How Hidden Commissions Impact Your Real Estate Transaction

Real estate fees charged by most brokers and agencies are intentionally unclear to consumers. The lack of transparency in the amount, as well as how it works or who pays them, means that buyers and sellers involved in the transaction are negatively impacted while often times being completely unaware.  

The Impact on Sellers

Real estate commissions average between five to six percent of the home sale price. That amount, which is split between the seller’s agent and the buyer’s agent, is paid by the seller upon closing of the transaction. The seller is frequently unaware of the actual commission rates until a 6 month listing agreement is in front of them for signature and most are uninformed that those commission rates are negotiable. Most sellers feel pressured to sign and end up losing their opportunity to shop around for other agents and potentially lower rates. To illustrate how this lack of information can result in sellers losing thousands of dollars from their home sale profits, we’ll play out a common scenario.

Michael and Jenny are selling their mid-priced home in San Diego for $500,000. They were referred to a local agent by a family friend and signed the listing agreement where they agreed to pay a 6% commission rate (3% to the agent representing them and 3% to the buyer’s agent). This amounts to $30,000 of their hard earned home equity. Had they paused to ask about a lower rate and potentially negotiated it down to a 5% commission, they could have pocketed an extra $5,000 from the home sale instead of paying the two agents.

The Impact on Buyers

When buyers learn that the commission is paid for by the seller, they stop asking questions, which is a mistake. What buyers don’t realize is that most sellers consider commissions when setting the price of their homes, and in the end, the buyer ends up paying for those commissions.  

In the case of Mike and Jenny, the buyer agent and selling agent stand to take $15,000 in commission apiece. If the buyer had negotiated down the buyer’s agent commission to 2%, that’s an extra $5,000 Mike and Jenny would have saved in commission, and the buyer could have negotiated the selling price of the home down $5,000. When presented together like this, Mike and Jenny would be more likely to take $5,000 less on the home since the net income after commissions are paid would be the same. And a lower purchase price for the buyer means a slightly lower monthly mortgage payments for the next 15 to 30 years!

Another distinct disadvantage to buyers who don’t understand the commission structure is that they are vulnerable to being steered away from their potential dream home by agents who are incentivized to only show properties with high buyer commission rates. When agents consider comparable, suitable homes for their buyer clients, will they show homes with 2% commissioned along with 3% commissioned homes equally? Not likely.

Ultimately, it pays to be an informed real estate consumer. Having a clear understanding of how the commission structure traditionally works and how it affects your home sale or home purchase can make a big impact on your next real estate transaction. Additionally, the lack of clarity from agents can also strain the relationship with clients because clients look for agents they can trust. It is difficult for clients to know that their best interests are being pursued if agents aren’t forthcoming.

All interested parties stand to profit from increased transparency with real estate transactions, particularly in regards to commissions. Unfortunately, lack of transparency is the current norm with agents and brokers. (Read our recent post ‘Are Real Estate Agents and Companies Hiding Information About Commissions?’ which explores a recent report published by the Consumer Federation of America). With the advent of companies like Zillow making home listings publicly available via the internet, the real estate industry has already reaped the benefits of increased transparency over the past decade. More visibility into commission rates from agents would increase competition in the market, lower rates for consumers, while also improving the quality of service, which are normative trends in other financial sectors. Increased transparency would increase consumer confidence in agents, which benefits the entire industry.

Until there is a shift in industry standards around commission rate transparency, consumers should be proactive in educating themselves about commission rate structures and be willing to ask uncomfortable questions to better protect their hard earned equity.

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