Real Estate Commissions Are An Absolute Joke

January 9, 2014 · 43 comments

Girl Ninja and I were personal friends with our real estate agent. He has led Young Life with us for the last couple years and he’s a great dude. In fact, we had him over for dinner just the other night so we could show him all the changes we’ve made to our house since we bought it.

The dude is awesome and we love him to death, but I’m not quite convinced realtors in general are worth the 3% commission they receive.

We paid $357,000 for our house. That means our buddy made $10,000 when we bought our house (he doesn’t have to split his commission). I estimate we spent a total of 40 hours interacting with him over the course of the six months it took us to find our first home. This works out to about $250/hour.

My parents also decided to buy a new home shortly after we did. They used my friend, and within three weeks of searching, they found themselves a new home. That’s another $10,000 in our friend’s pocket. Oh, and did I mention my parents are about to sell their previous home, so he will make another $5,000 to $10,000 when that happens from them.

From just my family alone, our realtor will have made more than Girl Ninja makes all year as a kindergarten teacher.

That seems crazy to me. 

I mean, our buddy is a GREAT realtor. The best. That’s why we used him and this should not be taken as a knock against him. It’s not.

I just don’t think realtor commissions are justified.

Think about it like this. Say Girl Ninja and I decided to buy a $100,000 house. Our realtor would have provided us the same service he did for our current house, but only made $3,000 from the commissions. Fortunately for him, we bout 3.5 times that amount. The amount of work he put in would have been the same regardless of our purchase price, but he charges us $7,500 more if we buy a $$350,000 house.

Why is this not pissing off more people?

What seems logical to me is a fee for service model. Where I agree to pay $100 each time my realtor shows me a house – regardless of if I buy it or not, and a $2,000  bonus if I buy a house he has shown me. This seems much more fair. He gets paid every time he provides me a service (showing me houses or helping me purchase one). And I get to potentially save thousands (or tens of thousands) of dollars.

Why the crap do we agree to pay commissions based off the purchase price of the home?! Who thought this was a good idea? And more importantly, why do we continue to allow it!

I’m starting to think I got in to the wrong industry. 

1 eemusings

I don’t know about the US but here we’ve had some fee only real estate companies start up (pre GFC to my best recall). They all folded. I think they just couldn’t get enough traction. The traditional realtors are a beast and they are so dominant.

2 Eric

I completely agree. In fact, I wonder why the real-estate agent hasn’t gone away or isn’t at least moving in that direction.

My stepfather used mysecretagent.com and he got out of his house for $500. No, this is not an advertisement.

Here is the best part. Our agent was a family friend and when we were going to sell our house in WA State, she got wind of us using the same company. She actually matched their deal and did a flat-fee $500 listing for us :) It always helps to have leverage.

3 Mo D.

Our realtor is also a personal friend, and we used his services when we sold our condo and bought our townhouse. He waived his commission on the sale of our condo (he said it would see itself within 2 days, and he was right), and took 3% on the purchase of our new home. Real Estate is his part time job (he works full-time with my husband). He said the commission he made on the purchase of our townhouse was the equivalent to about 44 hours of OT he’d have to put in at his FT job. Mind you, we put in the offer same day we viewed the place, and the seller counter-offered, which we accepted… pretty nice piece of change for an evening’s work!!

4 Some Guy

I hate rapists! I mean realtors… no one needs them any more, get a digital camera (or your phone) take some pics, and list it for sale! job done.

5 Heather

It’s worth remembering that the commission doesnt go straight into the agents pockets. They pay fees to the company they work for, and that part of commission covers overhead. Plus, there are expenses like listing costs, etc that they incur. Don’t get me wrong though… I bought my home after a week of property searching and my Realtor did very little work. But at least here in Boston they take 2.5%

6 tom

Aren’t websites like Redfin supposed to “compete” realtors against each other so you don’t have to pay the full commission?

The real estate lobby is a strong one, especially in the midwest. You can barely find a realtor for less than the average 6% fee (3% for buyer and seller agents).

It’s kind of a scam, especially when most people do the leg work themselves on sites like Zillow.

