How to Save on Realtor Fees

When I announced that we're house shopping, I said that the realtor we were talking to was willing to negotiate his commission to save us some money. I also said that I'd talk about how we got him to agree to do this, and that's what I'll outline in this post.

Let's start with some basics:

1. In our area, realtors earn a 6% commission on average for selling a home.

2. The commission is paid for by the seller.

3. Generally, the commission is split evenly between the listing agent and the selling agent. If the listing agent also sells the home, he keeps the entire 6%.

4. Out of the fees the realtors earn, some (most? a majority?) goes to the agent's real estate office. This doesn't really impact the negotiation process, but I mention it just to round out the basics.

Now, here are some assumptions for our situation:

1. Our current house is valued at $200,000 (probably a bit less than this now, but let's use this as a round number.)

2. We're looking for a house in the $350,000 range. We could buy anything from $250,000 to $450,000, so I'm using $350k in this example.

So, given these basics and this situation, any agent we use to help us buy a home as well as sell a home will earn the following by being selected as our agent:

1. He'll earn $10,500 ($350,000 * 3%) when we buy our home. Yes, he could earn twice that if he was the listing agent too, but since this is rare, I'll assume he earns the lower amount.

2. He'll earn $6,000 ($200,000 * 3%) when we sell our house. Again, he could earn twice that if he found the buyer as well, but again, that's not likely.

Given these facts, we represent $16,500 to whatever agent we select. That's a good chunk of change. Realtor's like money, so it puts us in a good place to negotiate.

Now before we proceed, it's key to note that a majority of the $16,500 is not paid by us. The $10,500 is paid by the seller when we buy the home. We only pay $6,000 to our agent (plus another $6,000 to the other agent) when he sells our place. Needless to say, we'd like to minimize the amount we pay to our agent (there's little we can do to impact the other agent.) And since we have the $10,500 paid by someone else to offer our agent, we're in a good spot to reduce our costs.

I approached the first agent we talked to with these facts and he immediately understood what I was saying. He said he'd certainly reduce his commission on our house if we selected him as our agent. Notice that we're discussing this before we decide who our agent will be. In fact, I said something like, "IF we select you as our realtor, would you be willing to reduce your commission when selling our home?" The emphasis was on the "if" at the start of the sentence. We have the negotiating power at this point and it's key to use it if you want to decrease your commission.

We decided not to go with this agent, but we ran into another one we like and had her show us a few homes. After a couple weekends of this, I brought up the issue of a commission reduction IF we used her to buy and sell our homes. She said that of course she'd cut her commission. We agreed that she'd "only" take 1% on our home, making $2,000 from us if someone else sold our home. As such, we will end up saving $4,000 -- not bad.

Of course, the issue is how much work she'll do if we buy our home first and then rely on her to sell our place for only $2,000. But it's not like the agent does much anyway. Having her will get our house listed on the MLS system (the computer system all realtors use to find homes for their buyers) which is 75% (or more) of the value in having an agent in my opinion. So I think we'll be fine. Besides, I'm not 100% sure that we'll sell anyway, so we may explore some creative options for our current house.

So that's it in a nutshell. If you're buying and selling a home in the same market, you have great negotiating power. Use it and you can save yourself a bundle.

Comments

[Carl Heldmann]

First of all, you may think the seller pays commission, but the buyer is actually paying, as the commission has already been figured in the sales price, just like every product sold in America.
Second of all, real estate agents work harder to sell houses that have a higher commission! It's human nature. They may tell you this is not so, but what else would they say.
Carl Heldmann

[FMF]

Carl --

1. Not really. All a seller can hope to get out of the property is what the market will bear -- it's not like he can set the price he wants, add the commission to it, then see it sell in no time at all. It doesn't work that way. Price is determined by the market, the seller sets his price according to this (and if he doesn't, he won't sell the place) and THEN he pays the commission on the house.

2. Did you read what I said about how much a realtor really "sells" a house and the value of the MLS system? The real value is being listed and having OTHER agents sell the place (their commissions are not impacted by the arrangement I note above.)

