Mike Explains: Why Real Estate Commisions Are So High?

Imagine, if you will – you’re about to sell your home. You’re speaking with local agents you are familiar with, asking them about the closing costs of the sale. They list insurance, escrow fees, transfer taxes, and… commissions.

They list a commission between the 5 or 6% range. Come to think of it, your home is valued roughly at a million dollars - that’s $50,000 in commission. Your home is great and should be an easy sell. You’re an astute business person and ask yourself; what value do real estate agents offer, and why are the commissions so high?

Real estate commissions typically range from 5 to 6% and are paid out of the seller's proceeds. Commissions may vary and be negotiable depending on the price range, market, and brokerage. However, this basic range of commission has held amazingly consistent for decades. There are several reasons why. 

That hefty 50K commission is divided and split. A typical scenario would be 50% to each brokerage. $25,000 going to the seller’s side and $25,000 to the buyer’s side.

Then it gets split between the agent, the broker, and the franchise (if one is involved). These arrangements can vary. A standard one would be 8% of the top to the franchise, which is $2,000. Then the brokerage gets their cut. This number varies at 25% for the brokerage, which is $5,750, leaving out $17,250 for the agent.

Most brokerages have miscellaneous fees like transition, desk fees, errors and omissions, insurance premiums. That is approximately $850, leaving the agent with an earning of about $16,400.

It’s not 50K, but it is still may seem like a lot. Are our real estate agents overpaid? There is a lot more to it than most people think of.

Here are 12 reasons putting that commission into perspective: 

  1. Traditional real estate agents only get paid on the completion of a transaction. If the house does not sell, they do not get paid. (Attorneys who get paid on a contingency earn higher fees than by the hour.)
  2. Most showings do not result in a paycheck, as agents frequently show buyers who never buy and consult with sellers who do not sell. It is a big part of the business.
  3. An agent is supposed to put the client’s needs ahead of their own and often means that an agent works to help a client unwind and walk away. This is part of the agent’s job.
  4. Agents work long and often inconvenient hours. They are expected to be on during business hours and mostly available nights and weekends.
  5. Most agents are “independent contractors” that do not receive any benefits. Earnings may seem big but there’s no: overtime, sick days, vacation time, retirement benefits, disability, or health insurance. Plus, taxes are not withheld with does cause a problem for many agents.
  6. Agents have professional expenses.  This includes licensing fees, continuing education, and membership dues which run a few thousand a years.
  7. Most agents have marketing expenses. This is a big one. Agents have different strategies and budgets. Some examples include:
    1. The marketing card you got in the mail likely costs between 75 cents and $1. It was probably sent out to approximately 500 to 2,500 people. The agent covers this.
    2. Professional photography may be from $350 to $900 per property and a lot more for large expensive homes. Video is generally more expensive.
    3. Agents getting leads from Zillow are paying $2,000 to $6,000 per month. Many are paying a lot more. 
  8. Most high-producing agents pay a staff.  This includes licensing fees, continuing education, and membership dues which run a few thousand a years. Most high-producing agents pay staff, as are paying assistants, administrators, transactions coordinators, listing coordinators, and showing agents. This increases operational costs.
  9. Markets fluctuate. One good year does not make a career.
  10. Real estate sales are high-dollar transactions with many moving parts and responsibility falling on the agent. The commission is low compared to the dollar value and complexity of the sale. 
  11. Real estate sales may be stressful and emotionally draining. This is true for agents too. There is a benefit for the agent to have a vested interest in its closing.
  12. Real estate sales are a hard job. The majority who try to sell real estate for a living don’t make it. It takes a special kind of person to make it, and only a few are truly successful.

We are not saying real estate agents are underpaid, nor it is a bad occupation. There are lots of agents and brokers who have made a successful career out of it. At the Mike Dunfee Group, we have done well. Agents could certainly do a better job expanding their worth, and hopefully, this blog helps.

Here at the Mike Dunfee Group, we would be happy to discuss commissions or any other real estate questions with you more.

Dunfee Real Estate Services, Inc.

DRE # 02026232

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