Archive | August, 2013

Why It Costs So Much to Sell Real Estate

8 Aug

Just about every real estate broker uses the same process to sell your home. The idea is to post your property information to a large database (the Multiple Listing Service–MLS) so that another broker with a buyer in hand finds it and comes forward. The product of the process is an outcome: your property, sold. No one can argue with the product/outcome, but one can question the process that gets you there.

Every product has its price, based largely on the process used to make it. In the case of real estate,the price has to be sufficient to pay the two brokers who are responsible for the process: a relatively large commission which used to be as high as 7% or more for a typical single family home. But due to competitive pressures, in the last few years its fallen to a mathematical average of somewhere between 5 and 6% (our guess).  That percentage of the final sale price has to be shared between the two brokers, which is in many cases 2.8 or 3% to the selling broker (the one with the buyer), and the rest to the listing broker, which could be 2 to 3% or less. Its important to note that there are no standard commissions agreed upon by brokers, as that would be price fixing, which is illegal. So the rates do vary a bit, but tend to be in these ranges.  But gross commission rates (and even broker “splits”) cannot be fixed by prior agreement among brokers!  When we discuss “average,” we mean the mathematical average of a given set of rates contained in listing agreements for a given area or office.  Of course we are not privy to that information, so our numbers are purely theoretical and anecdotal.

Each broker takes home a check from the closing, made payable to that broker’s boss, the owner of the brokerage. Then the boss usually pays only part of that check to the broker who earned it. This could be as low as 50%, or range on up to 70 or 80% of the take. In so-called “100% shops,” the broker can keep all of that payment if he or she had been paying his boss a hefty monthly fee all along.

For example if home sells for $300,000 and the seller has promised to pay the listing broker 5%, the total commission due at closing is $15,000.  But the listing broker via the MLS has promised to pay the broker who brought the buyer 3%, so he has to pay her $9,000 from that $15,000, leaving the lister $6,000.  So both brokers go back to their respective offices and hand over the checks to the managing broker.  One manager may have a 50/50 commission split contract with his broker, so he cuts him a check for 1/2 of the $9,000, or $4,500, and keeps the rest for the company.  The other broker’s boss might have an 80/20 compensation agreement with his broker, so he takes the $6,000 and gives the lister a check for $4,800 and keeps the difference.

So that’s the system. A process that hasn’t changed very much since the MLS was invented, It certainly hasn’t changed much since 2008, when the real estate industry suffered its greatest slide since the Great Depression.

The challenge to sellers these days is twofold: at what price point do you offer to sell, and assuming you’re not selling on your own as a For Sale by Owner (FSBO), what broker do you hire if everyone uses the same process to achieve the desired outcome? We’re all selling the same inventory on the shelf with the same tools in the same way!

When it comes to selecting a broker, a recent National Association of Realtors survey found that only 3% of respondents thought that the real estate company itself was the most important factor. There were other factors, but most respondents (24%) felt that honesty and trustworthiness were the most significant factors, something much harder to quantify. Sellers have added some intangibles to the mix along with hard money costs.

If only you knew a broker who was honest. worked differently, and charged less for the desired outcome, you could wind up with less anxiety about who’s taking who to the bank, and more money in your pocket at the closing table.

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