Thursday, September 27, 2007

How do real-estate sales commissions work?

When it comes to real-estate sales commissions, not all Realtors or realty agents are created equal. Depending on which company you are talking to, you will find that some agents are more willing to negotiate the rate of their commission than others. If you know how a broker handles the commissions in his or her company, you're in a better position to know how much "wiggle room" you might have as you choose an agent to list your house. And once you know this, I also want you to understand why, especially in today's sluggish real-estate market, you may be disappointed with a less-than-full-service agency, even if you have negotiated a great commission deal for yourself.

Traditionally, real estate agents in NJ generally asked for a 6% commission. Yes, they have always been required to say that you're free to negotiate with them, but for many years, commissions other than 6% were the rule. When a sale closed, the listing agency generally got half that commission, or 3% of the sale, and the selling agency got the other half. The agency would split the commission they got with their agent, usually on a 50/50 basis. So the selling broker would end up with 1.5% , the selling agent got 1.5%, the listing agent got 1.5% and the listing broker got 1.5%. This was a general rule of thumb. Eventually, some of the larger brokers would reward the most productive agents by giving them a larger split, say 60/40.

Then companies like RE/MAX came along based on a different model. RE/MAX decided it could make a great profit by attracting the industry's best agents, the ones with the greatest number of sales, and letting them get a huge split, say 90 to 96% of the company's share of the commission. In exchange, the agents themselves are responsible for their own advertising. Many RE/MAX agents saw this as an opportunity to undercut competition by reducing their commission. I knew a RE/MAX agent in the '90s who routinely asked for 4.5% sales commissions on her listing presentations. She could do this because most of the commission was going to her anyway--she could still make a good living at the lower rate because her broker was getting less. Realty Executive franchises work on a similar model. They charge their agents a monthly desk fee, and the agents control the whole commission.

In the late 1990s, YHD or Your Home Direct was born in Red Bank. This company thought they could change the real estate industry by charging 2-4% commissions. At that point, a lot of real estate brokers felt the pressure to cut their commissions to stay competitive. YHD paid their agents salaries instead of sharing commissions with them. In theory, it all sounded good. Most people I talked to in the industry at the time said that in the long term, YHD would fail because there was no way that a broker could provide sufficient service, including a dynamic Web site, other advertising and professional marketing, as well as maintain errors and ommissions insurance and other business necessities on a 2% commission. In fact, YHD actually seemed to be discouraging brokers from other companies from showing their listings because YHD couldn't afford to share the commissions on those sales. And this wasn't in the sellers' best interest. Eventually, Foxtons, a British company, invested heavily in YHD, originally to help the company franchise new offices outside New Jersey. Then, Foxtons took over the company and dropped the "YHD" name altogether. Was this because YHD was in financial trouble?

Today, Foxtons declared bankruptcy. It looks like all those industry experts I talked to when YHD was born were right.

Tomorrow, I will discuss why you should seriously consider paying a 6% commission if you are selling your home with a Realtor.

Wednesday, September 26, 2007


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