[Kevin]

One flaw in that logic - what if the seller of the house you're buying has already negotiated a lower commission with his realtor? Then your realtor earns less than 3% on that transaction. If he figures this out ahead of time, it might further reduce his motivation to sell yours.

I think Carl is partially correct. Unless the seller absolutely needs to sell, they probably have a price in mind and won't go lower than that - figuring in the commission to get their net.

That being said, I think it is absolutely the right plan to negotiate commissions. In this tight real estate market, agents should be fighting to get business.

Just out of curiosity, what type of "creative" things are you thinking about for your current home?

[FMF]

Kevin:

"One flaw in that logic - what if the seller of the house you're buying has already negotiated a lower commission with his realtor? Then your realtor earns less than 3% on that transaction. If he figures this out ahead of time, it might further reduce his motivation to sell yours."

1. So far, we haven't seen any houses like this (it would have to be stated up front that this is the case if the BUYER'S agent was expected to take a lower commission.)

2. If it made that big of a difference to our agent, we could work it out. You can negotiate anything in real estate.

"I think Carl is partially correct. Unless the seller absolutely needs to sell, they probably have a price in mind and won't go lower than that - figuring in the commission to get their net."

Unless someone sets a price at the market, then they either need to be: 1) really lucky or 2) prepared not to sell their house. That's the definition of "market" pricing -- the market determines it, not a person.

For instance, if someone has a house valued at $200k by the market and they want to sell it for $212,000 (the market value plus their sales commission), why would it sell? No, they price it at the market (when i say "price it" I mean it's the amount they'll get for it regardless of their list price) of $200,000 and pay the commissions after that.

"That being said, I think it is absolutely the right plan to negotiate commissions. In this tight real estate market, agents should be fighting to get business."

They are.

"Just out of curiosity, what type of 'creative' things are you thinking about for your current home?"

1. Giving it away.
2. Selling it to a needy family for half of market value.

Just depends on how much of the proceeds we want to do without.

[broknowrchlatr]

Why are you looking to buy a house first and then Sell yours? First, you can save a lot of money if you buy a house first and set a closing date 45 days away and buy a house in that time.

If you do that, you can arrange with your realtor that the 'reward' of selling your house is that they get to recieve the purchase commission when you buy. But, that may mean you have to agree to buy a realtor listed home.

[Kevin]

I guess I should have explained my example better. Here is what we will probably do with our house:

Offer it at $130k, but our absolute price floor would be $115k. We are going to try to sell by owner at first, so commissions wouldn't affect us. However if we did use an agent, I would still figure their commission into the equation when arriving at the $115k floor. If we didn't "net" that much from the sale, we wouldn't sell.

The "market" for houses is just a general rule, in my opinion since no 2 houses are exactly the same and buying a house can be an incredibly emotional experience. One person falling in love with our home could dramatically alter the so-called "market price".

Giving your house away...wow, congrats on being in that sort of financial position.

[Kevin]

brokowrchlatr - I assume you mean selling your house first, then buying one in the 45 day window?

[Lord]

Who pays the commission is determined by economics and in a seller's market, the seller pays it. The one thing you don't want to do is cut the commission for the agent buying yours since that would increase the selling time. Selling first in a declining market would be desirable but can be difficult to accomplish unless you are easily satisfied with any home on the market or are willing to rent and store until one comes up you do like. Buying first you should be satisfied with your purchase but the opportunity costs on selling your old one can dwarf any commission. The pickier you are, the less you can concern yourself with costs, but presumably save over the long term by moving less.

[broknowrchlatr]

yes, selling thehouse first, then buying one in the 45 day window was what I meant.

My brother recently sold his house to someone who was renting. But parties agreed to knock off $500 off the price and hold the colsing date for 2 months, which was enough to get a brand new home 75% built.

[Mayuresh]

Great idea for a blog. Keep it up!! :-)

[Tim]

This is not for everyone, but at least consider www.iggyshouse.com. They will list in MLS by a licensed broker for NO LISTING FEE! You can pick how much to pay for a buyers agent fee. It was in Money magazine, and I have no affiliation with them, but have used them as a customer with great results. They are not in every state yet, but something like 37 with plans for the rest soon.

