If you want to save a few thousand bucks the next time you sell a house, read on. Here are three strategies you can use right now:
#1: Sell it yourself
One radical option is to go it alone. By omitting the agent — and the commission fees — and going for the grassroots For-Sale-By-Owner (FSBO) approach you can save a bundle of money. But it’s not entirely free.
For instance, the cost of posting a listing on websites such as ForSaleByOwner.ca and PropertyGuys.com ranges from free to just over $2,000. Like the MLS, these dedicated Internet portals allow homeowners to include descriptions, photos, price and contact information.
Then there are the fees for neighbourhood signs, online advertisements, flyers and flyer delivery. You’ll also have to consider how much your time is worth, as you take on the role of open house host, neighbourhood canvasser and real estate marketer.
But be forewarned: only about 7% of buyers have embraced the FSBO option, which means a significantly smaller pool of potential buyers for your property.
#2: Negotiate a lower fee
Shaving just 1% off the average 6% real estate agent commission could save you $4,000 on the sale of a $400,000 home.
Unfortunately, not all realtors are receptive to the idea of dropping their rates. In 2008, Consumer Reports released a study that found that only 46% of U.S. sellers attempted to negotiate a lower commission. Of those who did, just 71% succeeded.
A good strategy is to ask for a slightly lower rate or to promise a double-ended commission. A Boston study found that lowering commissions from 2.5% to 2% had a negligible impact on both sale price and the time-on-the-market — but this fee reduction could save the seller $10,000 or more in commission fees.
The double-ended request means you ask for an overall lower commission, but commit to working with the same realtor for selling your current home and buying your new home. Because the agent is now getting two ends of a commission, they may be more receptive to lower the overall fee they charge.
#3: Pay a flat fee
When you go the flat fee route, you get an MLS listing but you do almost all of the other work yourself.
As some veteran Realtors explain, this service is best for people who have sold a home before and are comfortable with the process.
A variant to the flat fee is the flat rate options, where you pay a larger fee, but a smaller commission, to obtain some guidance. These fees can start at $1,995 and go up — which is still much cheaper than paying full commission to a listing agent.
Keep in mind that whether you go with a flat fee, a flat rate, a negotiated discount rate or choose a FSBO listing, you will probably still need to pay the buy-side Realtor a commission. Why? Because these agents won’t drive business to your listing if there’s no money to be earned. While you may consider this unethical, you have to consider that most Realtors will work weeks and months with no payment, but with the expectation of a payout at the end of a transaction.
Should you Negotiate Your Seller Agent’s Commission and Services?
Want to pay less or get more from your Realtor? The key is to understand what’s on offer
There is a common misconception that there is a standard percentage when it comes to Realtor commissions. In truth, there is no set price. That would be price-fixing, which is illegal in most industries.
Instead, most jurisdictions in Canada follow precedence when it comes to paying Realtor commission rates. For instance, in most parts of Ontario and the Prairies, the average prevailing fee paid to agents is about 5% to 6% of the home’s final sale price. In B.C., most Realtors charge 6% to 7% on the first $100,000 and 1% to 2% on the balance of the purchase price.
However, Realtor commissions aren’t set in stone. If a Realtor sells a vacant lot, the commission is usually higher — sometimes as high as 10% to 20% — because selling land takes longer and involves more marketing dollars.
This also means that Realtor commissions are totally negotiable.
Who Pays the Commission and Where Does it Go?
Sorry, home sellers: You’re on the hook for paying all Realtor fees.
Typically, half the fee you pay will go to your listing agent — the Realtor you worked with to sell your home — and half will go to the buyer’s agent.
To appreciate the impact of this transactional cost, let’s assume that you sell your home for $450,000 and that your listing agent and the buyer’s agent will each earn 2.5% of the sale price. In this transaction, the seller would be responsible for paying $22,500 in Realtor fees. Half of this money will go to the buyer’s brokerage (where they will keep a percentage before giving the agent their share of the money); half the money will go to your agent’s brokerage (where they will keep a portion, before paying out the listing agent’s commission).
From these fees, most Realtors usually have to pay for their own advertising and marketing, insurance and business license, in addition to all the other expenses associated with running a small business.
An agent only gets paid a commission when the title on a home is transferred to the new owner. That means an agent may work with a seller for many months — and through many offers — before getting paid.
Are commissions negotiable?
Absolutely! Commissions are always negotiable but that doesn’t mean all Realtors will drop their fees to get your business.
