What should I be paying my real estate agent?

Question

I looked for answers to this but couldn't really find a clear answer. I am in the middle of my second investment property and using the same agent as I did on the first deal. They are a family friend but are charging me 3% realtor fee. They are great but that cuts into a lot of cash I need for the deals.

Is 3% too high for a regular agent when I am buying multiple properties a year? How would you suggest going about negotiating a lower rate from them?

Aaron Williams · Answer

@Bryan Laufenberg As an agent in Boise, ID and from the comments above I can tell commissions vary from state to state. They are negotiable and in my market they are typically 6% split 50/50. 3% going to the Buyer's broker and 3% going to the Seller's broker. The seller predetermines how much they are willing to pay out to both sides before they list their house. The Buyer's broker commission is disclosed to the Buyer broker through the MLS. When signing a Buyer Representation Agreement, the buyer is agreeing to how their agent/broker will be getting paid. This should be negotiated before/when this agreement is signed. Typically, the buyer is agreeing to pay their agent/broker 3%. However, this is actually getting covered/paid from the Seller's proceeds at closing. BUT, for example, if the seller is only offering a 2% Buyer broker fee, technically, the Buyer is liable for paying the 1% difference. In my opinion, and how I work is just receiving whatever is offered from the Seller on their MLS listing and not require my Buyer client to pay the difference.

Getting back to negotiating a Realtor's fee. I agree with @Steve K. in that you get what you pay for. How much experience does your family/friend Realtor have? How many deals a year do you plan to do with them? Are they finding you off market deals as well as on market? Have they been able to save you money during the negotiations? I believe there is some truth to the answer (as cheesy as it is), "If an agent can't defend their commission, how do you expect them to defend and negotiate for you when it's your money?" So, what is your agent doing to earn their full 3%? If they have a lot of experience negotiating real estate deals for years and years and almost more important, keeping deals together all the way to close, chances are they're earning the full 3%.

Basit Siddiqi · Answer

@Bryan Laufenberg

What market are you buying in?If you are buying in a market with low cost, sometimes I see that the agent will charge the buyer a fee.As with everything, it should be negotiable.

Bryan Scott · Answer

@Bryan Laufenberg

This question is tabled, discussed and debated alot on BP.  Sorry in advance for the length of this answer to you post...

One small glitch you offered was that your agent is also a family friend.  Oops!  Tough to do, but you both will benefit from having a candid discussion so you can calibrate each others professional expectations to arrive at a mutually beneficial conclusion going forward.  If willing, perhaps they could do a financial breakdown so you understand all the "moving parts."  Then, you can decide from there whether/if you have a good match.

Just know that "big box brokers/agents" have lots more expenses than independents (licensees who may choose to go it on their own after at least 2 years in many states).

As an investor, agent and A-type thinker, I like to use the concept of "Zero-based Budgeting" to build my business plan from the lowest common denominator, which is how much does it costs me to represent a buyer or seller and how much is reasonable for me to earn when I do it.  I, for one, need to be able to defend my position if asked the question about commission rates.  Expenses include corporate/admin overhead and direct expenses associated with each client.  In order to stay in business, I need to be compensated for both plus a reasonable margin of profit.

Having done this for a while, I can safely tell you that representing the average buyer will take at least 5 outings looking at about 6 properties per outing.  I break down each phase of the process and list all the details required to check off the tasks required to get a buyer from the interested stage to the closing table.  Same when I represent a seller.  On average, I spend around 45 hours with a buyer and around 30 hours with a seller.  I have spent a great deal more time with some buyers or sellers, but these are the averages, which I use for my budget model.

Next question I have to ask myself is, "What is my profession and my expertise worth on a per hour basis, when compared to other professional service providers?"  All things considered, including competitive market forces, am I worth, say, as much as my attorney, or doctor, or are my services more closely valued at what I pay my CPA?  I am fairly confident that my value exceeds what I pay my electrician, plumber, or handyman (no offense to all of my tradesmen friends BTW).

Fast forward to the end:  This is just one agent's perspective, but my budgeted "shop rate" is $120 per hour.  If I spend 45 hours on average with you as a buyer, that means I believe I am worth at least $5,400.  in your town of Boise, according to Zillow, the average home value price is currently $323,540, so this means my 45 hours worth of representation for you should be 1.67% of that price.  My current, fixed-rate price, regardless of sales price ($200K or $2MM), is $4,995.  If I do multiple transactions with one buyer, I will negotiate further, but this depends on how much work the buyer is doing, or willing to do in the process.

If the listing agent/seller is offering 3.0%, agreed to in advance by those parties, great!  What do you think I do with the difference (1.33%, or $4,303.08)?  Simple...  I give it back to my buyer client at closing.  This is planned in advance so that it is fully disclosed on the Closing Disclosure and all is made part of the transaction legally.

Bottomline is this:  If you never ask for a discount, you won't get one.  If the amount of commission, or the current arrangement is giving you pause, just table the issue and get it behind you.

Good luck!

Steve K. · Answer

@Bryan Laufenberg the typical commission on a real estate deal is 6-7% split between buyer’s agent and listing agent. The commissions are usually paid by the seller (and built into the sales price so essentially passed on to the buyer that way but technically debited to the seller). Typical commission split is 3.2% for the listing agent, 2.8% for the buyers agent but that varies. If you’re buying MLS listed deals “on market”, the commission split is usually already determined by the listing agent and the seller and included in the listing info on the MLS. If you’re finding off market deals yourself it may be possible to negotiate some on commissions but if you’re working with a great agent be careful not to incentivize them to not want to work with you anymore. Keep in mind agents have fixed expenses they pay each month such as E&O insurance, MLS fees, desk fees, realtor board fees, etc. and they also split their commission with their employing broker. So if the total commission seems like a lot to you for the work you think they’re putting in, know that they’re doing more work than you know about behind the scenes and only actually pocketing a portion of that money. There are discount brokerages out there you can work with that offer reduced commissions but you get what you pay for as they say; working with these brokerages will limit the number of properties you get access to because the traditional brokerages don’t like working with them. Overall in my experience a great agent is worth what they earn in commissions, but not all agents are equal that’s for sure. You could also look into getting your own license, it will likely cost you about $1500 initially and $2-5k per year to maintain, but if you’re not actively working as an agent and building your reputation, your deal flow may go down as other agents don’t always like working with part-time agents, just like they tend to blacklist the discount brokerages. That’s how I see it working at least in my market.

Bryan Laufenberg · Answer

Yes, I found the property. They just wrote up the offer and took 3% when the deal was finalized. So, I'm guessing I need to re-evaluate things with my agent.

Morgan Eriksson · Answer

so they are charging you to BUY a property? I don't charge my clients anything unless i'm selling a property or finding and working a off market deal for them.

What should I be paying my real estate agent?

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