Real estate commissions on the up

Jun 13, 2011

As the housing market has soured, real estate commissions have managed to climb. Post reporter Dina ElBoghdady and real estate editor Elizabeth Razzi take your questions about this phenomenon.

Hello, everyone! Welcome to this special-occasion chat. Dina ElBoghdady's story about trends in real estate commissions is an interesting one. The owners she highlighted seemed to have tried every way of marketing their house -- traditional agent, FSBO, discount agent.  They found two things: If you're going to offer a commission, it needs to be high enough to attract agent's attention. And, it doesn't matter what the commission is if you get the home's price right. Dina was able to answer a couple of questions before rushing off to an interview. So, let's talk. What are you seeing out there in the marketplace, especially in terms of real estate commissions?

Do commissions correlate with real estate market health? One would think that in hard hit areas like Tampa, Las Vegas, Phoenix, for example, agents would be willing to negotiate because a lower commission is better than no commission.

When it comes to foreclosures and short sales, the banks tend to offer much lower commissions than in traditional sales.   Therefore, average commissions are probably lower in the areas you mention.

 

I allowed my neighbor to put in a turn around at the end of the easement through my property to his. He put in a very elaborate bricked in area with plantings and a waterfall. It's very attractive, but I didn't expect him to go quite so whole hog. Does he have any rights to that part of my property when I go to sell my house? I gave him temporary permission and I pay taxes on the property.

Hoo-boy. That's one for a real estate lawyer. It might be worth a short consultation with one over this. Whose responsibility is it to maintain the waterfall? Will this improvement boost your property tax or liability insurance? And it's a good question whether this easement might turn into a de-facto acquisition of property. Any lawyers out there want to comment?

Have their been any rigorous studies of net difference in revenues to the seller using an selling agent versus no agent?

Not that I know of. The National Association of Realtors does some studies on this, but I would imagine that it's tough to get a true apples-to-apples comparison. And from their studies, they always note that a lot of FSBOs (with no agent) are between relatives, neighbors or friends. The price might be a little soft, for example, if you're buying a house from your parents.

I sent an email this morning, as a Realtor, I have been giving 30% of my 100% commission back to all buyers, in hopes that this helps them in their purchase, so for me while commissions are up, mine is down. I think buyers should try to work with Realtors that will help them. Henry Immanuel: hwmimmanuel@yahoo.com

Thank you Henry Immanuel -- at least you know how to do cost-effective marketing for yourself. You're not really charging a 100 percent commission, though, are you? Seems a tad high.

What is a reasonable rate to offer in the Washington region at this point in time?

Excellent question. I certainly can't dictate it. Chatters -- anyone want to share what commission they've paid recently?

Can't tell you how empty my alternate Fridays have become... Not directly on today's topic,but... I keep seeing articles on internet news sites about the "problems" in the housing market. Can you explain why from a national perspective, we should want housing to be expensive? Why are high availability and low cost a "problem" for anyone other than sellers who were hoping to cash top dollar?

Hi, Chatter. Thanks for beeing sweet. I've missed these chats, too. Hey, it's in everyone's interest for people to be able to find a home they can afford, isn't it? The "problems" now are that people are paying mortgages based on prices set 3 or 4 years ago. Or their income has been drastically reduced because of job loss--or re-employment at a lower pay rate. It's tempting to assume that everyone who bought at the peak of the market were spendthrifts buying mini-mansions with no downpayment. There was that -- but there were also many, many people just trying to find a decent place to live and raise a family. They had to out-bid other buyers, eliminate reasonable protections (like inspections) from their offers and make snap decisions. That's the way it was. And, if you recall, renting was no sure thing either. I know quite a few people who got turned out of their rentals when the owner decided to go condo or sell. So, nationally, the problem is there are a whole lot of people now stuck in untenable financial situations because of the housing bust/recession.

When we sold our house in Chevy Chase last December, we had negotiated that the commission would be 5 1/2% rather than 6%. Before the contract signing, I had suggested that the commission should be either 5% or 5 1/2%, and the agent said she was willing to accept 5 1/2%. The amount of the commission was still sizable for the real estate company and agent. The point is that it may be possible to negotiate a lower real estate commission if sellers are not too shy to make the request.

Thanks for sharing that!

It's nothing new. It's called good ole' fashioned greed. Poor sellers these days need to entice buyer realtors to bring in their clients by offering higher commissions and bonuses. I had to do that when I sold my house in PG County 4 years ago.

