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Negotiating Commissions: What Agents won’t tell you

by sfishome on October 10, 2006

Everything is negotiable. When an Agent tells you “I can’t” or “I won’t” he/she is either telling you their personal policy, or their company’s policy. There is no State, Local or Federal law that mandates commissions. It is ALL negotiable. If you can dream it up, it can be done (one such story is below). Whether or not it’s the smart thing to do for you is more than one blog post can handle, but I’ll try to share what most Agents either don’t know, or aren’t willing to tell you.

Commissions 101:
Seller’s generally negotiate commissions with their agent, the “Listing” Agent. San Francisco’s most common commission is 5%. Most of the time 50% of this commission is offered to “Buyer’s Agents”, and most times a Buyer’s Agent is involved. So most agents earn 2.5% of the sales price in every transaction they’re involved in. 2.5% of a $1 million property is $25,000, but then most Realty firms take 30% to 50% of that commission. So the Agent’s “gross” commission is $12,500 to $17,500, and from this we pay for nearly everything a typical office worker takes for granted; health insurance, office supplies, office space, marketing, taxes, etc, etc. Taxes alone mean we probably net no more than $9,000 to $12,000 on a $1 million sale. But since you’re probably not crying for us agents, let’s move beyond Commissions 101.

Dual Agency:
This is when an agent represents both the Seller and Buyer. This most often happens when the Buyer is searching for homes without their own agent (not wise, but many Buyers start out this way before they consider themselves “serious”). The Listing Agent offers to help them write up an offer, or have a colleague write up the offer (often for a very small cut). Thus the Listing Agent earns close to or the full 5%. In this instance the Buyer can try to reduce the purchase price by 1% or 2%. Sounds easy, but it can be very difficult since most unrepresented Buyers don’t know what’s possible, or how to do it. Again, this is a long subject on negotiating in general, and is often property and situation specific. One strong piece of advice – ask a LOT of questions. You want to know the Seller’s motivation for selling, how long it’s been on the market, what comparable properties have sold for, and more. You might over-pay for a “stale” property by $50,000 and save yourself $20,000 in commissions which is still a $30,000 loss to you by trusting the Listing Agent to represent you. Be very careful with agents who say you don’t need your own agent.

Leverage:
Don’t negotiate with the person with all the power and leverage. As a Buyer, a Listing agent in a Seller’s market has no reason to give you a commission break. There are 10 buyers behind you trying to buy the house for full price with full commission. Additionally, in a Seller’s market, Buyers are a dime a dozen. A Buyer’s Agent has too many Buyers and can’t get them into homes given all of the competition to “win” the bid. So if you ask for a piece of their commission, they’ll just move on to another Buyer. And without a Buyer’s Agent in a Seller’s market, you stand little chance of “winning” a bid against buyers with knowledgable representation unless you severly over pay.

However, as a Seller in a Seller’s market, you are in total control. You can negotiate an extremely low commission because nearly any decent agent will sell your home quickly for top dollar (but be wary of branded “discount” brokers – that’s another blog for another day), and the Buyer’s Agents won’t have much choice but to accept what you give them since it’s so hard to find homes for their clients. Similarly, in a cold Buyer’s market, the Buyer is in total control. I had one Buyer who made an offer that excluded the commission from his offer, and made his own Commission offer. In this particular case the Seller had agreed to pay 6% total with 3% to each side (it was a tough property to sell in a slow market, so he paid top dollar in commissions hoping the job would get done – ie Seller had no leverage). The Buyer deducted 6% from his offer, and wrote up a “Commission Offer” paid by the Buyer of 5% split evenly between the two agents. The Seller’s net was still the same, and both the Buyer and Seller got tax advantages (although relatively small) while the Buyer effectively paid 1% less than he had to. The reason this worked was that the property had been on the market for 3 months and the Listing Agent really had no choice but to agree since no one else was making offers. I represented the Buyer and just did what he wanted, and what was in his best interest. My Buyer actually saved more than 1% because our offer was very low as well. The Seller very reluctanly sold at this price because my Buyer made it clear he was willing to walk away if his price and terms were not met. Again, this was a very stale, unwanted property.

Today’s Market:
In today’s more balanced market (albeit still a Seller’s market in most of San Francisco, just not over-heated) I personally find it far easier to attract Buyer clients. Therefore, it is fruitless for a Buyer to try to negotiate a commission with me up front. However, if they find a stale listing, the above strategy could work. In the above case I was paid a fair commission, and we just needed the other side to agree. Since the market still favors Sellers (Sellers with realistic expectations that is) they are the ones with the most leverage to negotiate. I personally have some unique “Win-Win” commission programs for Sellers that I would not offer in a Buyer’s market, but am offering now.

An entire book could be written on this subject, so I suggest you interview several agents, and ask a lot of questions until you find the agent you like, with the “deal” you want. Hopefully I’ll be one of those agents!

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