When putting up your house for sale, the standard realtor fee or commission is 3% of the house price for the seller’s realtor (listing agent), and 3% for the buyer’s realtor (buyer agent). The seller would pay about 6% commission in total for both the listing agent and buyer agent fees. In this post, I will discuss how to lower the realtor fee to the listing agent.
Is 3% commission fair? Well, it depends.
Here’s how I look at it, the amount of work a realtor have to do to sell a $100k house is about the same about selling a $1 million house. However, the fees the realtor will receive is drastically different.
- For $100k house, 3% commission will be just $3,000.
- For $1 million house, 3% commission will be $30,000.
A whopping 10x more for roughly the same amount of work, why should that be? The answer, it doesn’t have to be. In a hot housing market like now, the average Days on Market for houses in Silicon Valley is less than 20 days. In this area, for a house in a reasonable location and in decent condition, the realtor will put in less than 30 hours of work to get the house sold. How much do you think his time and expertise is worth? How about $3,000? That’s a hourly rate of $100, high but still reasonable. How about $30,000? To put things in context, think about how long it is going to take you to make $30k, is it 1 month, 2 month, 6 month? For $30,000 of realtor fees, that’s a hourly rate of $1,000 for the realtor. Do you think his time is worth that much? I don’t think so.
Can I negotiate a lower commission? You bet
If you are paying 3% commission on a $1 million house, you are overpaying. And that’s exactly what one of my colleagues did. He is an ivy league education, successful executive. Was he stupid? Definitely not. But why didn’t he negotiate a lower realtor fee? The answer is that he simply didn’t know that was an option. Most people will sell a home once or twice in a lifetime, it’s not an area they have much expertise. This is a classic case of Information Asymmetry where one party in the transaction has more or better information than the other. With ubiquity of internet and the upstarts like Ziprealty, Zillow and Redfin, on the for sale listing front, there are much more transparency now than twenty years ago. However, the real estate process and practice are still quite opaque to most people. Having bought and sold 15+ properties, I’m still finding new things. If I have more time, I’ll do a startup in the area to bring more balance to this information asymmetry. But I digress.
Ask first, and ask with a smile
As my business school professor for negotiation said many times, “everything is negotiable, but you have ask first”. How much you can negotiate down would depends on how much your home is worth? How much work goes into prepping your home for sale? How hot is the market? How busy is the realtor?
I live in the very expensive silicon valley where the median home price is over $700k. When I sold my house last year, the housing market was hot, I paid a lot less that 3% for commission. In the silicon valley area, the common commission rate is 2.5% for listing realtor, so that’s the starting point. When I was interviewing agents, one of the questions I asked was how much would she charge for commission and whether she/he would consider lower the commission? Ask and ask nicely, I say ask nicely because you will partner with your realtor in selling your house, no need to make it into adversarial relationship.
Just by asking a couple of simple question, of the four agents I interviewed, two of them told me because it’s December, there are fewer listings, they are willing to lower the commission to 2%. Right there, I have already saved myself 0.5%. On a $1 million house, that’s $5,000, all it took was asking.
Negotiate not only on the commission but also on the services
But I didn’t stop there, I asked about how they will help me to get the house ready for sale. My house is already in very good condition, pretty much everyone talked about the following services (see post on how to prep your home for sale for more details)
- handyman to fix up odds and ends around the house (i.e. dents on door or walls, touch up paint where your kids left their artwork, leaky faucet, etc.)
- gardener to plant some nice flowers, new mulch, trim hedges, etc.
- declutter or move out
- cleaner to give your house a thorough cleaning
- stager to stage your home
- photographer/videographer to take great pictures/videos of your house
I told the prospective agents that I would like them to have some skin in the game and cover these services out of their own pockets up front, and when the home is sold , they will make way more money back. After a little back and forth, one agent agreed to cover all the services listed (declutter not included obviously), one agent agreed to cover a subset of it (handyman, cleaner, photographer), another agent agreed to credit me back the cost of the staging when the home is sold.
Let’s take a look at how much these services would cost
- Handyman ~$50-$100
- Gardener ~$50-$100
- declutter or move out – this one the homeowners would have to do
- Cleaner – $150-$300 depends on size of your house
- Stager to stage your home – $1000-$2000 depends on size of your house
- photographer/videographer to take great pictures/videos of your house – included as part of their services from the beginning
These services would have costed me somewhere between $1250 -$2500. Equally important to the money saving, this was also really important to get the realtor to have more vested interest in getting this house sold and sold quickly. It is a well know psychological behavior that it cause people more pain on the prospect lose money than the prospect of gain money.
If you didn’t negotiate for fees or services in your last sale, don’t beat yourself up on it. This was my seventh property to be sold, and it’s only the first time I figure out that these services were negotiable. See what I mean about information asymmetry. Part of my motivation of starting this blog was to share some of the learning I had over the years to bring more transparency to the real estate industry.
Putting some competitive pressure to negotiate further
But I didn’t stop there. After the realtors saw my house, it’s in great shape and in great location, I was knowledgable of the market and had realistic expectation of the housing price. They know this would be an easy and fast sale, remember that 30 hours of work we talked about earlier in the post. They were eager to work with me. Out of the four I interviewed, three of them called me back within a few days to follow up. I mentioned each of them that I was very impressed with them, I was, all three of them had done their homework. Of course, I selected them to interview for a reason. (See Tips on find a great realtor when selling your home) But other agents were willing to lower the commission to get the listing. They asked how much, I said 1.5%. They were some hesitation, and I said, think it over and let’s talk about it later.
One called me back and agreed to the term, I was surprised as she was from a big firm, and I didn’t think they had the flexibility to go down so much. Another agent came by, and suggested an alternative, she said she will agree to the 1.5%, but if she sell the property way above the asking price, she would like to get a higher percentage of commission. I thought it was very reasonable, we ended up with a tiered commission structure.
- Let me illustrate how this work. Let’s say we price the house at $1 million.
- If she sold the home below $1.05 million, she would get 1.5% commission.
- if she sold the home above $1.08 million, she would get 1.75% commission.
- If she sold the home above $1.1 million, she would get 2% commission. For this one, I picked a price target I didn’t think we could hit.
I liked the last agent the best and chose her.
How did it work out for me?
In 7 days, with her and her team’s help, we were able to get our house in tip top shape and put it on the market. In another 7 days, we received four offers, the best offer was 10.2% above asking price with no contingencies, we closed in 30 days without any issue. The final price exceeded the my highest price target I set. I was happy to pay the 2% commission. For my agent, she was happy, in such a smooth and fast transaction, she spent less than 30 hours on this deal and got 2% commission.
Some of you who are familiar with the local real estate may say, the market so hot in December 2012. Did the agent selection and all the prep work make a difference? For comparison, on the same street with identical house. There were a house that was sold just before we put our house on the market, it was actually 500 sq ft bigger since the previous owner added an extension, they sold at our asking price. Another house was put on the market in February 2013, identical to ours, they sold for quite a bit less than our house and the house was on the market for 30+ days.
- Like most things in life, realtor fee / commission is negotiable
- Ask first, and ask nicely, you might be surprised
- Expand the scope of negotiation beyond money, include additional services
- Try to get realtor to put some skin in the game by put some of their own money upfront in to the listing
- Be creative with tiered commission structure to create right incentive structure
Reader, have you tried to negotiate realtor? Share your experience in comments below. If you have questions or requests, ask in the comments below.