Sometimes I’ll get asked, “How do real estate agents earn their commission?”, or they’ll say something like “What does a real estate agent do for 6% that I can’t do myself?” So after having been posed the question again last week by Nathan, I decided it would be a great topic for discussion here.
If you want to sell your house today, basically you’ve got 2 main options. One, you can sell it yourself (For Sale by Owner), or two, you can hire a real estate agent. Simple enough, right?…not always.
Sellers often have a tough time making this decision for themselves. On one hand, they would like to sell their home quickly and painlessly. On the other hand, making as much money as possible is a top priority.
I mean let’s face it, these days hiring a real estate agent to sell your home at 6 or 7 percent could cost as much as a new Honda Accord . Only you might feel better spending it on the car. And seriously, what does a real estate agent do to earn that much money anyway?
Well before diving into what a real estate agent does, it’s important to understand a few things about agents, like the different types of representation. An agent wears different hats depending on if they are working with a buyer or a seller. We’ll refer to them as buyer’s agents and seller’s agents. In both scenarios, the agent has fiduciary duties to their client. Fiduciary duties means that the agent’s relationship to their client is held to a higher standard of confidentiality, trust and loyalty than is commonly standard with the general public. Realtors also must abide by a “code of ethics” which is enforced by their association and the state.
Additionally, real estate agents must be licensed and complete continuing education requirements in order to renew year after year.
So let’s look at a general outline of both a buyer’s and seller’s agents activities in working with a client.
- Buyers Agent -
- * Educate the buyer in an initial “buyer orientation”
- * Advise client through the loan pre-qualification process
- * Find properties that fit the buyers needs & wants
- * Schedule preview appointments with agents and owners of homes for sale
- * Preview properties with the buyer
- * Analyze the value of each property previewed
- * Offer personal/professional opinions regarding client’s favorite properties
- * Research that property’s history, current value, and future potential
- * Help determine a strategic offer price
- * Coach the client on the negotiation process
- * Fill out purchase contracts, addenda and disclosure forms
- * Present offers and negotiate on behalf of the buyer
- * Present counter-offers to the buyer and advise
- * Handle earnest money according to state requirements
- * Process purchase contract
- * Order and review preliminary title report
- * Offer references to the buyer for inspections and home warranty
- * Work as a team with the seller’s agent, the lender and title company to ensure a smooth transaction
- * Review seller property condition disclosures and present to the buyer
- * Schedule and orchestrate the inspection
- * Negotiate repairs and other objections that may arise from inspections and disclosures
- * Assist buyer in working through other miscellaneous issues that may arise such as loan glitches or buying concerns
- * Protect buyer’s interests and earnest money in the event a cancellation of contract is desired
- * Ensure key deadlines are met, such as appraisal, loan denial, inspections, disclosures, settlement etc.
- * Review settlement statements for accuracy
- * Coordinate closing and possession
- * Handle any post-closing issues that may arise such as property misrepresentations, possession, and failure to fulfill on contract agreements
- * Close out transaction file
- …and when everyone else bails out at the last minute…, even help them move
- Seller’s Agent -
- * Preview the property
- * Make suggestions on preparing the home to sell
- * Educate about the selling process in an initial “seller orientation”
- * Prepare and suggest a sales price
- * Present a plan to generate a buyer
- * Promote the property, execute marketing plan
- * Network with other agents, affiliates, and vendors
- * Arrange and schedule showings
- * Follow-up with buyers and agents who preview the property
- * Deliver regular feedback reports to the seller
- * Track & analyze specific market activity weekly
- * Report personal observations and progress
- * Suggest price adjustments in a timely manner if necessary
- * Motivate agents and buying prospects to submit an offer
- * Present all offers to the seller
- * Generate net-sheets to show seller’s bottom line after all expenses are paid
- * Give personal/professional opinions in respect to offers
- * Give best and worst case scenarios with each offer
- * Negotiate on behalf of the seller with the buyer or buyer’s agent
- * Process purchase contract
- * Order and review preliminary title report
- * Work as a team with the buyer’s agent, the lender and title company to ensure a smooth transaction
- * Coordinate and process escrow
- * Negotiate repairs and other objections that arise from inspections and disclosures
- * Resolve other issues that may arise such as buyer loan problems, buyer’s desire to cancel, or unforseen issues with buyer’s ability to fulfill contractual agreements.
