Tips and Traps When Negotiating Real Estate: How Does the Commission Impact the Agent’s Role in Selling?

Negotiate the Commission: How Does the Commission Impact the Agent’s Role in Selling?

What does an agent do for you? A good active real estate agent who makes a concerted effort to sell your property will do the following. Besides the obvious sales tools such as placing advertising in news­ papers, holding open houses, putting a sign on the property, and installing a “lockbox” so other agents can show it, your broker will also “talk up” your house at sales meetings. Large brokerage firms have at least one sales meeting a week, which all agents attend.

If your agent “co-brokers” the property (shares the listing with other brokers and, accordingly, splits the commission), he or she should attend MLS (multiple listing services) meetings at least twice a month. Here, agents from all the real estate companies in the area meet. Your agent can stand up at these meetings and tell other agents from dozens of other offices about this wonderful property (yours) she has listed—its features, low price, good terms, and so on.

If your agent attends enough of these meetings, talks up your prop­erty to enough other agents (and follows through with phone calls and e-mails), chances are he or she will find one of them who is working with the buyer who could be just right for your property.

TRAP

Some agents won’t want to co-broker your home. They’ll tell you they have a better chance of selling if they only list for their office. (They’ll advertise it more, show it more, and so on.) This is nonsense. You want the maximum number of agents made aware of and working on your house. If a broker insists on not co­ brokering a property, I’d wonder if he or she was just trying to avoid splitting a commission.

In other words, the most effective thing your agent can do is “talk up” your house to as many other agents as possible. Since agents in the area are in contact with the vast majority of buyers, this immediately increases your chances that the right buyer will hear about your home.

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On the other hand, let’s say you negotiate a reduced commission.

Now, your agent stands up before other agents at a large sales meet­ing and describes how well your four-bedroom, three-bath house shows to buyers. A colleague raises a hand and asks, “What’s the commission rate?” Your agent replies, “Four percent.” If there are a lot of houses listed at 5, 6, and even 7 percent, whose houses do you think agents arc inclined to show their clients first?

TIP

Buyers’ agents are required to show buyers all proper­ ties that are appropriate for them, without regard to what commission rate they might make. That’s part of their fiduciary relationship to the buyer. In the real world, however, where judgment is a big factor, that’s not the way things always work out.

On the other hand, let’s say that you have negotiated something quite different. You have told your agent you’re willing to pay a 3 per­ cent commission to the agent who brings in a buyer. That’s half of what happens to be a commonly paid commission in your area at the time.

When your agent stands up and is asked what the commission is, he or she can truthfully say, “It’s a full 3 percent to the buyer’s agent.” Now your house is marketable.

Adding a Bonus

Further, you say you’re offering an all-expense-paid week in Hawaii to the agent who brings in a buyer. Now, your agent stands up at one of these crucial meetings and describes your house. When someone asks what the commission rate is, your broker beams and says, “My client will not only pay a full 3 percent buyer’s agent’s commission, she will also give an all-expense-paid week in Hawaii to the buyer’s agent!” You should be able to hear the cheers.

Now, when another agent has a prospective buyer and has the choice of showing them your house or someone else’s, where do you think the buyer will be steered?

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Rather than increasing the rate of the commission, offer bonuses to agents who sell quickly or who sell at all. Trips, television sets, even an old car or boat that you own and want to get rid of can be offered. So long as the item is tangible (not money), it has the potential of cap­turing the imagination of other agents and helps to make your property stand out. Also, most such bonuses are actually cheaper than offering a higher commission.

What About Only Giving the Selling Agent—Your Agent— a Lower Commission?

When you negotiate with an agent over a commission, what should be most important in your mind is the service the agent is going to perform. You should talk about how the agent is going to promote your home.

  • You should be concerned with:Will the agent “talk up” your home at sales meetings? How many? How often? To how many agents?
  • Will your agent co-broker the property with other agents in the area?
  • Will he or she list your property on the multiple listing service?
  • What plusses can the agent find to help induce other agents to bring buyers to your house?
  • How much advertising will the listing agency do as a whole? It’s necessary to do more than just advertise your specific home to find a buyer for it. Large amounts of advertising bring in lots of buyers, one of whom may be just right.
  • Does your agent have other sources of potential buyers? For example, does the listing office have contacts with other offices nationwide that might refer transferees to your area?

In other words, what you should really be negotiating about is what the agent will do to promote the sale of your property, espe­cially how he or she will talk it up to other agents. Only when you’ve reached a satisfactory arrangement for services should you negotiate price.

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Should You Tie the Fee to the Services Performed?

All agents will (or should) tell you up front that the listing fee is negotiable. However, they may also say something such as, “Even though the fee is negotiable, our office accepts only listings for 6 percent.” Or “Our bottom line is no less than 5 percent.” The agent can legitimately turn down a listing if he or she feels the commission rate is too low.

On the other hand, you can point out other factors. For example, if the market is strong, it doesn’t take a whole lot of effort to sell a home. When buyers are plentiful and frequently bid against one another for each house as it is listed, there’s much less work for a commission.

