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Is 6 percent commission a rip-off?

 

Few topics in real estate elicit more passionate opinions than real estate agent commissions. "Rich Dad, Poor Dad" guru Robert Kiyosaki recommends making a real estate agent part of your investment team and paying him or her well. Others, like discount brokerage Redfin, say that the vast majority of real estate agents overprice their services. Who says they can't both be right?

6 percent?! For what?!

Perhaps the difference of opinion exists because the average homeowner doesn't really know how to differentiate between agents at the top of the profession -- whose experience, education and work ethic add value--and those whose main asset is a pretty smile.

The United States General Accountability Office said in a statement that "despite the intensely competitive local real estate brokerage markets, broker fees are usually set without regard to either the quantity or quality of service rendered. Rather, fees are based solely on the price of the home."

Is the 6 percent model flawed? James Dingman thinks so. He's the chief development officer at Help-U-Sell Real Estate, a fee-for-service real estate company that bills itself as "offering a set-fee alternative to paying the traditional broker commission."

"The truth about percentage-based commissions," he says, "is that they just don't make sense. Think about it: You have a four-bedroom home on Elm Street worth $300,000. A 6 percent commission would be $18,000--a lot of money. A three-bedroom two doors down worth $250,000 would pay just $15,000. What did you, as the seller of the larger and more expensive four-bedroom house, get for the additional $3,000 you paid? The answer is 'nothing.'"

In Europe, where the commission-based system has been nearly replaced by fee-for-service structures, selling costs average 1.5 percent to 2 percent of the property's sales price.

Realtors respond to critics: Do you work for free?

Alethea Smock, a former Realtor in Colorado, says, "There is a huge investment a person makes to become and continue to be a Realtor with absolutely no guarantee of an income. How many people have called a Realtor to drive them around to look at houses for 'decorating ideas' or called a Realtor to list their house for a month only because they wanted to 'see if the house would sell?' And how many people would invest over $10,000 to become a Realtor with no guaranteed income?"

Smock continues, "Do I think 6% is a rip-off? As a homeowner who is oblivious to the real cost of being a Realtor, yes. As a person who was a Realtor for over eight years and finally quit to find something more lucrative, no, 6 percent is not a rip-off to find a person who can make a living in the housing industry."

What do you get for 6 percent, anyway?

Nathan Letourneau, a real estate investor in the Twin Cities area of Minnesota and western Wisconsin, says hiring a real estate agent helps his bottom line.

"I use a real estate agent and I personally feel that a great real estate agent is well worth 6 percent. Great agents, like the one I use, have expert local knowledge and lots of contacts to help you sell your house quickly for the maximum profit."

He adds, "Just remember that 'maximum profit' does not always mean highest price. Selling quickly for less money can be more profitable once you figure in monthly mortgage payments, interest, insurance, taxes, heat, water/sewer, electricity, etc. every month that it sits on the market waiting to be sold."

According to the National Association of Realtors, the median sales price of owner-sold homes in 2011 was $150,000, while agent-assisted sales brought in $215,000. Does that mean that agents get more money, or does it mean that folks with less-expensive homes are less likely to use agents? The NAR's position is that Realtors price homes competitively, negotiate better and have superior marketing techniques.

Another experienced real estate investor, who wishes to remain anonymous, remains unconvinced that Realtors add real value.

"What are they [Realtors] doing to earn that hefty commission? In many cases, not much," the investor says. "The reason we continue to use Realtors is for the buyer's peace of mind. Buyers--particularly inexperienced ones or those searching in a new market--like having a middleman or woman on whose advice they can rely. The only thing a Realtor adds is a comfort factor for the buyer that the Realtor, as middleman, is acting on the buyer's behalf."

Study: Realtors don't get higher prices

A Northwestern University study found that owner-sellers who did not use an agent got 4 percent more for their homes than those who used real estate agents for comparable properties. That is a 4 percent higher price in addition to the commission saved. If average commissions are 5.4 percent, self-sellers are putting about 9.4 percent more in their pockets than those who use real estate agents.

"Our key finding is that Realtors do not offset the cost of their commission; they do not get you a higher price," says Northwestern University researcher Aviv Nevo.

However, the findings may not be as clear-cut as they appear. For example, the researchers speculate that people who feel confident enough to sell their own property might be better negotiators and thus may get a better price than the average homeowner likely would. In addition, the researchers found that Realtors sold homes in less time than owners who sold on their own. As Letourneau says, costs can mount if you carry a property for extra months while hoping to get a higher price.

Bottom line: You don't have to pay 6 percent

Sellers, especially those in very hot or expensive markets, are learning that they can get full service for less--you can work with a full-service agent and negotiate a lower commission. Alternatively, you could go with fee-for-service outfits like Redfin, Help-U-Sell or Assist-2-Sell, which offer MLS listings, access to licensed real estate brokers and marketing help. Or, you can do the advertising, showings, negotiating and contracting yourself.

There are options for everyone, depending on your comfort with the process and your desire for involvement. Nevo doesn't see for-sale-by-owner sites replacing brokers; rather, the two will co-exist, each serving a slightly different set of needs, he says.

"Different people want different things; therefore, [for sale by owner] is a good thing because it gives you more variety in the market," Nevo says.

About the author:

GinaGina Pogol has been writing about business, mortgage and finance topics since 1994. In addition to a decade in mortgage lending, she has worked as a bankruptcy paralegal, a business credit systems consultant for Experian and an accountant for Deloitte.

 

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