Why do so many pay the 6% Realtor Commission? Simple…
And who else benefits?
The 6% commission Realtor business model has been around for over 150 years, it actually started in the 1850’s. Now there is a long story on how we got to where we are today in real estate and I am going to do you the favor of just fast forwarding to the present day and talk about Realtor commissions and why people are so willing to pay 6% or even more when it comes time to selling real estate. But in the end the real estate industry is muddy; it is loaded with sharks in my opinion that all want a piece of your homes equity and they do it in ways you do not notice.
Traditionally your 6% is split 50/50 between the listing brokerage and the selling brokerage, 3% going to each for the total of 6%. As home prices continue to rise those involved in the % based business model continue to see higher and higher paychecks for the same work, its genius because they pay raise is always built into the market values of homes. So selling a $300,000 home and paying the real estate industry 6% is costing you $18,000 of your homes equity; and people run to pay it without a second thought; this is why everyone wants in on the industry, so many what their piece of the pie because there is plenty of pie to go around.
The real estate industry has a low entry point, meaning after about 2 weeks of school and testing you to can be a real estate agent. I believe the reason for this is in part because the industry is built on relationships; people like to do business with people they know, family and friends of family and so on, so the bar is relatively low and that is why you see so much turnover in the industry. Generally someone can get into the real estate business and work their sphere of family and friends and pick up some business. Brokers that hire new agents give them “Low splits” during their training, generally an agent will keep 60% of the total commissions they earn until they are good enough to demand more or climb up an earnings scale to higher commission splits. Generally people will NOT negotiate much at all on real estate commissions or fees with friends & family and it is through these relationships that I believe the has kept the traditional 170 year old real estate commission alive and well. Lets be honest; technology has streamlined the industry and made the listing side process easy and the MLS does all the advertising needed for the most part through syndication of listings around the world and on consumer real estate websites, in fact now buyers can see inside pics and all sorts of data before they decide to view the property, most of the time these days the buyers tell the agents which houses they want to see.
Realtor commissions are a hot topic and are fiercely defended, there are so many videos to educate Realtors or real estate agents on how to handle sellers when it comes to commission objections when it comes to Realtor Commissions ( Here ), Now sometimes something like 6% is reasonable depending on the price of the home and at others it is not enough but that is for the seller and agent to decide. But in the end the 6% business model seems to be the industry norm and most cave and pay it in the end. Saving people money in real estate has been my hardest job, people just seem to be ok with paying 6% and I have often considered going back to charging a higher fee.
Now, we add all the other companies that want a piece of your homes equity for their huge contribution (Sarcasm), this is when an entity like Veterans United, Rocket Mortgage, Mr Cooper, Realtor.com , Clever Real Estate, Upnest, Dave Ramsey ( HERE ) and countless entities secures a buyer or seller who is interested in buying a property or selling a property. What happens is these companies troll for leads through ads online and TV and when they capture a lead they then refer that prospect to a local agent who must agree to pay the company a referral fee on commission earned by the agents work of (Generally 35% and this is legal) of the agents gross earnings. So if you engage one of these companies ads and wanted to buy a home and lets say it is $300,000 and the agent earns 3% ($9000), that agent will have to send $3150 to the company who sent them the lead, this is big business in America and the agents can’t compete with these companies huge ad budgets for leads so they have to pay to play, so to speak. And then the agent needs to split what’s left $5850 with their brokerage, so lets say that agent is on a 60% split, so the agent who did all the work ends up with the least amount of earnings of $3510, that is just 39% and still must pay all expenses and taxes on the income. This is one of the reasons the 6% business model stays as well, to many companies make good money from it.
I do full service flat fee real estate and charge just $3995 on the listing side, I try to keep it fair for home sellers and hope for some buy side business as well, but doing more business because my rate is lower has not been as consistent as I thought it would be in year 7 of doing flat fee real estate. People seem to be willing to pay more because they have been conditioned to it.
The real estate industry is currently battling in court commissions in a national lawsuit details here ( Here ) check it out.