Why is that when buying/selling property we happily agree to pay a certain percentage as opposed to a certain amount to Real Estate Brokers. In many cases to sell a higher priced property require much less efforts than to sell lower priced property. Why we are so complacent with this rip-off.
Why in the world would you think that? There’s a lot more people can afford a $200,000 home than a $2 million home. Less qualified buyers = harder to sell.
Come on…what’s really going on?
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There’s a lot more people can afford a $200,000 home than a $2 million
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and there are a lot more houses for $200,000 then for $2 mil, try to sell all those.
There is an article in Boston magazine this month about really exclusive houses in the area. One property they highlight was an actual estate in the several million range. It was noted that one property was really hard to sell and the real estate brokers spent over $70,000 marketing it and they didn’t know if and when they would get their return. Selling actual estates isn’t that easy because most people don’t want a bonafide estate even if they are among the few that can afford it.
Anyway, there are levels of real estate agents just like there are for anything else. There are plenty of college students with real estate licenses but those aren’t the ones selling the multi-million dollar houses. People that can afford to buy such a place expect to deal with a certain type of professional and get certain kinds of service. It is a tough business and many don’t do well at the lower end let alone with the more exclusive clients and there is always competition. Marketing an expensive property can be expensive in its own right and might require advertising even in national publications. That takes experience as well.
It is naive to think that raw effort is the only thing that is rewarded. Waitstaff in high-end restaurants generally make more because they are good at what they do from food and wine knowledge to personability. If sheer effort was the only thing rewarded then we could just attach little meters like in taxis on people’s foreheads and pay accordingly. I work in IT business systems consulting and I am good at what I do. Several times a day, I solve complicated problems that all others failed to solve and I figure it out and usually very quickly. They expended many times the effort I did sometimes over days and weeks and I spent maybe an hour. Who should be rewarded more?
All professions are like that. There are many agents that could eventually get a multi-million dollar real estate transaction to work from a legal perspective but that is only a small piece of it. Charm, personability, attention to detail, instincts, and marketing knowledge are necessary for someone to be consistently successful at those levels and most people don’t have it.
It’s not like you’re required to use an agent. You could do it yourself. You could also try to negotiate a better deal. The thing is that if the commission is percentage based, they have more of an incentive to get you the highest price, right?
not really
say I sell $100,000 property and get 4% commission (=$4000) that goes to my company and I as an agent will get say $1000 out of it.
Now let’s asume I put much nore energy and efforts and sell it for say $110,000
I would get $1100 …hardly worth an effort .
What about a million dollar house? Or, what about all the $110,000 homes you sell in one year? Of course it’s worth the effort.
I know someone who sold a million dollar home. Well, it was an 80,000 dollar home, but it was sitting on 920,000 dollars worth of dirt. The realtor made a percentage of the first 250K, then a smaller percentage of the next 250K, and so on. The realtor still made what I consider a metric buttload of money, because the place sold so quickly, but as I asked the seller, "Would you rather it had taken a long time?
I viewed it as an excellent investment for both buying my home, then selling my parents’ home. For the fee, I negotiated 3% if I found the buyer, 6% if they did. No one year contract for selling the home, but I did agree to direct all inquiries to the agent.
When buying my home, I had far less experience. The seller was using Foxtons.com, so I used the next door neighbors and a shark of an attorney. When I found out the offer I had made (15% off the asking price) wasn’t even brought to their attention, I had the lawyer write a polite letter on the firm’s letterhead asking why my offer hadn’t even been brought to the client. I got a response later in the week.
$2,000,000 houses are much more difficult to sell than $200K houses. There are fewer people qualified to purchase them. Usually the commission is lower too. Sometimes 2% as opposed to 5%. And some people offer a flat commission of say $100K no matter what the selling price.
In our local market, a certain big name person is offering 2.5% sub on his $28,000,000 asking price house, and we still can’t get a buyer for it. And I have tried.
We’ve had a couple detailed threads on this recently that address the commission issue as it plays out in the real world.
The bottom line is that marketing & selling real estate is (on average ) quite difficult and expensive to the individual brokerage and agent. And for the record you can take listings where the commission is a fixed amount.
Marketing million dollar plus houses is a very different kettle of fish, time and expense wise for most agents than the 200K range. Sellers expect the level of everything multi-media advertising, brochure quality, extended market coverage & penetration, etc. etc., to be absolutely be top notch, and beyond this the agent is dealing with buyers and sellers who are often (not always) very high maintenance and time consuming to deal with. Selling higher end properties is often a lot more expensive than selling 250K - 400K houses.
The reason the real estate sales commission model it’s structured the way it is, is because the average home seller (in the US at least) does not want to take the up front risk of spending hundreds or thousands of dollars marketing their house on the chance it may or may not sell. They prefer to let the brokerage and agent take that risk and work for free, until they perform.
Real estate sales is a risky business, and I’m sure many agents would be glad to work for a set fee where they know they got paid regardless of the sale outcome. The commission model exists so far because it’s the most efficient way for a seller to motivate people to sell their property with minimum financial risk to themselves. If a better and more efficient selling paradigm appears (and many have been tried, believe me) it will prevail.
This is discussed in Freaknomics.
To expand and clarify DanBlather’s statement, Freakonomics concluded that real estate agents do not necessarily negotiate for the highest possible price (unless selling their own property). justqwerty nailed the reasoning.
A couple of comments:
A. It’s not always the case ,in my country ( not the US) a lot of high end properties are selling like hotcakes, because the buyers (usually wealthy Europeans) consider it a bargain.
Estate people,obviously, are well aware of this situation but still fixed percentage (6.5-7)
is a norm.
To sell a lower priced property to a local buyer with relatively limited means is considered
to be more difficult…hence those agent are getting more money for less work that I believe
kind of unfair.
B. Now let’s not go to extremes comparing multimillion properties with low end properties
let’s compare $400,000 with $200, 000
are you saying that it’ll take twice as much time , advertisement ,dealing with
bureaucracy than in case of cheaper house?
Obviously not! So why double commission ?
In case of real estate despite the high competition
supply and demand somehow failed to ensure competitive pricing from different agents.
Their attitude generally is: here is my (fee)requirements…take it or leave it.
D-Odds
I did in fact took that reasoning from Freakonomics couldn’t directly quote ,though.
Glad I’m not alone in in that “secret” knowledge 
I am a real estate agent. I do not rip off my customers or clients. I provide a service for a fee which we mutually agree upon in advance with all our cards on the table. The fee may vary due to many factors, including the selling price of the property. The services I provide are ones that I am an expert in and you probably are not.
Advertising expenses are a large part of my budget. Selling a higher-priced property takes different kinds of ads and usually more costly ones in higher-scale publications.
If you think I am ripping you off, please do not try to hire me to work for you, as I won’t. You can do it yourself.
**Musicat ** you seem to take it personally, please don’t,
besides the situation in the US
might be a bit better as people are able to negotiate fees to an extent .
I was thinking more about country where I live which ,supposedly ,has a market economy
(irrelevant), where my ability to negotiate is very limited because of cartel like behavior of real estate industry despite the high competition.
The Freakonomics guys also think that the days of the full-service real estate agent (like the full-service stockbroker and full-service travel agent) are numbered. In this article, they describe some other fee models and predict that the internet is going to do away with the traditional 6% fee, except in special cases.
great article