These days there are brokerages and agents that charge fees that cater to every income level (and snack bracket). This means it’s important to shop around and ask questions. Particularly given how much you can save with just a small reduction in fees.
For instance, shaving just 1% off the average 6% real estate agent commission could save you $4,000 on the sale of a $400,000 home.
Unfortunately, not all realtors are receptive to the idea of dropping their rates. A Consumer Reports study, released in 2008, found that only 46% of U.S. sellers attempted to negotiate a lower commission. Of those who did, 71% succeeded in lowering their agent’s commission costs.
Here in Canada, Realtors may be even less receptive to negotiating. As one reader, who lives in Vancouver, recently found out. After calling a dozen agents, and asking them to lower the commission rate charged, this home seller received five “flat out refusals.” The remaining responses varied from hard “no’s” to a discussion on why a good Realtor won’t bother discounting their rates.
The Key: Understand How Agents Work
Of course, when selling your home the idea of paying only 1% or even 2% in commission versus 5% to 6% or even 7% can be very, very appealing. Who doesn’t want to save as much as $33,000 on the sale of a home listed for $550,000? But before deciding on a discount brokerage, consider how the industry and agents work.
Big Name Equals Big Costs
Agents who work for big-name firms charge more in commissions because they pay more in fees to their brokerage offices — as much as $2,000 each month (and this doesn’t include expenses associated with operating a small business, board fees or professional insurance costs).
So why would an agent stick with these large firms with high fees? Because these firms spend a lot of money on marketing and advertising. Pick up the newspaper or go online and you’re sure to find a study or statistics recently released by a big-name brokerage. One reason why newspapers, magazines and bloggers report these stories is because these large firms spend millions each year on press releases, marketing and building relationships with media and influencers. (Long before influencer marketing was a thing, real estate brokerages new how important it was to get influencers talking about their brand.)
For most agents working with traditional brokerage models, the biggest hurdle is getting clients. Loads of time, money and strategy is focused and getting client leads. Some agents don’t mind paying high fees if it means their brokerage spends time and money marketing and generating awareness and leads. (There is another way, see the “Evolution of Real Estate” on page XX.)
Still, this doesn’t totally explain why agents don’t jump ship and go to a firm that charges little to no fees (allowing the agent to pass on those savings to their clients). Perhaps the real answer boils down to quality versus quantity.
The Mathematical Truth About Discount Brokerages
When an agent works for a discount brokerage, they earn less in commissions. It’s basic math. What that means, however, is that the agent has to attract, work with and successfully close more sales than an agent that doesn’t work for a discount brokerage.
Say, for instance, agent Pat works for a brokerage and gets 1% for each sale he closes and let’s say agent Casey works for a brokerage that charges 5% on each sale (2.5% goes to agent Casey).
If both agents have a goal to earn the annual median family income of $70,336, according to Statistics Canada 2016 Census data, and each agent works sellers listing homes for $500,000, then agent Pat needs to work with 100 sellers in a year to meet his target earnings, while agent Casey need to work with 40 sellers in a year to meet her target earnings.
Not a big deal, right? It is if you care about how much time and energy an agent can devote to you, the client. If agent Pat has to market, find and secure 60 more sellers than agent Casey, how do you think that impacts the amount of time agent Pat can dedicate to marketing your home, returning phone calls and attending viewings? And we’re not even talking about agents who take it a step further with strategic marketing techniques and dedication to developing a client network.
Most people are good enough at math to understand that an agent charting 1% will save you money compared to an agent charging twice as much (assuming both will sell your house for the same amount), but will the agent charging less have the time to return every call, show up at every viewing and develop a unique marketing plan to entice more buyers?
In other words, the cheapest agent is not necessarily the best but neither is the most expensive agent. The key is to interview a variety of agents and to pick your real estate professional based on their plan and expertise, as well as their cost. It’s the strategy used if you were to undertake a kitchen renovation or other major home renovation and picking the right agent is no different. Clearly, price is important but there are other factors involved.
Should you negotiate a lower commission?
From a personal finance perspective: Yes! Truth is it never hurts to ask, but keep in mind, you get what you pay for.
If a Realtor easily agrees to their lower commission, how great will that Realtor be at negotiating in general?
As a seller, you want an agent who can broker the best sale price and terms. Think about whether or not you want to work with a Realtor who caves quickly on their own pay. Will this person be able to negotiate the best possible price on your home? Plus, for many Realtors, the marketing dollars for a property come from their commission, so a lower fee could mean less advertising for your property.