Don't Reduce Commissions Now
Recently, a few sellers have been asking me if I would reduce the amount of the selling fee, or real estate commission, for listing, marketing and selling their property.
I understand the logic behind that request. Sellers are faced with falling prices and need to recoup every dollar they can when selling their property to try to make up some of the loss which has been thrust upon them by the falling market and the recession.
On its surface, such a request seems logical from the seller's viewpoint.
In actuality, reducing the commission will also reduce the chances of selling the house. It is not to the seller's advantage to reduce the sales commission in the current market.
Here's why.
Real estate agents make their living solely by the commissions they earn from selling properties. Nobody pays a real estate agent a salary or covers their monthly business expenses. Real estate agents are true independent contractors who cover their own costs and earn only the commissions from what they sell.
So, if a seller reduces the commission he is really taking away the incentive for real estate agents to show and sell the property. Fewer showings mean less of a chance for a sale. That's why a reduced commission puts the seller at a huge disadvantage compared to other sellers who are offering a larger selling fee. To be candid, it always has been this way no matter what the market conditions are like.
"But," some sellers may say, "I'm only asking for a 1 percent reduction in the commission. How much can that hurt the agent?"
Well, you need to look at it from the real estate agent's viewpoint. Let's say you want the agent to reduce the commission from 6 percent to 5 percent as an example. To the seller, that's just a 1 percent reduction. To the agent, that's a reduction in income of 16.67 percent. Why should the agent show your property, market it at his own expense, negotiate all the closing matters, and provide all the other professional services required in selling a house and earn less than normal?
Many buyer's agents today immediately go right down to the bottom part of the MLS listing sheet where the buyer's agent commission is disclosed. Usually, it is one-half of the total commission amount the seller agreed to pay on the listing agreement, about 3 to 3.5 percent normally.
But when that commission is reduced, you are also reducing the commission and income of the buyer's agent. Instead of receiving 3 to 3.5 percent, the commission may be cut to 2.5 percent. If we are selling a $300,000 house, the buyer's agent quickly calculates that instead of receiving about $9,000, he will only receive $7,500 for bringing the buyer to the closing table. From that, many agents must then split with their broker by as much as one-half of the commission amount, meaning the buyer's agent may take home as little as $3,750 for selling the $300,000 house instead of the $4,500 or more that might be earned at a higher commission figure. That $750 difference is significant in many family budgets.
Frankly, I know of few industries where a salesman would sell $300,000 worth of product for a commission of only $4,500. Back in my advertising agency days, a $300,000 media buy would earn a commission of $45,000 and I thought that was too low!
So, when a seller tries to negotiate a reduced commission, he is tampering with his own success. Some agents will cave in and reduce the selling fee for no good reason. When that happens, the astute seller should ask himself this question: "If this agent is unable or unwilling to defend his own income, how good a job will he do when negotiating the price for the sale of my property?"
The agent who just reduced his own income may not have a particular interest in getting the highest possible price for your property. Your interests may, in fact, become sacrificed in favor of a "quick sale" for the agent. A few seasoned sellers will, right at this point, go find a better agent who is willing to be a tougher negotiator.
So, think about these things if you're a seller. A commission that gives the buyer's agent a financial incentive to show your house in this market is the best way to go because as you can see, reducing the commission also reduces the incentive to sell the house.
With so much property on the market today, many buyer's agents simply decide not to show the house with the reduced commission and move on to show other houses that offer a larger selling fee. It's the way of the world, folks.
For more information about real estate in the Tampa Bay area, please visit my website at www.TheStPeteRealEstateSite.com.
I understand the logic behind that request. Sellers are faced with falling prices and need to recoup every dollar they can when selling their property to try to make up some of the loss which has been thrust upon them by the falling market and the recession.
On its surface, such a request seems logical from the seller's viewpoint.
In actuality, reducing the commission will also reduce the chances of selling the house. It is not to the seller's advantage to reduce the sales commission in the current market.
Here's why.
Real estate agents make their living solely by the commissions they earn from selling properties. Nobody pays a real estate agent a salary or covers their monthly business expenses. Real estate agents are true independent contractors who cover their own costs and earn only the commissions from what they sell.
So, if a seller reduces the commission he is really taking away the incentive for real estate agents to show and sell the property. Fewer showings mean less of a chance for a sale. That's why a reduced commission puts the seller at a huge disadvantage compared to other sellers who are offering a larger selling fee. To be candid, it always has been this way no matter what the market conditions are like.
"But," some sellers may say, "I'm only asking for a 1 percent reduction in the commission. How much can that hurt the agent?"
Well, you need to look at it from the real estate agent's viewpoint. Let's say you want the agent to reduce the commission from 6 percent to 5 percent as an example. To the seller, that's just a 1 percent reduction. To the agent, that's a reduction in income of 16.67 percent. Why should the agent show your property, market it at his own expense, negotiate all the closing matters, and provide all the other professional services required in selling a house and earn less than normal?
Many buyer's agents today immediately go right down to the bottom part of the MLS listing sheet where the buyer's agent commission is disclosed. Usually, it is one-half of the total commission amount the seller agreed to pay on the listing agreement, about 3 to 3.5 percent normally.
But when that commission is reduced, you are also reducing the commission and income of the buyer's agent. Instead of receiving 3 to 3.5 percent, the commission may be cut to 2.5 percent. If we are selling a $300,000 house, the buyer's agent quickly calculates that instead of receiving about $9,000, he will only receive $7,500 for bringing the buyer to the closing table. From that, many agents must then split with their broker by as much as one-half of the commission amount, meaning the buyer's agent may take home as little as $3,750 for selling the $300,000 house instead of the $4,500 or more that might be earned at a higher commission figure. That $750 difference is significant in many family budgets.
Frankly, I know of few industries where a salesman would sell $300,000 worth of product for a commission of only $4,500. Back in my advertising agency days, a $300,000 media buy would earn a commission of $45,000 and I thought that was too low!
So, when a seller tries to negotiate a reduced commission, he is tampering with his own success. Some agents will cave in and reduce the selling fee for no good reason. When that happens, the astute seller should ask himself this question: "If this agent is unable or unwilling to defend his own income, how good a job will he do when negotiating the price for the sale of my property?"
The agent who just reduced his own income may not have a particular interest in getting the highest possible price for your property. Your interests may, in fact, become sacrificed in favor of a "quick sale" for the agent. A few seasoned sellers will, right at this point, go find a better agent who is willing to be a tougher negotiator.
So, think about these things if you're a seller. A commission that gives the buyer's agent a financial incentive to show your house in this market is the best way to go because as you can see, reducing the commission also reduces the incentive to sell the house.
With so much property on the market today, many buyer's agents simply decide not to show the house with the reduced commission and move on to show other houses that offer a larger selling fee. It's the way of the world, folks.
For more information about real estate in the Tampa Bay area, please visit my website at www.TheStPeteRealEstateSite.com.
-30-
posted by Terry Ward at 5:50 AM
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