Real Estate commissions based on sales price

Buying & Selling Real Estate
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Real Estate commissions based on sales price

Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

I ahve recently had several debates with several agents and others regarding how much agents should be paid for contracted price.

The scenarios that come up with me are this: If you list a property for $300k and an offer comes in at $290k with seller to credit buyer $8k towards closing costs, then their actual offer (in my book) is $282k. s such, I believe it is only fair that agents should be paid based on the $282k (assuming that was agreed upon as final contract) and not based on $290k.

I have had several issues with buyers needing money for closing lately so they often increase their offer price, then reduce it with teh seller paid costs. As such, I feel that the agents should be paid based on the net of the offer price less the seller credit (of course I dod not expect them to get reduced by all other closing costs, only seller credits requested by buyer.

What are your thoughts?

- Will Barnard

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y

If you look at the secret comments in the listing for REOs it always says "commissions based on net sales price". Add that to your listing and it removes all question.

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    Seems logical to me Will. Compensating agents based on a straight percentage of sale commission is a bad compensation system too IMO...but I don't want to hijack!

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  • Ophelia Nicholson
    Involved In Real Estate · Hyattsville , MD · Member since 2011 · 298 posts · 256 votes
    15y

    Maybe I'm just programmed to think a particular way, I think its always been a case where the agents want to be paid on the full $290k because that would net them more than the $282k.

    I agree with you from a seller point of view that the realtor taking of cut of 282k would be better but then if that was the case they'd probably end up with less buyers.

    The Realtors main goal would change from selling your house and bringing buyers to only wanting to work with the buyers who will ask for less incentive or zero incentive since it would affect thier paycheck.

    I think the main thought has always been seller can afford to take the hit so lets see just how much money we can get out of the sellers hands. They can afford it but the buyer cannot. I'd prefer to pay based on price after concessions all day long if I could get away with it. Its my money why can't I keep it.

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  • CJ L.
    Rehabber · Denver, CO · Member since 2010 · 79 posts · 20 votes
    15y

    I also believe the agent's commission should be based on the sales price after the sellers concessions are made, and fortunately I have an agent who agrees with this as well. :D

    The last house we sold was listed for $162k and an offer came in for $159k with $3k in closing costs. We told them that the $3k closing cost were fine, but they would have to pay the $162k. They agreed as the closing costs were far more important to them than the $3k price difference.

    Total net to seller was the $159k, which was used as the price my agent received his commission from. I can see that they're trying to get paid, but to get paid based on money that I never saw, well that's another story.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    If you look at the secret comments in the listing for REOs it always says "commissions based on net sales price". Add that to your listing and it removes all question.

    9Reply
  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
    15y
    Originally posted by Jon Holdman:
    If you look at the secret comments in the listing for REOs it always says "commissions based on net sales price". Add that to your listing and it removes all question.

    Excellent comment.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    In sounds good in theory but most agents get 2.5% - 3%. $8,000 in closing costs is $240 in extra commission. On $3,000 it is $90. I usually don't complain.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Steve L.:
    In sounds good in theory but most agents get 2.5% - 3%. $8,000 in closing costs is $240 in extra commission. On $3,000 it is $90. I usually don't complain.

    I was going to say the same thing. If you're willing to alienate your listing agent and the selling agents who show your properties over a couple hundred dollars (and you will piss off agents by doing this), then you're not thinking long-term in your business.

    We go the opposite direction -- giving bonuses to our selling agents -- and it keeps them calling us and asking us what we have to sell.

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    15y

    It depends on how you view it.I agree with J Scott and I am sure others will disagree with me and him as well.

    I also believe these costs wouldn't be an issue if the are accounted for before the purchase.In other words run the worst case scenario and if that doesn't happen then you are better off than you thought.

    It also depends on the potential "book of business" you will be getting from the relationship.

    If this is a big seller who has a large portfolio of properties selling in the millions of dollars than that is different from an investor selling an occasional 50,000 flip.

    If I am a broker/agent playing in that range I need to make every little cent and as a broker/agent someone cutting me on every deal will be a turn off to do future business with them.

    I just think you will burn more bridges than you build.For everyone's information the REO companies are some of the nastiest unethical companies out there and treat brokers/agents like slaves.

    Everything from a 2% co-op to paying off the net to belonging to 10 organizations charging hundreds of dollars each a year to paying for computer platforms,etc.

    I could go on forever but many seasoned REO brokers have left that side of the business.For the investor the investment makes sense based on the return but not for the broker/agent.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y
    Originally posted by Steve L.:
    In sounds good in theory but most agents get 2.5% - 3%. $8,000 in closing costs is $240 in extra commission. On $3,000 it is $90. I usually don't complain.

    But if you're the seller you're paying a total of 6% in commissions. 6% of $8000 is $480. Not a huge sum of money, but not trivial, either. And the net sales price is truly the price less the concessions. Structuring it this way is, in a sense, just a way to get around the down payment requirements of the lender. If you're OK with this $8000 concession really costing you $8,480, that's fine. If that helps your business, great.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Jon Holdman:
    If you're OK with this $8000 concession really costing you $8,480, that's fine. If that helps your business, great.

    I think the bigger issue is whether paying $8000 (when the agents have come to expect $8480) will *HURT* your business.

    I can't speak for others, but given the relationship we have with many of the agents we work, with, I'm pretty sure it would hurt our business (we're successful because we have the reputation of NOT being frugal when it comes to our business)...