- * Protect sellers interest in the event the contract is cancelled
- * Strategically re-list the property for sale so as to generate another offer quickly in the event the contract is cancelled
- * Ensure key deadlines are met, such as appraisal, loan denial, inspections, disclosures, settlement etc.
- * Review settlement statements for accuracy
- * Coordinate closing and possession
- * Handle any post-closing issues that may arise such as buyer complaints & accusations, possession, or failure to fulfill on contract agreements
- * Close out transaction file
- …and even mow the lawn just before a hot buyer previews because the seller extends their vacation and the there’s no one else who can do it in time :p
Thanks again.
I think your side note isn’t exactly true. The price could possibly be lower without the 6% commission, which means theoretically the buyer could save money. I think that doesn’t usually pan out though, because the seller agent probably just takes the full 6% commission.
When we bought our current house, we bought a HUD home with an FHA loan and we didn’t have an agent (our big mistake). I think most of our problems happened when we got down to dealing with FHA loan regulations and paperwork. Would you have been able to save us the bureaucratic head aches?
I think I get what you’re trying to say, yet still, there are no charges to a buyer for the services of a real estate agent.
Even if the buyer has no agent, the seller is still contracted to pay a full commission to the listing brokerage.
Now, even if the agent concedes a portion of their commission, regardless of who the beneficiary of that concession is (buyer or seller), the buyer is left either unrepresented or is left to participate in a limited agency transaction.
Limited Agency refers to one agent representing the interests of both parties. Imagine going to court and one attorney represents both plaintiff and the defendent. This is not an ideal scenario for either party.
For the second part of your comment, help me understand what bureaucratic head aches you experienced.
I don’t want to get into specifics on this forum. Lets just say that we had to sign a thousand forms and dot a thousand i’s and it seemed like nothing with the paperwork was ever perfect so then we’d have to pay a penalty fee and apply for an extension and submit more paperwork.
OK, everything that you say makes sense. But a Honda Accord???? My “typical” house in Sunnyvale California is going to sell for about $899,000. The six percent is $54,000, and the amount of work involved is no more than if he were selling a home for $400,000. My personal opinion is that in todays market a Realtor, broker, or agent should charge a fixed fee rather than a percentage, and make whatever arrangements he wants with the buyers agent. I’m sure there are confidential “MLS” pages where the buyers “cut” could be published such that those of us not in the business would not have access.
When my home in CA sells I’ll be buying here in TX and I will not be using an agent. Instead I will negotiate the sales price AND the sellers commission since the selling broker will not be splitting the commission with anyone. While I am not expert specifically in Real Estate negotiations I was a contract negotiator for 25 years and expect that the seller, agent, and buyer will ALL be pleased with the resultant contract.
In response to John Boucher. It is un-true that a property selling for $899k is no more work than one selling at $400k. A property selling for $899k will have a whole different clientel to please, which also may require the agent paying for dinners at costlier establishments. The cost to advertise a property in that price range is so much more due to the types of advertising required in order to reach those potential buyers. The agent pays for all of the advertising and carting around buyers, etc until the deal is finally closed. Plus out of that 6%, typically the buyer agent office and seller agent office split it 50/50, then each office splits again 50/50 with the agent, then the agent takes out for taxes and reimburses themselves all of the expenses associated with handling either the buyer side or seller side.
A good real estate agent EARNS their fee. The typical car salesman gets paid off commission just the same as a real estate agent. The car salesman may work all day showing cars and not make a sale and therefore not make a dime for the day, just like a real estate agent showing homes. You don’t see people negotiating the price of the car and discussing how much the salesman should make from the deal, people just negotiate the price of the car and that is it. After all, the car salesman just fills out a little paperwork for his $1,000 fee, right? Wrong. Just like a real estate agent does more than just a little paperwork.
Going back to a GOOD real estate agent who EARNS their fee. If you, as a buyer or seller, don’t see all of the work going on behind the scenes to get to a perfect closing, then the agent has done their job. Unfortunately, an agent doing a GOOD job appears only that the agent has simply filled out some paperwork.
6% of ANY sale is way to high. I hope that someday soon technology will edge out realtors. It would be a better service if there was some type of mediation service for help with paper work, etc. currently most realtors seem to do very little other than have access to the MLS.
Instead of pressuring us, you re-assured us. Instead of rushing us, you took time to chat and listen to us. Instead of trying to sell us something more than we could afford, you showed us great value at a price we could afford.