The Real Estate Industry Isn't Broken. Consumers Were Never Taught How to Use It.

Are Real Estate Commissions Negotiable?

Real estate commissions and brokerage fees are negotiable. There is no standard commission rate that a seller is required to pay. Individual brokerages and agents can establish what compensation they are willing to accept, and consumers can compare those costs when deciding whom to hire.

 

There is a strong perception that real estate is a broken marketplace filled with overpaid agents and excessive commissions. But there is another way to look at the problem. A real estate brokerage is paid what a consumer agrees to pay it. Commissions and brokerage fees are negotiable. The problem is that, historically, many consumers haven't approached them that way. Consider a typical home seller. The seller interviews four agents. Each presentation is a little different, but much of the conversation is similar. Experience. Marketing. Photography. Exposure. Communication. Pricing strategy. And inevitably, the question the seller cares about most:

“What do you think my house is worth?”

That's understandable. Most people sell only a handful of homes in their lifetime. It may be one of the largest financial transactions they have ever completed, and they're trying to determine whom they can trust with it. Suppose the seller chooses an agent. The listing takes 10 days to prepare. The home hits the market, receives an acceptable offer three weeks later and closes roughly 40 days after that. The home sells for $700,000. Then the seller sees the closing disclosure and the line that states “real estate commissions” says $42,000. Nothing was hidden. The compensation was discussed when the brokerage was hired, and compensation-related terms may have come up again as the offer was negotiated. But percentages can feel abstract and at closing, the percentage becomes $42,000 of the seller's money. Suddenly the seller looks back at the roughly two months between hiring the brokerage and closing the transaction and asks themselves a question that probably should have been asked during the original interviews:

“Why did I agree to pay this amount?”

 The interview was backwards. This is where I think consumers misunderstand their position in the real estate marketplace. Our seller interviewed four agents, but the conversation focused primarily on which agent the seller wanted. Very little attention may have been paid to how badly those four agents wanted the seller's business. When we look at the economics of that interview there may be dozens—or hundreds—of qualified agents and brokerages competing for listings in a particular market. There is only one seller sitting at that kitchen table with that particular house to sell. The Seller has the leverage. Yet consumers often approach the interview as though they are applying to the agent rather than the agent applying to them. Sellers should change the questions being asked.

Instead of only:

“What do you think my house is worth?”

Ask:

“Why is your fee structured this way?”

“If we choose your brokerage, are you willing to provide these services for less?”

“If part of what we're paying is intended to compensate another brokerage, what happens if the buyer doesn't have one?”

“Why couldn't the buyer negotiate and pay for their own representation?”

Those aren't hostile questions; they are questions a consumer should ask before agreeing to spend tens of thousands of dollars. Treat it like hiring any other kind of professional. Imagine a business owner interviewing candidates for an important position. They wouldn't simply determine whether each candidate was qualified and then hire the person who gave the best interview. They would compare experience, capabilities, expected compensation and the actual scope of the job. Real estate representation shouldn't be fundamentally different, but it has been presented as such. One agent may have considerably more experience than another. A particular property may require substantially more work. A brokerage may have policies governing the fees its agents can accept. And an agent is perfectly free to decide that a proposed fee isn't enough for the work involved. Negotiable does not mean every agent has to say yes. It means the consumer is allowed to ask, and if the answer is no, the consumer is allowed to interview someone else.

Price and value are not the same thing. This also doesn't mean the least expensive brokerage is automatically the best choice. Paying $10,000 for poor representation isn't a bargain simply because another brokerage wanted $20,000. But the reverse is also true; a higher fee does not automatically prove greater value. That's why consumers should compare everything.

“What services am I receiving?”

“What experience does this person have?”

“What will this brokerage actually do?”

“What am I being asked to pay?”

“Is that price justified by the value I'm receiving?”

Those questions are routine almost everywhere else in the economy, and they should be routine in real estate too. The consumer has more power than they think they do. Real estate operates in a competitive marketplace. Brokerages compete for listings. Agents compete for clients. Consumers decide who to hire and what terms they are willing to accept. That means the seller sitting across the table from an agent isn't merely asking:

“Will you represent me?”

they are asking:

“Why should I hire you—and what will it cost me?”

If more sellers begin treating brokerage representation as a service they are purchasing rather than a predetermined percentage attached to the price of their home, competition can work the way competition is supposed to work. Some consumers will willingly pay more for a particular agent or service, and others will decide they don't need to. That's a functioning marketplace. The question isn't whether a real estate professional deserves to be paid, of course they do. The question is much simpler:

What is their service worth to you and what are you willing to pay for it?