When selling a home it's important to ask as many questions as you can so you learn more about the sales process and what decisions you're making for your future. Most of your questions will likely be about how the sale actually works, but are you also wondering why the agent's commission is set at what seems like a high price? In most situations this is an expense that the seller will take on, and that's why it's so important to understand what you're paying for. Some of the top answers that can help you understand more about this rate include:
The Commission Will be Split
Let's say you're selling a home for $300,000 and the commission for the agent you hired to sell it is 6%. You might think that making $18,000 for one sale is a lot, but that's likely because you're not considering how that commission gets split between others. When you take all of those things into account, the amount that the agent takes home really isn't as much as you would have thought.
In most situations the selling agent has to pay out 50% of their commission to the buyer's agent. This alone takes a huge chunk out of the money they make, but the expenses don't stop there. They will then have to pay their brokerage a fee, which is, on average, around 30% (depending on the brokerage). And in addition to those fees, they will have to take care of these other expenses:
- Advertising Expenses
- Office Expenses
- Operating Fees
- Assistant Income
- Insurance Expenses
- Licensing Fees
Considering all that selling agents have to pay out, it's easy to see why they set their commissions at a certain rate. It's really a necessity if they want to make any income from the homes that they sell.
Not Selling High Priced Homes
Selling a high priced luxury home can mean a big commission for an agent, even considering the fees and payouts they have to make. But, most real estate agents aren't selling multi-million or even million-dollar homes on a monthly (or regular) basis. They might get to see the odd one, but unless they specialize in only luxury homes, they'll likely be selling at the mid-range price point. This means that their commission isn't always going to be a big pay check, and may just barely cover their expenses.
Not Selling Many Homes
A lot of people have the perception that real estate agents sell 10 or more homes per month just because they have a lot of listings. But in reality, even the most experienced agents sell only six to eight homes per year. This means they really aren't making a lot of money from their commissions, even though they are working around the clock. Of course there may be months where the market is booming and the agent is selling a lot of homes per month, but this isn't always typical.
They Do a Lot For Clients
Real estate agents are some of the hardest working professionals out there, because their livelihood depends on getting things done. It might not be easy to see what they do from the seller's perspective, but rest assured there's a lot that goes on behind the scenes. That's why most agents work over 10 hours per day and only take one day off per week. As for what they bring to the table, it includes:
- Knowledge of Local Laws
- Knowledge of the Market
- Drive to Sell
Bringing on an agent is always recommended because they'll be there to help you do one thing: get your home sold quickly. They are the experts and know all of the small (but important) details that go into the sales process. If you think they just list your home for sale and then wait around until someone contacts them, think again! They actually do a whole lot more, and some of those things include:
- Taking Pictures/Videos
- Setting up Appointments
- Speaking with Potential Buyers
- Open Houses
- Legal Forms
There are a lot of steps that need to be taken to sell a home and get the keys in the buyer's hand. Agents work much harder than most people realize, and have to do things properly in order for the sale to be legal and binding. Their service is worth the commission that they are charging because of all that they do!
The Risk of Selling
Being a real estate agent is actually quite risky, especially for professionals who are just getting started. Some of the biggest risks come from:
a) Not Being Able to Sell
Sometimes homes are just difficult to get off the market, even if the agent does everything they are supposed to do. All it takes is the right buyer, and sometimes that one buyer is hard to come across. Unfortunately if this happens and the seller decides to drop them, the agent is out operating costs.
b) Not Having a Lot of Homes Selling
An agent could have a lot of homes for sale at one time, but if they aren't actually selling any of those, then they are once again out the operating costs for their business. Not only do they have to pay their staff, but they also have to pay for insurance, marketing, transportation, office expenses and everything else that is required to simply run their business. If there aren't commissions coming in, then the agent has to figure out how to pay for these on their own.
c) Seller Backs Out
If a seller decides they want to back out of working with an agent before the sale is complete, then the agent is again out cash for trying to sell that home. Unfortunately this does happen quite often, especially since sellers are generally under the impression that their home should be off the market within days or just a couple of weeks.
d) No New Listings
Real estate agents can have a steady income when they are selling homes on a regular basis, but if they don't take in new clients all the time, then their income could suffer. They have to make sure they are constantly marketing themselves so they have new homes coming in to sell.
They Have Experience and Expertise
You could certainly try to sell your home on your own, but do you think you'd be successful? A very small percentage of people who try to do this are, and the rest generally turn to agents to help them out. After all, they do have to be licensed in order to do this job, and are extremely knowledgeable about all types of real estate transactions as a result. In addition to this, most agents train with those who are more established when they first start out so they can get real life experience.
And how important is experience? In real estate, it's everything! It could mean the difference between a sale going through successfully or being denied because of a technicality.You want someone who knows what they are doing, and time on the job is one of the best ways to be sure of that. Some other reasons why and experienced agent is worth paying for include:
- Contacts in the business for help finding buyers
- Network of agents they can work with
- Catching potential problems ahead of time
- Making sure all paperwork is done properly
- Knowing how to talk with potential buyers
- Being able to negotiate
- Giving you realistic advice based on past experience
- Knowledge of the sales process from start to finish
- Knowledge of the local market
They Help You Avoid Pricing Too Low
If you're thinking you could just hire an appraiser and then go to a lawyer to sign contracts to sell your home, you'd be right. And while this would help you avoid paying a commission to a real estate agent, do you know how much money it could cause you to leave on the table? On average, owners who sell their own homes end up selling for 20% LESS than those who hire real estate agents. If you're wondering why this happens, it generally starts with the appraisal.
Many appraisers may give their clients lower prices for what their homes are worth, and that's because they don't want to be sued for fraud. If you went off of the number they gave you alone, you could miss out on tens of thousands of dollars that you rightfully deserved.
A past client of mine is a great example when they received various appraisal values for their home. They had finished renovating their property and they wanted to refinance their mortgage to pay back some of the renovation cost. The bank's appraiser came in at $750,000 while the independent appraiser valued their property at $950,000. That's a whooping difference of $200,000.
When you pay for a real estate agent you're paying for their expertise with the market, and they will know the appropriate price for your home. They want to help you maximize profit, and will provide you with a realistic number for what your selling price should be.
Seeing the Value in Service
With all that you now know about real estate agents, how they work and the true commission they take in, do you see why commission rates aren't really that high? It might seem like they are taking in a nice amount of money at first, but that could be far from the truth. These professionals have to work long and hard to become good at what they do, and then have to earn all business that they get in the future. They also rely only on commission for their income, and don't make a base salary from anything else.
It can be exhausting being in this career, and that's why you have to truly love what you do to do it well. When you sell your home with one of these professionals, take a moment to ask them more about what they are doing for you. Chances are they'd be glad to explain more about the process, and you'll see just how much value they bring to the sales process.
I am a licensed member of the Real Estate Council of Alberta since 2005 - proudly representing CIR REALTY, Calgary’s largest real estate brokerage. I enjoy keeping my readers up to date with real estate related information that they can easily understand and use for their own benefit. I welcome feedbacks and comments equally from first-time visitors to my blog, past clients and also from my fellow REALTOR® colleagues. Thanks for stopping by!