7 SavvyFinancialLatina

Yeah, I completely agree. I actually found the houses on Redfin we were looking for. If I could have scheduled the tours, I wouldn’t have really needed my realtor.

8 Meg

Thank you for posting this, my husband and I have been talking about this for weeks! My thoughts are that I am more than happy to set up showings, view houses on my own, and contact inspectors. The parts I need help with are negotiation of price, contract, and finding comps (Utah keeps sale prices private, boo). Wouldn’t a law firm be able to assist with those?

Our first time looking at houses I really had a hard time realizing just how much our Realtor could make for mediocre work.

9 Victor DeFrisco

As owner of a real estate company and a Realtor for over 13 years I love your model. Pay $ 100.00 for every house an agent shows you and a
$ 2,000 bonus if you buy it. That is great for agents, they would LOVE it. However, the buyer doesn’t pay the commission, the seller does, so no buyer will agree to pay anything, not even gas money.

I know agents that have shown 20, 30, or how about 80 houses over a 1-2 year period to people who bought nothing. Why tip a waitress 20% on a $50.00 steak in Morton’s and the same 20% on a $ 20.00 steak in outback?

Fact is everything is relative. So why does a seller not sell the house on their own and pay nothing if it as easy as you say. The founder of for sale by owner.com tried it on his own, after 6 months failed and hired an agent that got him 150k more than he was asking. Copy the link to see the article.
http://www.dailymail.co.uk/news/article-2022112/For-Sale-By-Owner-founder-sells-home–using-real-estate-broker.html
The average Realtor in the United States earns about 40k a year and like any other profession, the best earn more, and I carefully use the term earn. There is a lot more to buying and closing a home than finding it, unless you hired a tour guide.

10 Eric

You said, “However, the buyer doesn’t pay the commission, the seller does, so no buyer will agree to pay anything, not even gas money.”

But, here is the problem. As a buyer you ARE paying the cost by inflated housing prices as people list a bit higher to try and cover the ridiculous commissions.

11 Aragon

Realtors don’t decide the price of a home the market decides the price of a home. If a person prices their home based on how much it will cost them to sell their home then they’re going to price their home out of the market and it won’t sell.

12 Lutus

Realtors will usually try to talk you into lowering the price of your home when you sell it so that it will sell quicker. That way they get the commission and move on.

Realtors won’t miss the 6% on a 10,000 price drop, whereas you will most surely feel the 10,000 price drop.

13 C The Writer

Or maybe people are trying to list their homes for way more than they can ever realistically expect to get and they don’t like the reality check that a realtor provides.

14 C The Writer

An interesting point worth considering is that people are often emotionally attached to their properties and will list them at ridiculously inflated and unrealistic prices. Therefore, the homes won’t sell.

Sometimes it does require an objective, educated third party to cut through the bullshit and be like “Look. This is what you can get for your home. This is what will get it sold faster. I know more about this than you do, this is what I do for a living.”

It takes someone who’s not emotionally involved and sees it purely as a business transaction, which is what it is, to get the home sold faster by listing it for what it’s actually gonna sell for.

And let’s face it, realtors know more about real estate than the average person trying to sell their home. It’s what they do for a living.

15 LK

It may have been worth it BEFORE the internet, when there wasn’t the information available now, but now any more. Now people search for themselves and MLS listings are more open to the public.

If you want to really feel sick, commercial realtors get that same 3%….. Sell one 2M property and they make more than I do all year!

16 C The Writer

And you make more in a week than I do all month. Life sure sucks, doesn’t it.

17 BRB

I was thinking about that the other night and thought I bet you could make a killing here in the seattle area if you advertised that you only took a 1.5 or 2% commission or even 1%.

18 SD

I used to think the same until I actually became an agent. What I didn’t realize is the amount of liability us realtors take on whenever we are representing a party in a transaction. That’s liability the buyer/seller would carry if they decided to enter a transaction unrepresented. With everyone ready to sue at a drop of a hat these days, I think realtors are well worth the fees. And when it’s a higher priced property, then the stakes are higher, thus the reason for a percentage commission. Good realtors know how to represent your best interests, market/expose your property, negotiate on your behalf, make sure all the deadlines are being hit, get a transaction through the inspections, repairs, appraisals, funding, closing, ect, ect. Realtors do a LOT more than what meets the eye.

