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Real Estate is Changing

Updated: Feb 20

The real estate business is changing in a way that matters directly for consumers. Here’s what you need to know:

  • Real estate agents are typically paid via commission. The seller pays the seller’s agent a percentage of the sale price, often 5%-6% (more for land deals).

  • The seller’s agent then turns around and pays some portion of that commission to the buyer’s agent.

  • A recent lawsuit resulted in a jury saying that this arrangement causes increased costs for buyers.

  • Accordingly, buyer’s agents may need to charge clients directly for their services.

Note important facts here:

  • Buyer does not pay buyer's agent directly.

  • Commissions are financeable when they are lumped together with the price of the home.

  • Agents are paid on spec (speculation). If the deal doesn’t close, they don’t get paid.

  • In order to pay agent commissions, neither buyer nor seller have to come up with cash at a time when it’s not available.

Why are agent commissions so high?

For buyer’s agents, it’s because they work on spec. That is, a typical buyer’s agent will only close deals on maybe 5-10% of the prospects or clients they work with.

While buyer’s agents are doing research, going to showings, and counseling clients, they have no idea whether they will ever get paid for any of it. That’s a significant risk. The commissions pay for this risk premium.

For seller’s agents, it’s also because they work on spec. They spend time marketing the home and are usually out significant costs in order to do so for things like photography, staging, and sometimes repairs.

These costs can range from a few hundred dollars to tens of thousands of dollars, depending on the listing. Seller’s agents have no guarantee that they will, in fact, get paid.

Should agents be paid so much?

This should depend directly on how much clients value not only the services but the manner in which those services can be paid for.

Would you prefer to pay out of pocket, upfront, for real estate services? Do you want to pay regardless of whether you actually ever buy or sell?

If you say yes to both, then you’d likely pay a lot less for services. If you’re not ok with those, then perhaps the current model is working well.

Ok, so where does that leave us?

Your preference, and the resulting discussion with your agent, needs to take account of all of the incentives and economic arrangements here, not just the facile, easy-to-see costs.

And while we're on the topic, perhaps consider what other buyers and sellers have said after either going sans agent or with an agent. The results are interesting.

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