Lately I’ve been bombarded with emails and flyers from developers and other agents touting the higher commissions they are now offering to buyer’s agents. Bring them a buyer, and I’ll receive a 4%…5%…6%, or higher commission. I’ve even encountered a Seller offering 10% to the Buyer’s broker. I suppose the thought is that higher commissions will result in quicker sales. But do these higher commissions actually result in a faster sale for the Seller? I’ll get to that in a moment, but first a quick primer on how commissions are set.
Each broker dictates the commission they charge to list and market a property for sale. For example my broker charges 3% to take a listing. In addition to the listing-side commission, the Seller usually offers a buy-side commission. Though this commission is typically specified as a percentage of the final sales price, it can also be stated as fixed dollar amount, or as a sliding scale. Sometimes the “commission” isn’t even in dollars. I’ve seen everything from HDTVs, trips and even new cars offered to agents?
The commission the Seller offers to the Buyer’s broker can vary, however the majority of properties listed on the MLS offer a commission that falls within a fairly tight range (see Table 1 below). When I am representing the Seller and am asked, “What kind of commission should we offer to the Buyer’s broker?” I usually recommend a commission that is competitive with those offered by the Seller’s direct competition (i.e. neighborhood comparables). Typically this has ranged from 2.5% to 3.5%, with the vast majority of buy-side commissions offered at the 3% level (again, refer to table 1 below). Occasionally, I have seen 4% offered to the Buyer’s broker, but not very often.
Lately though, I have seen wide variation in Buy-side commissions. And the greatest change has been on the increase in the commission rate being offered. I first observed this change with the commissions offered by builders. Earlier this year some builders begin offering a 4% commission. Others followed suit. [Keep in mind that during Reno’s housing boom, when buyer’s were camped out, waiting in line to enter into contract on a new home, builders were not so generous with their payouts. In fact, (I have been told) some builders refused to pay any commission at all to buyers’ brokers.]
After the novelty of 4% commissions wore off, a few builders got creative and structured their commission payouts to increase incrementally as the number of buyers an agent brought to the table increased. For example, bring one buyer who closes on a house and receive a 4% commission. Bring a second buyer and receive 5% on that transaction. Bring a third buyer and receive 6% on that transaction. And so on.
Though different, this kind of commission structure did not necessarily produce the desired result, namely a greater number of sales for the builder. In this market, most agents would feel fortunate to be working with one buyer…any buyer. Envisioning a scenario of working with two or three buyers, all of whom subsequently purchase homes in the same development, just isn’t realistic. So these commission structures gave way to simply offering higher commissions from the get go. 5% and 6% to the Buyer’s broker are now no longer an oddity.
As one would expect, these higher buy-side commissions are now finding their way into the resale market. Whereas it once one rare to find a Seller offering anything higher than 3.5% to the buyer’s agent, the MLS is loaded with such listings today. In fact, in researching this post I observed 165 residential properties currently listed offering a 4% or higher buy-side commission.
But do these higher commissions have any effect? More importantly, do they result in the house selling any faster? I spoke to my office manager about this and was told “No”. Our manager, who has over 25 years in the business, went on to say that the Seller would be more successful reducing his asking price by the amount of the increased commission rather than increasing the commission offered.
To be fair, a higher commission may capture the attention of agents and result in an increased awareness of the property, which is good; but a higher commission means little or nothing to the prospective buyer, and that’s if the prospective buyer is even aware of the commission being offered.
I wanted to analyze the numbers and see what I could determine from them. However, first let’s take a look at the breakdown of buy-side commissions currently being offered on residential properties for sale in Reno Sparks.
Table 1.
| Buy-side | # Solds | % of Solds |
|---|---|---|
| 1.50% | 1 | 0.02% |
| 2.00% | 53 | 1.17% |
| 2.25% | 6 | 0.13% |
| 2.50% | 1149 | 25.38% |
| 2.75% | 28 | 0.62% |
| 2.90% | 1 | 0.02% |
| 3.00% | 3037 | 67.09% |
| 3.25% | 9 | 0.20% |
| 3.50% | 78 | 1.72% |
| 4.00% | 132 | 2.92% |
| 4.50% | 2 | 0.04% |
| 5.00% | 17 | 0.38% |
| 5.50% | 1 | 0.02% |
| 6.00% | 11 | 0.25% |
| 7.00% | 1 | 0.02% |
| Total | 4,527 | 99.98% |
As one can see, commissions can and do vary, however 95% fall within the 2.5% – 3.5% range. Those 165 Sellers currently offering 4% or higher to the Buyer’s broker represent only 3.6% of the total Reno-Sparks listings.
To analyze the effect on sales, I pulled the days on market (DOM) for recent Solds (last six months) and broke them out by month and commission rate. The results follow:
Days on Market (No. of Sales) by Commission Offered to Buyer’s Broker
* The five sales (6% commission) in May were for five town home conversions in the Mountain Meadows complex in Sparks.
The table above shows the average days on market (DOM) on a monthly basis, by commissions offered to the Buyer’s broker. The numbers in parentheses represent the number of sales for that month. The average DOM for all residential sales over the last six months stands at 117 days. Regarding a correlation to commissions offered, no clear trends are apparent (other than that the number of monthly sales has been decreasing, which we already know.)