19 Ninja

I would probably say the same thing if I was a real estate agent. But the fact of the matter is our agent wouldn’t have worked any differently if we bought a $100,000 house or a $500,000 house. Especially with the age of the Internet and how much research I did independent of our agent.

20 SD

You’re right – he may not have worked harder if your house was $500k as opposed to $300k but he definitely would have been taking on bigger liability and for that he should be compensated. The bigger the value, the bigger the stakes…not to mention the personalities/egos.

21 Ninja

Liability and compensation aren’t correlated. You don’t carry increased risk of being sued simply because a house is more expensive. You are no more likely to be sued on a sale of a $100,000 house than a $1,000,000 house.

But you do get paid more when the purchase price increases. I get your argument, just not sure I agree with the premise. Especially when you consider the fact that an agent can carry an umbrella policy and virtually eliminate personal liability.

Say your toilet is worth twice as much as mine. We both need plumbing work done because we both stuck a banana down them and the pipes are clogged.

The plumber charges you $90/hour and me $45/hour. He charges you twice my rate, even though he performed the exact same task for both of us, simply because your toilet is worth twice as much.

Is this fair?

22 C The Writer

Ninja, I really don’t think you have any idea what you’re talking about.

23 Ninja

I don’t think you know what you’re talking about since you seem to think I think realtors are worthless. I never said that, or anything close to that. I have an issue with the commission structure. Not the service they provide. How do you miss such an obvious thing? Did you even read the title of the blog post that clearly states this!!!!

24 Ninja

p.s. word on the street has it we might get to see you and the fam in february :) Let’s continue this debate over beers and Dr. Pepper.

25 SD

Yes sir! See you in a few weeks.

26 Mel @ brokeGIRLrich

The way several jobs are paid drives me nuts, but I think your onto something with the real estate agents. That is crazy to think about how they’d put in the same amount of work whether you buying a $100,000 house or a $1 million and the vast difference in what they would make then.

27 momninja

I was a Broker years ago and when I sold in WA the pay structure was odd it was 6% on the first 100k then 3% over that – no other state I knew of did that but it is closer to the model you suggested.

We agree and truly enjoyed working with your Realtor – I even recommended him to a coworker who also bought a 350k house from him on the first day they met.

I think having someone you trust with such a large matter is worth paying for – I think as time goes by the pay structure will change again but who knows how…maybe back to the way it was when I was in Real Estate.

28 Matt

My wife found a house in Florida that we love, so we contacted the listing agent to show it to us, after we already saw all of the pictures online. The house was listed for 1,400,000, and the agent said that it was totally worth that price (even though the comps said that it was not). I wound up negotiating down to 1,275,000. The realtor did nothing, aside from taking an hour to show us the house, and he wound up with $63,750 (2.5% as the buyer agent and 2.5% as the seller agent). Oh yeah, he had to spend about an hour preparing the doc-u-sign for the remote closing also.
The whole realtor industry is a scam. When I list a property next time, I’m putting it in MLS using an online for-sale-by-owner service and just specifying myself as the listing agent. I’ll list a 0.5% commission for the buyer’s agent. Problem solved.

29 Victor DeFrisco

Wishing you all the best! With a 0.5 commission for the buyers agent I am sure all the agent’s on the board will be tripping over each other to show that property, NOT, especially when everyone else is paying 3% and offering bonus’s. You are complaining about charges the seller paid, I don’t get it. What about the marketing, the licensing fees, the other 10 or 20 buyers they met with, the visual tours, the videos, the time spent with the seller, the split with the broker, the inspections, the appraisal? If it’s that easy and you think agents make 60k an hour you should get your license and get in the business.

30 Lola

Ha ha. I totally get it. But in this market I had to look at 33 houses before I finally got an offer accepted. And my price range was much lower than yours so my realtor had to work a little harder for her money.

However the relator’s family double dipped in a sense since I used the wife as the realtor and the husband as my loan officer. What a racket! Although I was happy with their services, and neither pressured me to use the other, I don’t think I would do that again.

