How to Save on Real Estate Commissions

Commissions are part of the deal

While some homeowners are opting to sell their home on their own, a 2005 National Association of REALTORS® (NAR) survey revealed that 82% of homeowners enlist the services of a real estate professional.

The advantages of selling through a realtor include promotion of your property on the Multiple Listing Service (MLS), the most searched and up-to-date data base of homes for sale.

One of the criteria for listing a property for sale on the MLS is that a commission must be offered to the buyer broker. However, commission rates are a variable and not set by a governing body - if they were it would raise antitrust issues.

Instead, commission rates are market-determined, just like property values. There is little comprehensive data on brokerage fees but the national average is between 5-7%.

Consumers aren’t always aware that the commission rate is an adjustable factor in the terms of their real estate contract. When a broker presents a selling contract, it is an offer for an agreement on marketing strategy, time frame and terms of payment.

The seller has the option to negotiate the services and terms before committing and homeowners are increasingly negotiating lower commission rates when selling their home.

Behind the commission

It’s important to keep in mind that real estate brokers will carry the cost of advertising and promotion, valuable marketing elements that make a sale happen.

Advertising costs for prime real estate print ads can be several hundred dollars for a one-day print run. The high cost is relative to the wide exposure that newspaper print ads have traditionally given properties.

Commission fees are a way for brokers to recover advertising costs and related expenses so it’s not all profit for them. Still, there is room for negotiation.

Real estate is a highly competitive market and industry. Brokerage firms compete for your business with the quality of their services, reputation and prices. Competition is good for consumers and is a bargaining tool that many homeowners fail to use to their advantage.

There are some standards when it comes to commissions. For instance, a commission is usually split 50-50 between the seller’s broker and the buyer’s broker, and then split again between the brokers and their respective salespersons. The rates are determined within the frame of the contract between the broker and the client while the “splits” are between brokers and their salespeople.

These expectations are clearly defined in written contracts between all parties involved. Each individual including brokers, salepeople and clients can negotiate the terms of a contract and, depending on their leverage, gain or retain more percentage of a transaction.

The good news for homeowners is that as 2007 transitions into a buyer’s market, real estate brokers are aware that competition is increasing. As buyer’s become more empowered, brokers recognize that sellers need a competitive edge in order to cash out the equity in their home.

Some brokers are already offering seller incentives in the form of lower commission rates and other brokers are likely to consider them in an increasingly competitive market. When considering a selling agreement, homeowners should contemplate negotiating commission rates.

Lower commission rates based on time

The longer a property is for sale through a broker, the more advertising costs will accrue. If a broker is able to sell your home faster than expected, they save money on these costs. Ask your broker if they’d be willing to structure the commission rate based on a set time-frame.

For instance, the selling agreement could agree to a 6% commission if sold in three months and a 5 ½% commission if sold in one month. Keep in mind that these discounts apply to the selling broker only and that they are still obliged to pay the buyer broker as agreed in the listing.

Lower commission rates based on services

A full service broker can offer sellers marketing services in newspaper ads, real estate magazines, direct mail, internet and the MLS. Ask your broker about customizing your property’s marketing in a way that eliminates less cost-effective advertising in exchange for a lower commission rate.

For instance, you could ask your broker to pursue internet advertising rather than newspaper print ads. The internet is an increasingly cost-effective marketing tool, especially compared to time consuming and expensive print ads.

Lower commission rates based on competition

The competitive nature of the real estate business is good for consumers and just like when shopping for other services or products, real estate broker services and commission fees should be compared.

Real estate services vary between firms and between salespersons, and so do commission rates. Before signing a contract interview a few different brokers to compare the services, expertise and the fees.

Think qualitative, not just quantitative

The best choice is not always the lowest bidder. There are many factors involved with choosing a real estate broker and establishing a contract. The services offered, quality of service and proven effectiveness are just as important considerations as the commission rates.

In today’s market, a full service broker who offers seller incentives in the form of lower commission rates has a finger on the pulse of the market. That’s a good sign that you are dealing with a savvy professional who knows their industry.

If your broker presents you with a contract that features a traditional fee structure consider asking about discounts on commissions rates. A creative professional with an eye on the "big picture" will be open to ideas on how they can best retain your business.

When negotiating a contract, and commission fees, it’s important to keep in mind two main points. First, you are the client and the free market of real estate should be used to optimize your asset. Secondly, when dealing with a real estate professional remember that the best in the business offer quality services that will help you retain the equity you've earned.

Don’t assume that commission fees are a waste of money. Instead be sure to work with a professional that recognizes your needs and adheres to a quality of service that you deserve. The best way to ensure this? Ask for what you want and negotiate a reasonable contract that gets you the most out of your real estate investment.

*Note: The information in this article is general advice and not meant as a substitute for personal guidance from a financial advisor, real estate professional or legal counsel. Although the author is a licensed realtor, the advice given in this article does not constitute any client contract or agreement between the author and the user. The author is not responsible for any losses, damages or claims that may result from your decisions.