In Defense of Real Estate Broker Commissions
I hear it all the time from home sellers. “Why do Realtors make so much money?” I’ve heard a few variants on the sentiment, ranging from the more diplomatic, “Realtors don’t seem to do much work to earn their commission,” to the more direct, “this commission is horse s**t!” I submit to you, however, that Realtors more than earn every penny of their commissions.
My first point is quite simple — You don’t realize how much work a Realtor actually does. If your Realtor friend goes for spa treatments every day, they are not closing deals — it’s that simple. Prospecting and networking for clients takes a lot of time. Once those clients are found, if they are buyers locating properties and setting up showings takes time and effort. If they are sellers, preparing presentations to homeowners who may or may not list with you takes time and effort. They prepare and present offers. They negotiate. They work with their clients all the way through to closing, often on a daily basis. Realtors work weekends and holidays, because the rest of us aren’t available to look at property during normal working hours. A successful Realtor is someone who works extremely hard.
The next point is also fairly easy to understand — Realtors are sales professionals, which means their compensation is tied to results, rather than the amount of time spent. Let’s face it, most sales jobs are not salaried positions. It’s all about value added.
A good agent adds value by using their expertise to help you find good properties in the right neighborhood at the right price. Or if you are seller, they can pinpoint the right price so that the property will move quickly. They use their experience in sales and negotiation tactics to the table to cut the best deal possible once you’ve started negotiating. Once you are under contract, a good agent will make sure the appraiser has the right comps to do an accurate appraisal. These are just examples of some of the numerous things that Realtors do that add real value to the process.
My next point is a little more nuanced. You might ask why we need real estate brokers at all (you might be a amused to know that one of the first Google autofills when you type ‘why do real estate agents’ is ‘exist’). The answer to the question gets into the reason agents of all sorts exist in the first place. For example, why do actors and athletes have agents negotiate their contracts? Most of us have never needed someone else to negotiate the price of goods or our salary for us. Part of the answer is that the more complicated and nuanced the negotiation, the better you will do having an expert negotiate with you. And let me assure you, negotiating a 6 or 7 figure real estate transaction is as complicated and nuanced as it gets.
Take the example of NFL player Russell Okung, who defiantly announced in 2015 that he would enter free agency without an agent. Of course, most of us know that athletes and entertainers regularly use agents to negotiate salaries and endorsements. Okung proceeded to sign a five-year deal worth approximately $10.6 million per year with the Denver Broncos. Not too bad, considering that he doesn’t owe a cut to an agent, which can be up to 3% ($318,000 per year in this instance)! In fact, the amount he saved alone would put him in the top 3% of all earners in the US according to CNN Money.
Sadly, Okung only earned $8 million from that contract. You see, NFL contracts are voidable by the team at any time. The only money a player is guaranteed is the up front signing bonus, which is why you so frequently such large bonuses for players. No agent would have let him jeopardize his future by signing such a risky contract. Especially given the well know effects that playing in the NFL has on the human body and brain. Okung essentially gave up millions to save $318K.
It is well accepted that athletes and artists who represent themselves tend to get emotionally involved. It’s not easy to hear that you are not the best at your craft anymore or that you are not the box office draw you once were. Likewise, home buyer and sellers tend to have difficulty keeping their emotions out of the mix. It is not easy to hear that your kitchen is dated or the school district is sub-par. Suffice to say, you do not want to end up making a Russell Okung-like mistake when selling or buying the most expensive thing you may ever own. The best way to avoid such a mistake is by hiring a Realtor.
Finally, if you don’t buy some of my more squishy reasoning above, you will be happy to find out that the numbers support the fact that, in most cases Realtors add more value than they take away from a real estate transaction. For example, according to the National Association of Realtors (NAR) in 2015 the typical for sale by owner (FSBO) home sold for $185,000, while the typical agent assisted transaction had a sale price of $240,000. Granted, this is a very general statistic, but it is striking, nonetheless.
Setting a listing price for your home is difficult to do objectively. It is easy to fall into the trap of setting a high price just in case someone falls in love with the home and just has to over pay. In 2015, 18% of FSBO sellers found setting the sale price to be the most difficult aspect of selling their home. Overpriced homes sit on the market longer than necessary, which increases carrying costs and stress. The longer a home is on the market, the less attractive it is to buyers who begin to wonder what must be wrong with it. These sellers typically end up accepting lower prices in the long run, and a good agent won’t let you fall into that trap.
Likewise, it is easy for a buyer to fall into the trap of throwing a lowball offer out there to see if you can get the seller to bite. A lowball offer is just going to piss off the seller, who will probably not engage in negotiations with someone who does not seem serious. A good agent will steer you away from this tactical mistake that could cost you the home of your dreams.
This blog post is not long enough to be an exhaustive analysis of the value that Realtors add to real estate transactions or give all the reason they are worth it. I don’t expect everyone to be moved to change their opinions on the matter. However, I hope that I have given you some things to consider when thinking about Realtor commissions. I maintain that real estate brokers earn every penny they make. To be honest, they may suffer more from bad PR than anything else. Sometimes they make it look a little too easy. In this instance, looks are deceiving. I will leave you with a final musing — if a real estate license is a license to print money, why aren’t you selling real estate? Wouldn’t you like to have a job where you make too much money?