[Carl Heldmann]

FMF to Carl:
1. Not really. All a seller can hope to get out of the property is what the market will bear -- it's not like he can set the price he wants, add the commission to it, then see it sell in no time at all. It doesn't work that way. Price is determined by the market, the seller sets his price according to this (and if he doesn't, he won't sell the place) and THEN he pays the commission on the house.
2. Did you read what I said about how much a realtor really "sells" a house and the value of the MLS system? The real value is being listed and having OTHER agents sell the place (their commissions are not impacted by the arrangement I note above.)
CARL to FMF:
I was a Realtor for years & I didn’t really want to get into this, but here goes.
It doesn’t matter how the seller determines his asking price. The commission is built in regardless, and you, the buyer, pay it. Period! It’s YOUR money that leaves your hands and goes to the seller. If I’m selling widgets I have selling expenses built in and the buyer pays them when he buys my widget.
I know how home pricing works, it’s based on comparable sales. That’s what the market will bear. Comparables are what appraisers use, and all comparable sales include selling costs. Even new construction is priced with selling costs. The National Association of Homebuilders (NAHB) clearly tells builders; if you don’t build into your selling price selling costs, you probably won’t be in business very long.
As to your # 2 comment:
I, as a Realtor wouldn’t list a house for 1%. Here’s why:
A GOOD Realtor really does market a house. They don’t just stick a sign in your yard and pop the listing in MLS. They have to MARKET the house. Marketing includes newspaper ads (have you priced the cost of ads in the GR Press lately?), color brochures, open houses, virtual tours, etc. A 1 % commission does not encourage marketing, in fact, it discourages it. But, guess who screams the loudest at their Realtor asking “why don’t you advertise more, that one ad you ran was too small, where’s the buying traffic, yada, yada, yada, & ad infinitum? You guessed it! You get what you pay for. In a housing recession (and yes, we ARE in a housing recession), marketing, pulling out all the stops, is critical.

[Kurt]

I am in the process of purchasing a house whereby my agent gets 3% of the value of the house and then gives me half of that. The selling agent is the seller's mom (and I assume isn't taking any commission, though of course she will pay 3% to the buying agent). This counts as keeping fees down, I'd assume.

[Eric]

We shopped around for a realtor and went with someone who offered a "move up" program. As long as we purchase a house with him as our agent, he'll list our house for 0 commission (we just pay the 3% to the buyer's agent). He gets the 3% from our new home purchase and it works out to be a good deal for him and for us. As far as selling goes, he mainly just lists it in MLS and handles calls about the house. He's not the only realtor in the area offering such a deal either.

[FMF]

Carl --

1. Selling price - commissions and fees = net proceeds from the sale of a house. We're in a war of semantics here, saying the same thing but disagreeing on the interpretation. As for me, I know that when I sell a house, the payment of realtor fees comes from ME.

2. Wow, is that the great marketing a GOOD agent does? Seems like I could hire a first year marketing undergrad for that. Putting an ad in the paper -- yep, that requires a lot of skill.

With 20 years of marketing experience, I think I can handle the marketing of my house. Sheesh, I think anyone with common sense could do much of it themselves (it's certainly easier than being your own home contractor). That's why getting on the MLS system is so key -- it's the one thing I can't do myself.

[FMF]

Kurt and Eric --

EXACTLY!!!!! Good for you guys!!!!

[Carl Heldmann]

FMF -
YOU probably could do a BETTER job than most agents, but most people who list their house can't or won't because they expect, no, actually demand, that the agent spend the marketing $$$$.
I'm done with this topic...good luck.
Carl

[FMF]

Carl --

Maybe you should write "How to Be Your Own real Estate Agent." :-)

[Carl Heldmann]

FMF-
Why? Everybody knows all there is to know.
Carl

[Di the Faux Wood Blinds Gal]

We sold our 2nd house on our own and were both shocked at how easy it was. Would recommend it for anyone:-)