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How do real estate agents justify charging so much to list a house for sale?

How do real estate agents justify charging so much to list a house for sale?

If you spend any time on any internet message board with a page about real estate, you have seen a question like this. If you are on the right message boards, you have seen me arguing with someone who spreads this misinformation about… usually with a fair amount of mudslinging against the industry as a whole. Well after arguing the point more than a couple of times; I decided it would be useful to discuss our professional fees, also referred to as real estate commissions.

I want to begin by expressing that I understand people taking this position. From the outside looking in, we don’t appear to do a whole lot. The crazy thing is, the better a Realtor is at their job… the less it looks like they are “working”. On top of that, many of the people who are yelling this one the various BBS pages have had terribly negative experiences with one or more agents. Given the size of the investments we help people with, it is understandable that someone would be upset with any problem that occurred.

On the other hand, I don’t think people ever really think about what all those commissions support, and how difficult it would be to sell a home without those systems. I also don’t think people really consider the fact that real estate commissions are negotiable. Nor do they consider that realty is the last true bastion of the free market; in that it is fairly easy to get licensed and accredited and if you can construct a business model that will support you by doing the same work for less

Lets start by looking at some of the systems that the real estate commission supports.

Obviously there is the agents actual work, the agents operating expenses, the National Association of Realtors, the MLS (or BLC here in the Metropolitan Indianapolis Board of Realtors), Government oversight, and of course the managing brokers mentoring/apprenticeship system. Lets take a look at each of these separately.

The realtors actual work.

This is usually the whole argument. The person who thinks that real estate agents charge to much to list a home for sale start out by throwing out a home value at the top of the local market range, assume the highest commission percentage (which rarely happens anymore), figures the total sales commission and says, “what did the agent do to deserve this amount of money?”.

Well for starters, half of that commission goes to the buyers agent right off the bat. And before anyone gets started on “what did they do?”, their expenses and efforts are similar to the sellers agent… with some nuanced differences between them.

So what does the listing agent do for that half a commission? (that you will find shrinking with each subsection) They market to find people selling homes, consult with potential sellers, analyze the homes condition, location, and merits to determine its potential value in the market, monitor said market, advise the seller on repairs and upgrades which will facilitate a quicker sale and/or higher sales price, advise the seller on staging the home (and sometimes staging it), photograph the home (or pay a professional photographer if they aren’t up to it), measure the home, work with the seller to ensure that all appropriate documentation and disclosures are done (correctly), put the listing on the Multiple Listing Service, market the home to buyers agents who sell in the area, market the home to their personal networks, market the home to social media and other online venues, coordinate showings, field calls about the property, hold open houses, show the property to their buyers, receive offers and present them to the sellers, negotiate the purchase agreement on behalf of the sellers, follow up with the sellers and buyers agent on each aspect of the contract to ensure the terms are met, receive and present (to the sellers) the buyers home inspection response, negotiate terms and settlement of the home inspection response on behalf of the sellers, refer and recommend contractors to make those repairs, prepare all sales documents for title company for closing, and finally going to closing to represent the seller.

If you read over that list you will note that the realtor representing you is wearing more hats than the salesman that people think of us as. Each and every one of these tasks requires a different skillset, and given the value of our work to our clients there is little room for error. The broker selling your house must be an expert in each and every one of those areas. Even with all of that work, that commission gets cut down further.

The next big chunk of your listing agents commission goes to their managing broker. Business models between brokerages are too varied to really dig into the numbers here, but we can safely say that between 10 and 50% of your agents commission is paid to their brokerage (depending on what services are provided and the companies terms).

Once again I am going to head off the “why would you pay that” and “why should I support that” type questions by reminding you of all of the skills that a realtor needs to be effective. No one is born with them. Even if they have developed them before coming into real estate, no one has seen all of the potential problems in real estate. A course of study that taught them all would take about as long as a medical degree…and you know how expensive medicine is, so we don’t want that. So real estate uses what is basically an apprenticeship system. A realtor has to be an associate broker (or sales agent in some states) prior to becoming a full fledged broker. During that time all of their transactions are monitored (some more loosely than others) by an experienced managing broker who is responsible for that agents conduct. Good ones help develop the younger agent and coach them to become great agents themselves. In return for that education (and a variety of other services) the managing broker collects a percentage of that agents commissions.

Once your realtor pays their managing broker, they have to fund their operating expenses. This is the most overlooked (by realtors and their clients) piece of the “where did my commission money go” puzzle. Everyone seems to think that being a real estate agent is a job. while it is work, its not a job…its a business. An independent business. Complete with office expenses, vehicle expenses (for showing houses), continuing education expenses, and most of all MARKETING EXPENSES. Last year my personal business overhead was about 35% of my total commissions (after paying my broker of course)… and I am fairly tightfisted about my expenditures. The thing is, to adequately grow my business AND properly market my clients homes, I have to spend money. That’s why marketing was in all caps btw. Marketing was 56% of my expenses for the year.

After marketing the last big chunk of expenses that your agents commission check covers goes to government oversight, the National Association of Realtors (and local/regional boards), and to support the MLS. The last time I brought this up on a message board, I was lucky to get out with my head. The person I was debating just couldn’t get their head around why he (or anyone else for that matter, myself included) should pay for these things. I think they have value. Here is why.

Government oversight. We all have too much government in our lives, but after 2008 I think we can agree that having some checks and balances on this industry isn’t an entirely bad idea. People are greedy creatures, and will manipulate any system in place. Even with licensing, agency laws and a host of other measures in place there are still acts of real estate fraud (both by licensees and scammers who take advantage of people who don’t want to use licensees) that cost Americans hundreds of millions of dollars per year. Without our licensing structure (and our boards) that number would increase tenfold.

Besides taxes though, our fees to the state are fairly innocuous.

Realtor Boards. Every Realtor is a member of the National Association of Realtors, a regional board and a local board. These board perform several functions. The most important of these is regulating agents. We have a code of ethics and they are enforced by our boards. This prevents the majority of legal problems that could occur in real estate transactions. When the board and our ethics don’t prevent the problems, they provide a path of recourse for our clients and a means of removing less than honorable agents from our industry.

The second major function these boards provide is continuing education, both in principle and in practice. They outline what an agent needs to learn and provide a place (an option at least, private companies also provide these services) to learn those skills.

Lastly, our boards lobby the government to ensure that no laws are passed which limit the opportunity of home ownership to the people, and to ensure that our industry stays just regulated enough to make sure people can buy a home without getting scammed, without being overbearing.

Supporting the MLS. Every person who yells about what they are paying for comes to a point where they say “Why should I pay to support he MLS? I will just use (fill in commercial home search site here)”. Every one of them gets the reply, “where do you think that commercial home search site gets the data to answer your search query?”. Hopefully this answer is clear to you. every single home search site is fed by the multiple listing service that is funded by realtors commission checks. Without the MLS searching for a house would be as bad as trying to find a car online. Can you imagine if every person who was selling a house had to create their own ad and hope they knew enough about search engine logarithms to get their search found? I will put it this way. Some people would sell their houses for way more than they can now (the few who know how to work that system), and most may as well just go back to printing up flyers and asking random people to buy their home.

Hopefully this article has served to help our clients understand why realtors charge what they do to sell a home….and further to help them see that it is actually a good value.  Also, remember everything in this world is negotiable, including real estate commissions. which is why Your Realty Link realtors charge just 5% total commission to sell any home that can sell for $125,000 or more.

If you want to take advantage of this great deal on your home listing, call Robb at 317-657-8059 or email robb@yourrealtylink.com to schedule your listing consultation.

 

 

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