Are Realtors Worth It?
A capable real estate agent is one of the most important members of your Power Team, yet they are often the hardest to find. Though I have heard investors say that they do not want to work with a Realtor®, I believe that a good Realtor is worth their weight in gold. As investors, we can use Realtors to help us find properties on the Multiple Listing Service (MLS), to help us crunch numbers, and to act as dispassionate negotiators. So, why would any investor not want to work with a Realtor? In short, the answer is the commission.
Does a good Realtor earn his or her commission? Does a good Realtor sometimes cut his/her commission? The answer to both of these questions is, “Yes.” As investors, it is imperative that we understand the ins-and-outs of real estate commissions so we can maximize our profit while still making the relationship profitable for these valuable members of our Power Team.
As we analyze a typical real estate commission, we will use a six percent commission on a $100,000 property, or $6,000. A common misconception is that the agent who lists the property gets the entire amount. This is not true. The reason that the MLS works so well is that the listing and selling Realtors share the commission.
In a typical transaction, there is a Realtor who represents the buyer and a Realtor representing the seller. They usually split the commission 50/50, although this amount may change depending on the listing agent. In an equal split of a $6,000 commission, each agent would receive $3,000. For example, if I listed your property today, I would go to the MLS site, enter all the information about your property, and offer to split the commission with any Realtor who brings in a buyer. In other words, any Realtor can show and sell another Realtor’s property.
Realtors are usually able to sell a home faster than someone trying to sell their home on their own. Realtors work with one another, causing their properties to sell more quickly. For this reason, it is beneficial to use an agent when putting offers on listed properties. Since the seller already plans on paying a commission, it may as well go to the agent that works hard for you.
Although $3,000 may sound like a lot of money to be paid to each agent for spending a few hours showing homes or marketing the property, they are not often able to count all of that money as income. A Realtor must be affiliated with a company. There are two different types of real estate offices: straight commission split and monthly fee with a per-transaction fee. The difference between the two lies in how much of the money made is actually received by the agent. In an office with a split, a portion of the money goes to the agent and a portion goes to the broker. Most new agents start at a 50/50 split and work their way up the ladder to a 70/30 split. In the other scenario, the agent pays a monthly fee to the broker and a transaction fee for each closing. In both situations, the agent has to pay all of the fees out of their portion of the commission. This would include advertising, licensing fees, MLS fees, key box fees, annual dues, etc. These are normal costs of doing business, but can be very expensive.
The second thing to keep in mind when selecting an agent is whether or not they have to get permission to cut their commission. The type of brokerage your agent works for will impact how much of a discount they can give to you. If the agent is on a monthly fee, the brokerage does not care what they charge. The agent is renting the company name and is paying that monthly fee whether or not they are making any money. When they have a closing, they are going to pay the transaction fee no matter what the commission amount ended up being. Because of this, they can negotiate their commission.
If the agent works for a brokerage that has a minimum amount they are required to charge for the commission, it will impact how flexible they can be with their commission. For example, if they work for a company that wants the agents to charge a six percent commission, then their portion would be three percent for each side. Let’s assume that our agent is on a 70 percent split. On a $3,000 commission, the brokerage would expect to get $900 ($3000 X 30%=$900). In this case, the company may say, “You are welcome to cut your commission, but not our portion of the commission.” This means that the smallest commission they can work for is $900, however they would not be making a penny on this particular transaction. As a matter of fact, they will be losing money when the cost of advertising is taken into consideration. This type of agent can sometimes negotiate the commission, but they will have to run it through the brokerage, and they will not be able to discount the commission as much as a different type of agent.
Now that we have discussed how commissions are split, it is important that you become familiar with how to ask for a discount. One of the first questions new investors tend to ask is, “Will you cut your commission?” This is a dangerous question to ask until you have built a relationship with that agent. Right off the bat, you are not only asking them to give you more of their time than a typical homebuyer would require, but to do it for less money. Can we ask an agent to negotiate their commission? Absolutely! However, be realistic. If the agent is not going to make any money, why would they work for you instead of choosing to work with another client who is not asking for a discounted commission? If they have to choose between your discounted commission and working for a full commission, they are going to choose the larger amount every time. We have to show them we are going to give them volume as an incentive to work for less pay.
We already discussed that the original commission amount is established between sellers, or in this case, between you and the listing agent. When you ask your agent to cut the commission, make sure they never discount the portion of the commission that is being given to the buyer’s agent. As a matter of fact, you should increase the amount going to the buyer’s agent whenever possible. If you were offered two identical jobs, but one of them paid 15 percent more than the other job, which job would you take? The answer is obvious. This is also true of agents. If an agent is showing homes to a buyer, and one of the houses is offering a 3.5 percent commission, or even a four percent commission, while the rest are only offering 2.5 percent to three percent commission, which home are they going to show first? It is likely to be yours. If your house is getting shown more than all the other houses, which house is going to sell first? Yours! The holding costs on properties are stressful and expensive. If you can sell a property faster by increasing the amount the buyer’s agent gets paid, this is a simple way to solve both problems. You should keep in mind, however, that if you are asking your agent to cut the commission, while keeping the buyer’s agent’s commission the same, you are not going to get as much of a discount. Therefore, I would suggest that you budget in such a way that you are able to pay a higher commission when you purchase a property, so that you are less likely to experience problems selling it.
In summary, Realtors are expensive! But in my opinion, they are well worth the added expense. Budget for commissions each time you purchase a property. Find an agent who is willing to work with you. Build a relationship first, and then ask them to negotiate their commission later.
.