Is it still absolutely necessary to market through the real estate agents representing buyers? You have to be determined, but there are discounters and online brokerages that can help you do it for less.

to restate that I am an agent that if the commission is 6% I would then get 3% of which I would give the Buyer 30% of my 3% split. Henry Immanuel

Gotcha, Henry.

Perhaps this is just a freak accident or perhaps things might be turning around. I have a colleague who sold a house in Louden County in 30 hours with five bids, three of which had escalation clauses, and ended up selling well over listing. The agents said these were the first escalation clauses they had seen in a really long time. House was listed just below the other houses in the same development that have been on the market for a while, but the escalataion clauses pushed it substantively above. This may be just a one-off as I am seeing lots of houses not moving. Just an observation from the field.

I don't think it's quite that freakish -- I'm hearing of multiple bids in the DC area again. What I want to know is what happens with that appraisal! Will it support that price? Do they end up renegotiating the price lower after the appraisal comes in? If you know, drop me a note at razzie@washpost.com

I find some Realtors can be rather disingenuous when discussing home pricing, commissions, and net-to-seller numbers. They seem to disregard the fact that "net-to-seller" does NOT mean the amount the seller will get after subtracting any concessions/seller subsidies from the contract price. It means the amount the seller will get after subtracting the subsidies, commissions, and other seller-paid costs from the contract price. This makes a big difference when discussing a pricing strategy. Listing agents must be willing to make their commissions flexible and understand that a seller deserves to make some $$ from the home sale too, and if it means reducing the commission by a percentage point or two in order for the deal to go through, then that's what they should do. A low commission is better than no commission, especially in the Internet age when listing agents really don't do much at all.

Over the years I've heard many agents say they sometimes shave a bit off their commission if buyer and seller are at an impasse. The agent sometimes takes the difference out of their commission. They don't exactly offer to do that at the time of listing, though.

I thought I read somewhere that Congress is considering getting rid of this. That would be a tragedy! Is this true?

That proposal is still on the table. So, chatters -- the ones who aren't real estate pros -- would eliminating the tax deduction change your mind about owning? Or, if your overall tax bill stayed the same, would it be okay with you?

I suppose selling a house today takes more grunt work than five years ago. Back then, weren't salesman accepting cut-rate commissions when all they had to do was put the listing up and wait for closing?

There was a lot of that happening. And the Real Trends people quoted in the story said that's one reason why commissions have increased lately.

What's the justification for real estate commisions being a percentage fo the sale price? It's not fundamentally more work for the realtor to sell a larger house, the paperwork is all the same and they aren't responsible for cleaning and prepping to show the house, the owners are. Also, as was pointed out in Freakonomics, it doesn't really provide a meaningful incentive for your realtor to negotiate hard and get you a better price on your sale, since an extra 10k in sales price only means about $100 more in their pocket after the commision is split and the brokerage takes their cut. So I struggle to understand how this percentage pricing model persists. Seems like it would be better to start with a base price and fixed commision, and offer meaningful incentives for a higher sales price (say 10% bonus on every dollar above an agreed-upon threshold).

Well there are some brokerages out there that do a fixed-price service. The escalating bonus is an interesting idea--and there's no reason sellers can't try to negotiate that into their listing contracts.

It often occurred to me during the 6 months my condo was on the market (I gave up and took it off recently) that if the realtor was willing to take a lesser commission I might have been able to sell. I was already asking rock bottom price. If I'd asked for any less it would have been a short sale. As it was the condo didn't sell and she made no commission. Oh, well. I'll try again in a year or so.

Lots of people (especially condo owners) are in your situation because the value of their homes have eroded.  I'd be interested to know if you asked the agent to lower the commission and what his/her response was.   

"Soaring" commissions? Going all the way from 5% to 5.4% is "soaring"? I am in the middle of selling and buying, and I think my agent more than earns her commission by taking me to dozens of homes and staging our current house and keeping us posted on sales and price trends. I have no problem with this. It maybe feels worse for sellers because they pay all the commissions, but buyers pay their share of costs for no reason other than that it historically evolved that way. This seems like an unfair headline just to gin up attacks on agents.

If anything, this particular story points out the value an agent can add.  After all, we featured two guys who started out on the "for sale by owner track" but chose to hire an agent in the end. The story goes on to say how the agents helped these sellers stage the house and set the right asking price.  Hardly what I would describe as an attack on agents.

