, average commission rates stabilized, according to Murray. Apparently, some firms decided to exit the commission bidding wars with discounters, and to emphasize their far more extensive marketing services to clients, in exchange for slightly higher rates.
Many traditional, full-service firms have never cut their rates much. Though brokers generally are reluctant to discuss their pricing philosophies publicly, Washington, D.C.,-based independent broker Donna Evers of Evers & Co. Real Estate recently agreed to share some insights on the record.

As a general guideline, she said, her agents quote 6 percent to prospective sellers when making listing presentations on resale houses. For renovated homes or new construction, the target rate is 5 percent.

But in some cases, when the company potentially has both ''sides'' of the transaction in hand -- with an Evers & Co. agent already representing a ready and willing buyer for the house -- the commission may well be lower than the target rate.

One of Evers' top agents, who asked not to be identified, said ''other subjective considerations'' sometimes enter into the picture as well. For instance, if the prospective listing client was referred by a previous client or friend of the agent, the commission quote might be below the standard rate. Also, most listing agents may respond to highly competitive situations, where contending firms drop their negotiated rates in a battle to land the listing.

The point here for sellers and buyers is that whatever you may think, commission rates are absolutely negotiable -- and surprisingly variable -- across the realty firm spectrum. Discount, limited-service listing firms may charge minimal commission rates or flat fees to get your house into the local multiple listing service (MLS). But they're also likely to perform fewer marketing functions for you, and leave certain advertising, purchaser appointments and open house responsibilities to you.

Traditional real estate firms will charge you more, but spend more to sell your property - advertise in expensive magazines, full page newspaper advertisements, etc. This generally serves only one purpose - to build the brand of the real estate company. What sells a property is the property itself.

However, a real estate company does bring three very important things to the table. (1) A broker will list the property on MLS, making the property visible to buyers, sellers, brokers and other agents. (2) The cooperating commission listed on MLS (only visible to agents and brokers) provides an incentive to other agents and brokers to show the property. (3) The placement of a lockbox on the property provides agents and brokers with easy access so as to show the property to prospective buyers.

When it comes right down to it, a person buys a homes because that home meets their needs in terms of size, location, price and fuction, not because it has been advertised in a magazine or because it is listed with a particular real estate company.

Finally, in a seller's market, you do not need all the heft of a traditional broker to sell your home, and can certainly get away with limited marketing. You are the customer, and you have plenty of agents and brokers to choose from, so negotiate for a reasonable commission. Given the likely ease of the sale and the number of agents and brokers who want your business, you should have not problem. Just make sure you hire someone who knows what they are doing - a professional real estate agent or broker, not a part timer. In a soft, slow-moving market, you may want to pay a higher commission rate -- to get the sale closed quickly.

Remember, commissions are negotiable, you just have to understand the market and how it works.