Real Estate’s Dirty Little Secret

When you buy a home, there’s almost always a commission offered to your buyer’s agent (assuming you’re using one).

The total commission amount is agreed upon between the seller of the home and their listing agent, and then it’s generally split 50/50 between the two agents (buyer’s agent and seller’s agent). So, if a seller agrees to pay 5% to their listing agent, your agent will typically get paid 2.5% of the total selling price.

Last week, my sister and her husband sold their house. She asked me for advice on how to do it (note: she’s out of state, so I couldn’t be the one to help her). The first thing I told her is to remember that the commission is always negotiable. The second thing I told her is that agents might try to convince her to pay a higher-than-necessary commission by playing up fear around not being able to sell the house.

So what did they do?!

Her agent told them that if they didn’t pay a 6% commission (3% of which would go to a buyer’s agent), no buyer’s agents would show their clients the house, and they wouldn’t be able to sell. They agreed to the 6% and listed with that agent.

What happened next?!

The day the house was listed they had 8 showing requests, and within 1 day had a signed offer with no inspection, a flexible close date, and at 10% over list price.

Now, maybe there are extenuating factors in their particular market that effectively mandate a high fee, and maybe their agent did an incredible job promoting the house in the days prior to listing, and maybe he was right that nobody would have come to see the house if they had offered a 2% buyer’s agent fee instead of 3%. But if you ask me, the idea that an agent on either side of this deal earned 3% of the purchase price is bullshit. Neither of them had to lift a finger.

Over the past five years in the Boston area, the percentage that buyer’s agents have been paid has been going down consistently, from 2.37% in early 2013 to 2.24% this month. Data on how much listing agents get paid isn’t public, but it’s reasonable to assume based on industry practices of splitting the commission 50/50 that it has tracked almost exactly. So we’re talking about a 5% decrease over 5 years.

Yay, I’m going to save money!

Percentage fees have been trending down in the Boston area

Hold on just a second. As you are most likely aware, prices in Boston have gone up, a lot. Like, really a lot. The average list price when that fee was 2.37% was $616,075, which works out to an average agent fee of $14,539. Last month the average list price was $867,612, or a fee of $19,695.

Hey, but what about inflation?

Yeah, yeah, yeah, I know about inflation. That fee in 2013 would be just shy of $16,000 now. So after accounting for that, we’re talking about an inflation-adjusted increase in the amount that buyer’s agents are making of about 20% in 5 years! Cha-ching!

So there are a couple of conclusions that we can potentially draw.

  1. Being an agent has become a lot harder.
  2. Fees are being kept artificially high.

Boston has been a “seller’s market” for several years. When that happens, a listing agent’s job actually gets easier. More competition for fewer houses means less time on market, fewer open houses to run, etc. A buyer’s agent used to do a substantial amount of work to find a property, but the proliferation of websites for buyers to find a property has essentially eliminated that part of their job.

Now, recall the story of my sister. The idea that two agents would need to be paid a 6% commission total on a deal that was done in one day, to me, is insane.

However and whenever we came up with the idea that 5–6% is standard/normal/required, we need to forget it. Technology has completely changed what it means to be a real estate agent, and the market should adapt accordingly.

So, what do I do about it?

My advice to you is the same as I gave to my sister. If you’re a seller, don’t be afraid to negotiate with your listing agent. If they won’t budge, find a different one. If you’re buying, ask yourself if you think your agent is doing almost $20,000 worth of work. If they’re not, then you should ask them to give you back some of that money. If they won’t, then read on.

If the percentages that we showed above keep trending down and prices don’t keep increasing, then maybe this problem will solve itself as commissions decrease on their own. Until then, consider that there is a better way. At Torii, we use a large part of the buyer’s agent commission that we’re paid for representing you to pay for all of your closing costs, and to provide you with all the other services that you need to buy a home – like an attorney, appraisal, title insurance, and more – free of charge.

We believe that homebuying doesn’t have to be hard, and we’re putting our money where our mouth is to make sure that’s true.

If you’re thinking about buying a home in the Boston area, get in touch. We’d love to chat and learn how we can help.

No Comments for "Real Estate’s Dirty Little Secret"

Leave a Reply

© 2019 Torii, Inc. All Rights Reserved. MA License #422946