How to Avoid Paying Commission
Updated: Jul 30, 2019
Did you know these true facts:
The search engine Excite passed on a deal to buy Google for under $1 million in 1999;
There's a basketball court above the Supreme Court aptly referred to as the Highest Court in the Land;
Real estate commissions are negotiable.
It’s true. Commissions are not set in stone (and thanks to Mental Floss and Atlas Obscura for the first two facts).
In my first podcast, I discussed how real estate agents, as a profession, are often tone deaf when it comes to how we are perceived by the public. I don’t know if there’s anything less discussed and more misunderstood than commission. As a profession, we’ve not done much to educate the public on this aspect that is often the biggest seller expense in the sale of their home.
What is a Commission?
Simply, a commission is the compensation a real estate agent receives for services, specifically, representation in a real estate transaction. Other services include marketing your home (sellers) or finding you a home (buyers). A commission is NOT a tip for the joy of working with a real estate agent. One of the biggest complaints I hear about commissions is that an agent didn’t do anything and got a big paycheck.
If your agent “isn’t doing anything”, it’s time for a new agent. Seriously. Remember, you are paying for a service. Contact your agent anytime and ask for a progress report. Discuss what is being done to market your home and the results. Does this align with what the agent promised before taking the listing? Even a discount brokerage is obligated to a minimum level of service.
Hold your agent accountable as you would any professional you hire. Not everything we do is readily apparent. A professional will have no problem discussing, in specifics, what they are doing to market your property. If you still feel your agent truly “isn’t doing anything”, then it’s time to move on.
Did you know, real estate agents can not legally discuss commissions with each other? It’s true! Discussing compensation and terms runs afoul of antitrust laws and is a violation of the Fair Trade Act.
This brings us to a big truth about an even bigger myth: there is NO “standard” commission. Let me just say again: THERE IS NO “STANDARD” COMMISSION. If you take anything away from this post, just know there is no standard commission.
Commissions are negotiable. They always have been. Says so right in the contract. And yet, most people don’t know that. It’s perfectly reasonable that an agent sets a minimum fee for services and that’s just fine. If you’re satisfied with the service(s) being offered for what you’re paying, then excellent! (I once received a very kind compliment for a client at the closing table. As our escrow officer reviewed her line items, we got to the commission and she replied, “Best investment I could have made!”)
This brings us to a big truth about an even bigger myth: there is NO “standard” commission.
Likewise, a commission does not have to be tied to purchase price. It can be a flat fee, conditional fee, sliding scale, a bushel of apples — really anything of value — so long as the parties agree to it. But it’s customary to make the commission a percentage of the purchase price, thus providing the listing agent an incentive to negotiate the highest and best offer for their client(s).
“Negotiable” does not mean you determine what you’ll pay and an agent must do it. It does mean you, as the client, are now empowered to have an open discussion about your goals and expectations while the agent can present their service(s) and how they help you achieve them.
PRO TIP: Be cautious of fees such as Brokerage, Transaction or Document Fees. These are forms of compensation and must be disclosed but are not the same as commissions. Some agents don't address fees until they present the Listing Agreement. Fees will reduce your net proceeds. Discuss fees with your agent BEFORE signing any agreements.
Some agents may offer to reduce the number of services to reduce their fee and if you’re good with that, then great. If it’s not a fit for either of you, then no hurt feelings. Just move on.
I have found that many people may view the discussion as adversarial and want to avoid confrontation. Remember, it’s a business transaction. A real estate professional will not be offended discussing their service and compensation. Personally, I like to broach the subject to ensure we talk about fees because I always assume a prospective client will interview multiple agents. I’m confident I offer my clients the best service for their money to achieve their goals. I’ve found many real estate professionals have the same mindset.
How to Avoid Paying Commission
Fact: A commission is not legally required in a real estate transaction. It’s true. Just like an attorney can work pro bono, a real estate agent is not required to charge … well anything. It’s not defined by law because, you know, anti-trust laws.
But hang on. It’s the 21st century and there are a host of real estate saviors storming the market to save you from the plague of commission. The marketing campaigns vary but convey the same message: real estate agents are bad, they charge you way too much in commission and they are here to save you money … in commission! You know, not all heroes wear capes; some of them have dot com after their names and they are here to save homeowner humanity.
And many do exactly what they say they are going to do. They save the consumer in commission. Sounds great! But before you hand over your financial goals to a faceless start-up, take note that they promise to save you commission, not net you more money. Wait, what?
I Want to Steal Buy Your Home
Let’s say you decide to sell your home on your own (For Sale By Owner). I, a real estate professional with knowledge of the local market, want to buy your home to add my budding real estate empire. My empire may include a Lego castle but we’re just dreaming right now. Stay with me.
I produce a (cherry-picked) market analysis, tell you what your home is worth and then make you an offer below that price. As a benefit to you (and by you, I mean legally unrepresented homeowner), I’ll provide you with all of the documents, tell you where to sign and we’re done! You walk away with check in hand. So easy! By the way, you'll need to pay me 8% to buy your house.
You read that right. I’d like you to pay me to buy your house. Yeah, I know that sounds crazy but really, I want you to pay me to buy your home. On the plus side, I’m not asking for closing costs here. Actually, I am asking for closing costs but not much because I’m going to require you to use the title company that I own.
That scenario is absolutely ridiculous and yet, many people are enthusiastically doing just that when they sell their home to an iBuyer (yeah, looking at you OpenDoor and OfferPad) to avoid paying commission and/or working with an agent. Consider:
Selling your home below market automatically reduces your net proceeds so you are starting off in the wrong direction;
iBuyers only promised to save you on commission which they did. Be prepared to pay a “convenience fee” between 6% - 13% of the purchase price.
The iBuyer provides you with the documentation but they do not represent you and therefore, are not looking out for your best interests.
Foregoing representation is a bad idea. You wouldn’t go into court without an attorney. Don’t go into a real estate transaction without an agent (or RE attorney);
And can we just agree that the Buyer telling you what your home is worth and then offering BELOW that is rather audacious?
Your Home Is Your Investment
I’m not saying anyone should or should not use OpenDoor, OfferPad, Zillow Offers or other iBuyers. Likewise, I don’t pass judgement on anyone that has. Every situation is different.
Interview a few agents and see how they compare to each other and to the iBuyer offer. A professional will provide you with an estimated net proceeds sheet.
A net sheet includes your estimated sale less itemized expenses such as loan payoff, title and escrow fees, taxes and commissions. Seller services should include marketing, regulating access to the property, providing and guiding you through the documentation, assisting in negotiations and professional representation.
The home is the largest investment most people will make. Get the most out of your investment from a professional aligned with your goals. You’ll likely find that saving on commission with an iBuyer will likely cost you more and certainly net you less.