Aaron’s recent post on trust raised some excellent questions, and provided some great insights into the consumers’ point of view. I though that the comments also highlighted some misconceptions.
Trust is a funny concept. The warm and fuzzy quality makes some of us want to dismiss it as a lightweight issue. Realistically, trust can’t be assumed or demanded – it has to be built through a process. The challenge is executing the process in a compressed time frame.
Its been said that a consumer can become as educated on real estate as almost any person selling it. That may be true, but if it is I think that in most cases the consumer in question should be thinking about getting a new Realtor.
Consumers want value, and many want to understand the process. Many, unfortunately, don’t have complete information, and think that they are restricted from doing things that they would like to do.
I think that transparency is key to addressing this.
Commissions are as good a place to start as any. Null commented that 6% is a high price to pay for paperwork when he already knows plenty about real estate. Now its possible that he is commenting from another jurisdiction, and 6% may be a common commission figure there. Its way off base for the Vancouver area (so if Null is from Vancouver he’s not as well informed as he thought 🙂 ). Commissions are generally paid by the seller, and are generally figured on the basis of 7% on the first $100,000 of the sale and 2.5% on the balance. They are usually split on a 46.5%/53.5% basis between selling Realtor and listing Realtor (buyer’s agent and seller’s agent).
What do the numbers tell us? May’s benchmark apartment price was $358,428. Average price was $377, 160. Let’s call it $365,000. 7% on the first $100,000 is, of course, $7,000, and 2.5% on the balance is $6,625, for a total of $13,625. Divide that by the sale price and you get 3.73% across the board, not 6%.
That 3.73% gets split further, of course, since there are generally two agents involved. The usual breakdown is 1.73% of the total sales price to the buyer’s agent and 2% to the seller’s agent.
As prices go up so does the total commision – but the percentage decreases. May’s benchmark price for attached proeprties renders a gross commission of 3.5%. For a house, with a benchmark price of $711,245, the across the board commission is 3.13%. Again, in both cases the commission is usually split.
Those splits are further split as the agent, whether buyer or seller, either pays a percentage or a flat fee to the broker.
And, of course, we know that there are more agents than sales. We’ve got 9,167 Realtors in the REBGV. This May, a strong sales month, we had 4,331 sales. That’s .47 sales per Realtor.
I’m not arguing that Realtors are hard done by. Nobody is forced to sell real estate for a living. The numbers speak for themselves, anyway. As prices go up the absolute commission rises, but the percentage charged decreases. If real estate prices outstrip the majority of other costs the Realtor gains. If not, the Realtor takes a pay cut (what he did in 2000 for 3.6% he now does for 3.13%, a 13% drop in price). Real estate has doubled, and succesful Realtors are doing well, but commissions have not doubled and the number of transactions per Realtor has dropped.
When discussing commissions I’ve used the terms “usually” and “generally”. Its important to understand that there are no set commission rates. Discount brokers are permitted, and have full access to the MLS. You can pay a Realtor a flat fee. You can pay a Realtor on the basis of time and disbursements. And you can pay a commission other than 7% and 2.5%. The split offered by the listing agent to the buyer’s agent can vary. You can design an incentive based commission so that you’re confortable that the Realtor is either getting you the highest price or the lowest price, as the case may be. As a buyer you can require that the buyer’s agent not accept a commission from the listing agent, and you can pay him directly on the basis of getting a bonus for negotiating a purchase price under list, under assessment, or under appraisal. Nothing stops you aside from the Realtor declining your business. You do have to make it worth the Realtor’s time.
Its worth connecting a few dots at this point: if there are only .47 sales per Realtor, and we know that some Realtors sell tons, and some sell nothing, it could be argued that the more succesful the Realtor is the more he deserves…or doesn’t deserve. After all, does someone need $200,000 per year? (Mind you, if he’s that good at selling, maybe you want him to sell your place). If someone’s making only $15,000 per year, should you pay them more than 7% and 2.5%? Does a high income earner equate to better service? Maybe. Maybe not.
Commissions must be disclosed. Consumers must be told how much money their agent is earning and where it comes from. This is called the duty to disclose remuneration. Consumers have a statutory right to know how much money their agent is earning on a transaction. That’s not a “should know”; its a “must know”, “must be disclosed”, “statute bound to be disclosed”.
In some respects commissions appear to be all about money. As I bring this post to a close I would suggest that while the absolute amount paid is important, a succesful transaction is perhaps more important. That’s what the consumer has historically paid for (and paying on the basis of time and disbursements would clearly do way with that). If you pay less (or nothing) for a poor transaction (or no transaction at all), its possible that you haven’t saved a dime. Commissions aren’t so much about money as they are about value.