Commissions and Your Bottom Line
The economist Stephen D. Levitt and co-author Stephen J. Dubner wrote recently in their book Freakonomics (HarperCollins Publishers, Inc.) of Levitt’s study showing that when real estate agents sell their own homes, those homes stay on the market an average of 10 days longer than their clients’ homes. The same study shows that the selling price of real estate agents’ homes is on average 3% greater than that of their clients.
Here’s why. A couple who lists their home with a real estate agent for $250,000 may hear from the agent that someone has offered $240,000 for the home. In many cases, the agent will insist that the offer is good and that the sellers should take it. Why would the real estate agent be so eager to accept a price that’s $10,000 below the seller’s asking price?
It could be that the home was priced too high to begin with, and when this happens it's usually because the seller has insisted on the high selling price. But Levitt's study showed something interesting. Typically, agents split their commissions: half goes to the buyer’s agent, half to the seller’s agent. Then it’s usually split again: each agent gives half of their commission to the agency they work for. So the agent representing the seller is only getting 1.5% of the sales price of the home (6% ÷ 4). With a $240,000 offer, the price of the home is reduced by $10,000, but the commission is reduced by only $600. The real estate agent’s cut of this is $150. It will cost the seller’s agent only $150 to accept the low-price offer. What does it cost the seller? An additional $9,400.
This situation happens every day. There is a strong incentive for real estate agents representing the seller to entice their sellers into accepting offers well below their asking price. You've got to price your house correctly from the beginning so that your confidence won't let you come down too far in price.
Here’s why. A couple who lists their home with a real estate agent for $250,000 may hear from the agent that someone has offered $240,000 for the home. In many cases, the agent will insist that the offer is good and that the sellers should take it. Why would the real estate agent be so eager to accept a price that’s $10,000 below the seller’s asking price?
It could be that the home was priced too high to begin with, and when this happens it's usually because the seller has insisted on the high selling price. But Levitt's study showed something interesting. Typically, agents split their commissions: half goes to the buyer’s agent, half to the seller’s agent. Then it’s usually split again: each agent gives half of their commission to the agency they work for. So the agent representing the seller is only getting 1.5% of the sales price of the home (6% ÷ 4). With a $240,000 offer, the price of the home is reduced by $10,000, but the commission is reduced by only $600. The real estate agent’s cut of this is $150. It will cost the seller’s agent only $150 to accept the low-price offer. What does it cost the seller? An additional $9,400.
This situation happens every day. There is a strong incentive for real estate agents representing the seller to entice their sellers into accepting offers well below their asking price. You've got to price your house correctly from the beginning so that your confidence won't let you come down too far in price.
posted by Jan McBee at 3:34 PM
2 Comments:
Realtors don't always do this, and the ones that do give the rest a bad name. Usually the price is too high to begin with and the house has a very high DOM. The math here may be right, but each situation is different.
I agree. However, we've heard this story often from sellers who've sold before. In fact, after commission costs, it's the biggest complaint people have of dealing with real estate agents. But your point is well taken. The most important part of any sale is having realistic expectations when you (or your agent) price your home.
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