 

Regarding the issue of whether real estate should be "expensive" or not. Everyone agrees that prices were driven up by irrational forces, but those of us who DIDN'T buy during the bubble and need to sell now are being forced to sell at irrationally LOW prices, driven down by foreclosures and short sales. It always seems to come down to the appraisal. If appraisers were prevented from using short sales & foreclosures as comparables (or at least not allowed to give them the same "weight" as regular sales), those who are selling for rational reasons would have a fighting chance. Leave the foreclosures & short sales to the investors and the cash buyers, but separate them from the regular-sale marketplace. A lot of people want to buy turnkey, move-in-ready properties but are trying to buy them at fire-sale prices because their perception of "value" has been skewed by all of the foreclosures and short sales.

There's also the fear factor. If buyers are afraid that prices will continue to go lower, they will make smaller offers. Tell us, though, if you've had higher offers that were shot down by an appraisal. Or is it that the market is telling you that today's price really is lower than you wish it were?

What affect do higher commissions have on price creep?

Well, sellers sell for as much as they can get. That's always true. If commissions were cut in half, hypothetically, do you think sellers would lower their asking prices? I don't think so.

This is not about real estate commissions but a related topic... Can you give us an update on the state and federal investigations into that robo-signing mess?

Everything is in limbo.  The attorneys general, Justice Department and other federal agencies are trying to negotiate a settlement with the nation's largest mortgage servicers.  The Office of the Comptroller of the Currency and the Federal Reserve have reached a separate agreement with 10 servicers that calls for several things -- including having those servicers review foreclosures for the past two years and provide restitution to homeowners who were wrongfully harmed.  The banks must submit a plan of action on how they plan to comply and they have another 30 days to meet that deadline.  

Ahhhhhhhhhhhh yes. I would love to sell my nice condo in Arlington. If I didn't have to pay such a ridic amount of commission, I would lower my price.

Interesting -- thanks for sharing that.

I just heard from an NVAR official that your claims about commissions soaring is wrong. Closings in Fairfax for example fell 34% in April year to year while it fell just 27% nationwide. And NVAR says that commissions averaged 4.9% all last year. There has been some pick up because some banks give up to 6% on foreclosures and short sales and they are always no less than 5%. And any relocations do pay 65 but one has to give back 35% for a referral. Teh federal budget is about to be slashed and I think that JOhn Mccain or Sen Shumer will not cut at home and still pay unlimited money to DC area contractors. The truth is we are facing a collapse of the regional economy not like what we have ever seen before. And we have lost 4,000 agents in the past three years and many real estate offices are being closed. Weichert closed it Worldgate office and LF closed their Herndon office. MOre than 14 offices in greater NV have been closed but the Post never reports that. Just puff stuff. Where is the article about the # of gents decline 35% coming out?

According to Real Trends, which has been doing its surveys nationally for years, the commission percentage has gone up. That's certainly not to say every agent has shared that increase. Many, many agents have gone out of business. Some of them were experienced agents who were knocked out by this horrible recession. But there were also a lot of agents who got a license at the height of the market--looking to cash in on the boom. And when the crash came, some of them had no idea how to actually SELL a property that didn't sell itself. From a consumer's perspective -- which is what we write for in the Real Estate section -- the decline in number of agents is just a small piece of the big unemployment story.

How are the commissions calculated? Why aren't commisions,say, 8.2% or 2.4%? Is it a banking speadsheet kind of thing?

I don't understand what you mean by a banking spreadsheet thing. Brokers decide what commission their brokerage will ask for; sellers agree to pay it -- negotiate it lower-- or hire someone else.

A home in my townhouse development recently went under contract at what we all thought was a reasonable, if slightly low, price. The deal was killed by the appraisal coming in much lower than expected. The appraisal was completely skewed by the appraiser using a short sale and a foreclosure as comparables. They were not remotely comparable to the subject property -- they'd been trashed by their owners and had been vacant for months before the sale, while the subject property was owner-occupied and in move-in condition. Had the appraiser used truly "comparable" sales (i.e. non-duress, arms-length transactions) from nearby developments, the appraisal would have come in much higher. There IS a material difference between a turnkey, well-maintained property and a vacant, distressed property and appraisers should be forced to look outside the immediate subdivision if truly "comparable" sales aren't available within the same one.

Thanks for sharing that. This seems to be a real problem for many people.

Saturday's Real Estate section will have one of our Inhabit features on design and architecture. Lovers of the arts, and the opera in particular, are going to enjoy this peek at a celebrated artist's retreat in the shadow of the Blue Ridge.

In This Chat
Dina ElBoghdady
Dina ElBoghdady is a real estate reporter who writes about the mortgage and banking industries for The Post.
Elizabeth Razzi
Razzi authors the Local Address blog and is the editor of The Washington Post's Real Estate section. She is the author of two consumer-advice books: "The Fearless Home Buyer" (2006) and "The Fearless Home Seller" (2007).
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