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  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    I have read all the comments and appreciate the responses. I agree with some of what was said By Jason and those who agreed with him. I would like to point out that a $200 or even $400 differecne is not much in my neck of the woods, however, when I take issue is when a buyer comes in with an agent who has a necessity to get creative to get them into a home such as higher contract purchase price with a substantial amount back in seller concessions. Most of my sales prices are well North of $300k and I would say the avergae is above $350k. Using $350k as an example, if a buyer comes in who does not have capital for the closing costs on their FHA loan, they often ask for a large sum of concessions (As high as $10k). Now $10k at 6% sales commission is $600. Over a year's time and 15-20 flips, that can be very costly to a seller's bottom line.
    I don't worry about it when the concessions are small, particualrly if I am getting ask price or close to it, but I must also watch my bottom line too. Having a buyer's agent expect me to take a hit of $600 more simply because their buyer does not have cash to close is a hard thing for me to swallow.

    I also believe that area/location/dempgraphics have a lot to do with some difference in opinions as well. Take J Scott for instance, he works in the Atlanta area and has stated many times that he has buyers agents asking him what else he has for sale. It sounds to me like he does business with the same buyer's agents on multiple occassions. For me, I have yet to sell one of my flips to the same buyer's agent so worrying about burning some bridge with some buyers agent is not high on my list of worries. Many of the agents I am forced to work with have no business in this business to begin with (it can be very bad in CA as everyone and their mothers have a RE license, perhaps they pass tehm out like candy here in CA)

    Thanks again for all the comments, please keep sharing other points of view as well as continuing with your previous thoughts.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Will Barnard:

    I also believe that area/location/dempgraphics have a lot to do with some difference in opinions as well. Take J Scott for instance, he works in the Atlanta area and has stated many times that he has buyers agents asking him what else he has for sale. It sounds to me like he does business with the same buyer's agents on multiple occassions.

    That's very much a big part of it. Since I work in a relatively small area (about 100,000 people in my investing area), I see the same buyer's agents over and over again (and many of them are also REO listing agents or work in the same office as REO listing agents).

    If my market was a couple million people -- like Will probably sees in SoCal -- it probably wouldn't matter nearly as much, as it would be unlikely I'd see the same agents over and over again...

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  • Dale Osborn
    Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes
    15y

    Why not eliminate sales price from the whole equation? My feelings are a flat fee of $1K-2K would suffice for all their "efforts" in the matter of you closing on a property.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Dale Osborn:
    My feelings are a flat fee of $1K-2K would suffice for all their "efforts" in the matter of you closing on a property.

    Ummm...I know agents who spend more than $1-2K on marketing for high-end properties...if they did this, they'd lose money...

    Generally speaking, agents who are successful selling high-end properties get that way because they are better than agents who sell low-end properties. And why shouldn't a better agent make more money than a worse agent?

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    15y

    You could counter the offer and suggest that if the agents want you to accept the offer and pay seller's closing costs then they reduce their commission. My experience is that commissions become more negotiable with a softer market.

    You can also put on your listing seller will not pay buyers's closing costs, but if that is becoming the norm then you would be at a disadvantage.

    It's whatever the market will bear (as I am sure you are aware). Have seen builders be totally unnegotiable with nothing less than full price,and have seen same ones discount heavily when the market turns.

    Will, am a little biased having spent a good chunk of life selling RE, but reducung sales price an amount equal to the closing costs to reduce commission isn't something I have experienced.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    15y

    It's a business decision plain and simple.It all depends on how you want to run your business.

    I get plenty of business with no discounting of my commission.People that want to wheel and deal or feel brokers and agents are "overpaid" I wish them the best and tell them to find someone else.

    Nothing personal it's just business.I would say to the discussion we are having here to TEST and TRACK the idea and IMPLEMENT it on a small scale in your local market.If you do 15 flips a year then if you have 2 flips in a month try it on one and not the other.

    If you get a ton of push back and negative results then you have your answer for your local market.I do the same thing in my marketing and ideas and test and track the results.

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  • Bill Patterson
    Real Estate Investor · Portage, MI · Member since 2010 · 470 posts · 315 votes
    15y

    Lots of good replies! Another option, if the extra commission on the concession is an issue, would be to counter the offer by an amount equal to the added cost. The buyer probably wouldn't resist paying an additional $500 for a $300,000 house. From his perspective, it’s like trading $500 for $8,000!

    I know the old saying..."If you take care of the pennies, the dollars will take care of themselves". I'm just not sure that considering Jason's good perspective, that it is all worth it if the net to you is within the boundaries of what you would accept as a return on the sale.
    Bill

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  • Will BarnardPro Member
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    OP
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Again, thanks to all for your comments.

    I have not had to deal with this issue a lot, only a few times and two most recent ones. In one case, it was on a property in TX so the amount of the difference was only $200 so it was not a large enough amount to make me go after it. In one my recent CA flips, I had a buyer and their agent who had to work very creatibvely to get the buyer into this house of minbe that they loved so much. In doing so, they raised their offer price above what I was asking and then reduced it via seller concessions. In such a case, I informed the agent that I had no problem giving money back with the increased sales price, my only issue was that the commission should be based on the net between the two and that I was also concerend about appraisal issues. They did not argue regarding the commission and agreed to sign off on it so it did not ever become a negative issue in the transaction.

    In such cases, I think that is more than fair. In other cases, perhaps when the offer price is below the ask price and they also include seller concessions, at such a point, perhaps the seller should be on the hook for the contarct price as the mark to calculate the commissions as the seller would have the option to counter at a higher price or reduce concessions if the final net to seller was not what they were looking for.

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