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Everything's Negotiable -- Including Real Estate Commissions

07/01/2014 12:59 pm ET | Updated Aug 31, 2014
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There is a battle going on in the business of real estate brokerage. It's been going on for quite a while, but the alternative approaches to the full service-full profit real estate commission haven't yet gone mainstream. Sure, there are discount commission business models in many areas, but they often come with reduced services as well.

Some companies offer MLS-only services. The Multiple Listing Service is the local real estate cooperative membership in which member brokers offer properties for sale and share commissions when a buyer broker delivers the buyer for another broker's listing. Because more than 80% of all homes (recent market surveys show) are sold from MLS listings, it's a valuable place to market a home.

The MLS-only approach lists your home for a flat rate charge, usually just a few hundred dollars. However, for this you get listed but very little more. Many real estate agent MLS members will not even show those homes, even if they're offered a commission if they deliver a buyer. Some of them fear legal liability in dealing with an un-represented seller, and others just don't like this concept that threatens the real estate full service commission status quo.

Let's take a look at the traditional full service commission business model, as it will help us to understand the strong motivations to keep it dominant in the market. While commissions aren't fixed, the full service model seems to be running between 5% and 6% around the country. For many years, 6% was the norm, but it's been slipping due to competition from reduced service companies offering lower commissions. Let's use that 6% number as applied to a home sold for $200,000 to see who gets what:

  • $200,000 x 6% =12,000 full commission.
  • Listing brokerage keeps 50% (negotiable with other broker, but normal split) = 6,000.
  • Brokerage that delivers buyer gets 50% =6,000.
  • Agent in each brokerage gets their split, negotiable but often 50% = 3,000 each agent.

If a major franchise is involved, then these numbers can be reduced by the franchise fee off the top before the splits between brokerages and agents, sometimes as high as 7% of the commission. There's a lot of pressure for agents to keep home sales in-house (both buyer and seller represented by the listing brokerage), as the commission is kept in the same company, basically doubling the brokerage's take (known as double-ending).

If you're listing your home, you can read lots of stuff about choosing the right agent or brokerage, and much of what you read is focused on keeping the full service tradition alive and well. First, everything is negotiable, so you should be thinking discount from the first discussion with a real estate agent. The question can be asked early in discussions, as many will not be able to give up any of the commission because of the rules their employing broker places on them.

Once you find an agent, or maybe an independent agent/broker, who is willing to discount their commission, you can usually get 1 percent or more off the top. If they're pushing 6% and you can talk them down to 5%, that's a $1,200 ($200,000 sale price) savings that goes straight into your pocket. It's fine to be satisfied with that, but there's another opportunity to save even more if you're ready to do a little bit more negotiating to take advantage of the double-ending the brokerages enjoy. In many places it's known as a "dual-variable commission" rate.

Basically, because the brokerage gets 100% of the commission if their own agents bring the buyer, there is a lot more money in-house. By negotiating a dual-variable commission, your broker agrees to cut your commission if they represent both the buyer and seller. Even if you don't manage to get a discount off the top, this is one way to possibly get a discount when the sale happens. They still make more money, so they're more willing to do this discount than one off the top. However, you need to know that the odds are against you, as most buyers are delivered by other brokerages.

Real estate is a business, and selling your home is a business transaction. You shouldn't have any hesitation in negotiating the cost of marketing and selling your home.

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