31 M

I don’t mind agents, but I wouldn’t hire a friend again. I felt like I needed to buy my first house because I felt guilty starting over when my first offer fell through. I had only looked at 5 houses.
Also, I also am much happier paying the buyer’s agent than seller’s. When I sold my house, I did all the work (wrote the descriptions, did the staging, took the pictures, spoke to the buyer’s agent). It’s not like she had to drive me around to sell my house. She paid for a service to coordinate showings, too.

32 ND Chic

Very informed buyers or sellers can do it without an agent. Many people cannot. They can’t negotiate the deal, get a purchase agreement drawn up or make sure their interests are covered. Plus many sellers and buyers need the MLS to view properties. This is something that realtors pay for and is a benefit to using them.

33 C The Writer

What a coincidence! I put up with people telling me to throw away their trash, nasty tempers, weird moods, screaming kids, people telling me to “wrap” glass crap they choose to buy, senile old people who can’t run a debit card, standing on my feet all day, and insane holiday busy times and I don’t even get paid enough to buy a house.

Newsflash: the world isn’t fair. People who should get more make nothing and people who hardly do anything get paid too much. I would think you would know that by now.

How about a post about how cashiers don’t get paid enough for all the shit we have to put up with? Now THAT’S something worth complaining about, although I suppose the majority of your moneyed readers could care less.

34 tm

I could not disagree more. And moreover, I think the tone of this post comes off as extremely condescending.

I’m not a real estate broker, so I don’t know everything about the field. However, unlike Ninja, I’m also not going to pretend to know everything about the field. I am an attorney – and I recognize that brokers provide an incredibly valuable service in residential and commercial real estate transactions. I’m one hundred percent certain that there is a lot going into brokerage that non-brokers do not understand or want to deal with. From my experience of buying my own house, my broker was an extremely valuable guide through an unfamiliar terrain.

And more importantly – THEY REPRESENT A VOLUNTARY SERVICE. You did not have to use a broker. But, you chose to use one, and now you are questioning how much he got paid – an amount that you didn’t pay. Couldn’t we do that with EVERY profession? If we were as all-knowing as Ninja pretends to be here? Whoa, “chiropractors are just fancy massage therapists, they get paid way too much,” says me. And “bus drivers? Anyone can drive a giant car, they get paid way too much,” says me. Maybe someone thinks GN gets paid too much for what is essentially babysitting – how would you feel if someone said that, N? I’m certain that members of my family think my law firm salary is too high – but they did not incur $150K of law school debt to get this job. My point is, you are coming off here as incredibly judgmental.

The thing about brokers is that it’s a volatile field. Maybe your guy made $X in the first quarter of this year – but ask him how much he made in 2008. Or 2009. And then tell him you think he gets paid too much. Perhaps it seems to you that he gets paid too much on a per-transaction basis, but perhaps that’s also part of the risk/reward calculus of that profession.

And to answer Meg’s question above:

“The parts I need help with are negotiation of price, contract, and finding comps (Utah keeps sale prices private, boo). Wouldn’t a law firm be able to assist with those?”

The answer is no, lawyers do not do those things. You are describing the job of a real estate broker.

35 Ninja

You totally missed the whole point of the article (and my frustrations). I have an issue with commissions. The fact that an agent can sell a $1,000,000 home and bank $30,000 or a $100,000 and bank $3,000 is so silly. The same amount of work and service is provided by the realtor on both transaction but for some stupid reason they stand to make an extra $27,000 if I decide to buy a more luxurious home.

I never said realtors get paid too much. Simply the way they get paid is silly and wouldn’t stand in virtually any other industry. The commission based model is archaic for real estate.

Your arguments about bus driver pay or Girl Ninjas teaching pay are completely off topic so don’t require a response.

Feel free to look at my comment to SD about plumbers for a legitimate concern.

36 C The Writer

Comparing houses to toilets is pretty off topic too.

37 Moses

Man, you are such a troll.