Part of the problem in attempting to determine a correlation is due to the scarcity of data. But if we disregard the data for commissions of 5% and greater, we still do not see a relationship. Look at the average DOM for sales offering 2%, 3% and 4%. Over the last six months, these DOMs have been 114, 114, and 115 days, respectively. It appears varying the commission has no effect on the total time the property spends on market.
I may be simplifying my analysis of this data, but from what I can see I tend to agree with our office manager: reduce the price rather than increase the commission.
Data courtesy of the NNRMLS – November 2007
Jeff Royce
Diane,
I’ve often asked myself the same question. Thanks for doing this study on it. It is interesting that 3% did better than anything either more or less than that amount. It seems the commission should meet what buyers agents are expecting, but it doesn’t help to exceed it.
Lindie
You all want to see a perfect example of the bubble in housing prices in Reno? Take a look at a new listing that hit the MLS today. MLS # 70021873. 1 Newlands Circle.
This house sold on 8/31/04 for $595,000. It sold on 9/15/05 for $800,000. That’s a freaking 30% increase in price (note I didn’t say value) in one year. Did household incomes in Reno go up 30% between 9/04 and 9/05?
Listed today at $799,999. Apparently these sellers figure the market has not declined in the past 26 months.
Do you think this house will sell for $799,999 if they offer the buyer’s agent a 4% commission??
Boomer
Maybe you realtor folks could explain why it should cost twice as much to sell a well-priced house for $1.5M as a poorly priced house for $750K? It would seem to make more sense to base your commission on how reasonable the price was than on how much the home cost since you wouldn’t have to advertise or show it as long.
My personal feeling has always been that realtors should charge a fixed price plus the cost of advertising rather than the outrageous practice of a percentage of the home’s value.
BanteringBear
“My personal feeling has always been that realtors should charge a fixed price plus the cost of advertising rather than the outrageous practice of a percentage of the home’s value.”
It is my understanding that the rate is generally discounted quite a bit on high end homes. I don’t think the wealthy are shelling out 6% on the purchase/sale of a $5M property.
MikeZ
RE: “Bring them a buyer, and I’ll receive a 4%…5%…6%, or higher commission.”
I don’t have a problem with this, as long as it’s disclosed openly to the buyer(s) and not simply buried as an obscure line item in the settlement sheets.
If I buy a house and I find out, later, that MY broker/agent got extra $ to get me into THAT particular house, and didn’t tell me, it’s lawsuit time.
BanteringBear
What I find most interesting about the Newlands house, is the fact that it’s for sale for the 3rd time in as many years. There is really no reason to purchase a house if one is not expecting to live in it for at least five years. I smell speculators. It’s truly remarkable how many homes, currently on the market, were purchased within the past few years. A lot of shants pitting going on, I suppose.
Boomer
Interesting how “Bantering Bear” reverts to the commission on a $5M home when the question was $1.5M vs $750K. Hard to believe most realtors wouldn’t be pushing for 6% on both.
Reno Ignoramus
What kind of Fool?
What kind of Fool would employ an agent to buy a house from a developer?
I’m going to spend $500K to buy the Tuscan Evening model at Happy Hearth Meadows from the StuccoIsUs Company, (granite and stainless included of course) and I am going to use an agent to do that? I am going to watch StuccoIsUs pay my agent a $20K commission? 20K that I could have paid less for the house??
Diane, please tell me that this really doesn’t happen, ok?
BanteringBear
Boomer posted:
“Maybe you realtor folks could explain why it should cost twice as much to sell a well-priced house for $1.5M as a poorly priced house for $750K?”
Then:
“Interesting how “Bantering Bear” reverts to the commission on a $5M home when the question was $1.5M vs $750K.”
Your question was for “realtor folks”, not me. When I threw out the $5M figure, it was random. So what’s your point, anyway?
Kevin
Just a couple corrections-
“Diane, I’ve often asked myself the same question.”
and
“Diane, please tell me that this really doesn’t happen, ok?”
Note the article byline: “Posted by Guy Johnson on November 02, 2007”
Diane Cohn
Kevin, thanks for noticing!
Jeff, Guy did all the work on this post so he deserves the credit. And yes, an interesting vote for the accepted norm.
Boomer, at this point, given all the homes that don’t sell I would love to charge a fixed fee plus costs for marketing, but all my competitors charge nothing up front so it’s difficult to compete with free. So for now I limit my listings and focus more on serious buyers.
BB, high end homes equal higher risk due to less demand, so I personally still charge full price. Unique homes are more difficult to price, market and sell due to the unpredictable nature of the high end players. Many of my competitors will discount, however, so check with them first.
Mike Z, any ethical buyer’s rep will disclose immediately a commission offered above average. When I see such an offer, one of the first things out of my mouth is, wow, X percent. They must be motivated!
RI, many people aren’t comfortable negotiating on their own behalf. In some instances as an industry insider, I’ve been able to negotiate $70K in additional incentives, a $20K price reduction, and still get a paycheck from the developer. If some of you out there can go in and negotiate the 6% commission off on your own behalf without an agent and get all the incentives you want, then great, go do it! You don’t need me.