Real Estate Commission: How Much Should You Pay?

Realtor commissionIn today's turbulent housing market, where supply outstrips demand and strict lenders hobble buyers, it pays to have an expert guide you through your home sale. But when the ink dries and the deal is closed, just how much of your hard-earned money should go toward the agent's commission? Not as much as you might think.

It used to be conventional wisdom that a full-service broker was paid a flat 6 percent of the sale, regardless of the state of the market. But according to data from real estate research firm Real Trends, that hasn't been the case since the early 1990s.

"I don't think we'll ever return to an average 6 percent in the U.S.," said Steve Murray, editor of Real Trends.

When the market was really churning in 2005, brokers were taking, on average, a 5 percent commission, the lowest that Murray had seen since he began tracking the data in 1991. But despite the recent slump in home sales, commission rates have only crept up a little – and that's good news for today's sellers.

It's Negotiable?

A lot of homeowners don't realize that commissions are negotiable, and hashing out a mutually agreeable rate should be part of the process of choosing who to give the listing. But there's a limit to how low an agent will go. The vast majority (68 percent, according to the National Association of Realtors) are paid on a split-commission model, which means that they share their commission with the buyer's agent and also must give a cut to their own employer. If the commission rate is set too low, your agent might have a tough time finding a buyer's broker willing to share such a small pot.

Before making a final decision, speak to at least three agents to gauge their flexibility, as well as their knowledge of your community.

Consider also that, in most cases, your agent doesn't earn a dime until you sell your home. In May, the median number of days on market for a listing in the U.S. was 95 days -- that's more than three months before your agent sees the fruits of their labor.

For that reason, most will want an "exclusive" on the listing for at least three months -- but anywhere from six months to a year may be reasonable, depending on the strength of your market.

In 2010, the average full-service commission rate was 5.4 percent. At that rate, on a $300,000 home sale, your agent would make a little over $16,000. But of that sum, they'll have to give about half to the buyer's agent and, depending on their experience, another half to their brokerage -- leaving them with about $4,000 for a deal that may have taken several months or longer to close.

How Competitive Pricing Saves Money

One way to both save on commission and make your agent happier is to price your house as competitively as possible. The promise of a quick sale is likely to motivate the agent to take a smaller cut, and you'll boost your chances of finding a buyer sooner. The longer your house lingers on the market, the dimmer your prospects will appear -- so while your first priority should always be to get the best price for your house, your agent might be onto something when she suggests that you price your home closer to market value.

If you're looking to pay even less in commission, you might consider a discount brokerage. These agencies use alternative pay structures that can go as low as 2 or 3 percent for stripped-down agent services. Be aware, however, that going this route requires significantly more time and effort on the seller's part, and isn't recommended for real estate novices.

The most important thing to keep in mind is that the commission rate, like any other fee associated with your home sale, is paid against the final price tag that your home commands. The more attractive you can make your home to prospective buyers, the more satisfied you're likely to be with the money you've spent to market it.

For more on real estate brokers and related topics see these AOL Real Estate guides:
Also see:
Home Sellers Step In Where Banks Fear to Tread

The Best on the Block: Luxury Homes at Auction
Unreal Estate: Home Seller Throws In $1,000 Worth of Booze

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