38 CSK

It seems like half the people here think the buyer is having to pay a commission at closing. If that were the case, perhaps some of this outrage would be more understandable. However, if the seller is paying for it, why on earth would you really care? Perhaps it is different in other states, but here in Texas the seller pays the commission to both the listing agent and the buyer’s agent. This works the same way for leasing in TX. So you are getting represented by a professional agent and their broker at no charge because the seller is paying for it. You can look at 100 houses and then just walk away; this is just part of the game for a realtor. I see the argument of the price being inflated, but as mentioned earlier the market is the market. An overpriced home will sit indefinitely.

Now a seller has more grounds to be concerned about the fees. However, they have a choice. Listing with a broker is entirely voluntary and commission is negotiable. You can stick a sign in the yard if you wish.

Yes, it can be great money if you look at individual sales and the time involved. However, I think that many people are not cut out for a job that has absolutely no base pay or any guarantee to make a dime. Not to mention paying taxes, providing your own benefits, marketing, education, etc. Self employment is not for everyone.

If any of you are truly upset about this injustice, why don’t you call your local real estate school and enroll? It takes a whole lot less time than getting a college degree.

39 Ninja

The seller pays the commissions only because the buyer gives them a buttload of money to pay said commissions.

If I give you $20 and then you buy me lunch, I wouldn’t necessarily say you “bought” my lunch.

It’s like when renters argue they don’t pay property tax, as though the landlord hasn’t rolled that in to the cost of rent.

40 charles@gettingarichlife

Ninja,
Great post as I have a future post called “The 6% Real Estate Scam”. Agents don’t get paid 3%, it’s 6 total. (Buying and selling) The biggest myth that it’s pad for by the seller, it’s paid for you the buyer. It’s in the price, so you paid $350,000 which is $21,000 in commission. If it was a flat fee say $5000 total, you could negotiate a $335,000 price point which the sell would accept because that’s what they net on a $350000 list with 6%.

41 CSK

There just isn’t a scam or mystery in any of this. It sounds logical that the seller would accept 335K, but they would fight to keep the price as high as possible. If you were selling your house FSBO, and the other houses on the block sold for 350K, regardless if they were represented by a broker or not, would you drop your price to 335K based on that logic?

There are brokers out there that will list a house for 1% listing fee, but they still offer 3% to a buyer’s agent (total of 4%). If you want to play the game on the MLS you’re going to have to be competitive. If an agent could take their buyers to a house that paid 3% vs. .05%, which house do you think might have an advantage? If buyers en masse decided that they don’t wish to be represented by an agent and want to negotiate directly with sellers, perhaps the whole structure will crumble. As long as they do, seller’s will have to accept this and offer a competitive fee to have their house seen by as many people as possible.

The market will ultimate determine whether sellers will keep paying 6%. Sellers have the choice to sell all by themselves, market their home through hundreds of websites, and organize the whole process. They can negotiate directly with buyers and meet with every agent and buyer personally and show their home. There are seller directed auction sites. Maybe someday realtors will go the way of travel agents, but if they do it will be based on the market and consumer choice rather than exposing some grand conspiracy of real estate agents.

42 JoeTaxpayer

In theory, the realtor selling your house is supposed to fight (work) for the best price they can get you.
In reality, say you are trying to sell your $300K home. For you, the last $10K is $9700, but to your realtor, it’s only $300. So if they can dump your house for $290K or $280K, they’ll coax you to take the deal. For them, it’s about volume, not selling half the houses at a 5% higher sale price for the home seller.
By the way, commissions are negotiable. You can offer 1% of the first $200K, and 5% above that. Or even tell them you can sell you own house for $200K, and offer 6% above that number. What they can’t do is agree to a net listing, where you say you just want to clear $300K regardless of sale price. That’s illegal.

43 Rueen

I am not sure what you mean they get payed too much. They have a lot of expenses and those that don’t have expenses need to charge more to make a living. It is difficult to find clients, if they are not a broker they need split their commissions, they need to budget for advertising, they have travel expenses, their are a lot that goes behind the scenes of just taking pictures and showing homes. I bet if majority spend 6 months as a Realtor they will not be able to make a living. There is a lot of competition and work involved and deserve to get paid that 3%. I feel sorry for those who sell themselves short and give 1-2% if you list with them.

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