In a situation where properties are selling almost as fast as listed, it’s silly to pay a full seller’s agent’s commission. Since the market is so hot, it won’t really make much difference (perhaps a few weeks) whether you offer the agent 3 percent or 1 percent. As soon as a sign goes up, buyers will come by.

Further, in a hot market, listing rates tend to fall. You’re not the only one who realizes that paying the full rate is foolish. Other sellers do as well and that puts downward pressure on the market. For example, in some areas of the Northwest, the average commission rates (combined buyer’s and seller’s agents) are only around 4 percent.

Agents may still try to get a higher listing commission rate, but savvy buyers won’t let them. Besides, in such a market, sales are so plentiful that almost any agent should do well regardless of the listing rate.

However, in a very slow market, attempting to cut the commission rate would probably work against you. If you are serious about sell­ing, you will want to get out of your property as quickly as possible, before the value drops further. That means getting as many agents as possible working for you, and a high commission rate can help. I have seen sellers negotiate a 7 percent commission when 6 percent was common, so long as the agent promised quick action on a short­ term listing.

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Remember, time is money.

Should You Deal with Discount Brokers?

If you have an agent who won’t negotiate downward the selling agent’s commission, you have other alternatives. There are agents out there who regularly work for less.

“Assist-2-Sell,” “Help-U-Sell,” and other national realty agencies have a much lower “standard” rate. Some even offer a sliding scale of commission rates that depends on just how much work you do as part of the selling. If you show the house and pay for the advertising, you might get a 1 percent seller’s agent’s rate, for example. For just handling the paper work, some brokers will simply charge a flat fee, say $1,000 or $2,000. On the other hand, if you want full service, you might end up paying 3 or more percent to the selling agent.

Does it pay to deal with discount real estate companies?

My own experience is that you get what you pay for. Today, dis­ count brokers list their homes on multiple listing services right along with full-service brokers. Their commission rate is also given on every listing.

As noted, in a hot market it is probably foolish to list for a high rate since your house is likely to sell no matter how much or how lit­tle effort is poured into it. In a cold market, however, you need all the help you can get.

What About Negotiating the Commission as a Percentage of Equity?

At various times in the past, I’ve seen ideas put forth that would change the listing system in real estate. Instead of the listing com­ mission being a percentage of the sale price, it would be a percent­ age of the equity.

For example, you have a house that sells for $200,000 and you list at a 6 percent commission. The agent receives $12,000.

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On the other hand, you have only $40,000 in equity in your property; the rest is mortgaged. If the agent’s fees were based on equity, at 6 percent the agent would receive only $2,400.

I know that sellers will be enthusiastic about this sort of arrange­ment, but any real estate agent I know will explain that it simply won’t work. Few agents can afford to work for that kind of commission. Further, your equity really shouldn’t be the basis of the com­ mission, they will argue. After all, the price and the mortgageable amount are based not on seller’s equity, but on what the house is worth on the open market. Why should commission be different? Besides, buyers’ agents are paid a commission based on sales price, not seller’s equity. Finally, for any given price, there are bound to be hundreds of sellers, each with a different equity. Thus a commission system based on equity simply would be unworkable.

In short, I wouldn’t hold out much hope for a system of commission rates based on equity to be enacted by real estate companies any time soon.

Can You Get the Agent to Accept Paper Instead of Cash?

When you sign a listing, all agents will insist on cash. In fact, they will want it written into the listing agreement that you owe them a cash commission if they produce a buyer “ready, willing, and able” to pur­chase, even if you back out of the sale! But that doesn’t necessarily have to be.

TRAP

The agent is technically entitled to a commission not when the sale closes, but when he or she produces an appropriate buyer. It’s something to consider before list­ing if you’re not fully convinced you want to sell. Some sellers will add a clause that the commission is payable only when escrow closes, thus helping to avoid a prob­lem if they decide to pull the home off the market.

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It’s not necessary to ask an agent to take cash or paper. You could negotiate a split—some cash and the rest paper. There can be any combination of the two, depending on how you negotiate the deal.

Some agents are adamant and will not cut their commissions or accept anything but cash, no matter what. Other agents, however, are willing to compromise on their commission if they see no other way to make this deal and only a remote possibility of other deals occurring on this property.

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However, even if your agent is willing to take paper or cut a com­ mission, be aware that other agents are probably involved. If there are two agents involved in the deal, a buyer’s agent and a seller’s agent, both might have to agree on taking paper or on reducing the commission. Further, you may be dealing with salespeople instead of brokers. Thus, before they can give you the go ahead, they may have to get their broker’s permission. And while the salesperson may be eager to make even a reduced commission and a sale, the broker may nix the idea on principle or policy—his or her office simply doesn’t do that sort of thing.

All of this is negotiable. The trouble is, when it comes to commis­sions, you can get so many people involved that the negotiations over the commission can be more extensive and heated than those over the sale!

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If you are going to negotiate the sales commission lower or include paper instead of cash, usually the best time to do this is when you’ve got a deal in hand and its success or failure hinges on how the commission is handled. It’s far harder for the agent to say no then.

The Bottom Line

Keep in mind that sometimes getting the best deal doesn’t neces­sarily mean getting the lowest commission rate. What you want, or should want, is a quick sale and a good price.