When looking for real estate agents, you've probably heard that the average commission is about 2.5%-3% for both the buyer's and the seller's agents. That's quite a bit of money on a home! Considering the median home price in the United States is $309,800, that means the average real estate transaction has between $15,000 and $18,000 in commissions. Although the seller pays these fees, the reality is that the buyer indirectly pays them (without these commissions, the seller could sell the home for less and pocket the same money). These seemingly "excessive" commissions have led many buyers and sellers to look for discount real estate agents.
The question is, though, do you come out ahead by paying less in commissions? Or, is the adage true that you "get what you pay for?"
What Are Discount Real Estate Agents?
You may be wondering what makes someone a discount real estate agent. Recall that the average commission is between 5-6% as a whole. Half of that goes to the seller's agent and the other half to the buyer's.
Despite this being the standard commission model, nothing necessarily says that's the way it needs to be. Agents are free to set whatever commissions they want. Historically, though, there hasn't been much incentive to break with tradition. The fees are all paid for by the seller, so there's little incentive to reduce their prices. Similarly, a seller wouldn't want to pay 10% to each agent because there's little incentive to pay more. Plenty of quality real estate transactions go through with the standard rates.
Some agents cut their commission to earn business and attract more clients (and use more innovative internet business models). Suppose you had to spend 100 hours per sale that made you 2.5% commission. Now, what if there's a model that got you 1% commission but only required 20 hours' worth of work? In those same 100 hours, you'd get 5% of the sales prices instead of 2.5%.
Much like big box stores, discount agents look to gain more business by lowering fees.
How Can Discount Real Estate Agents Cut Commissions?
There are a few reasons why real estate agents frequently have wiggle room when it comes to the commissions they charge.
As mentioned above, a reduction in fees might mean higher volumes. If an agent can reduce their commissions to generate leads faster, they might work less per deal. If they can do that, the agent might come out ahead even though each transaction results in less profit.
The other reason why agents have wiggle room on commissions is that the expenses they have to spend aren't necessarily proportional to the house's sales price. Consider a $100,000 condo and a $1 million home. At the regular rates, they would earn $2,500 and $25,000 in commissions, respectively. While there might be more back and forth for the million-dollar property, there isn't necessarily $22,500 more work involved. An agent could charge $15,000 and still make a nice sum of money on the transaction.
There's probably a minimum commission level that a seller's agent needs to charge to make the transaction worthwhile. For example, it wouldn't be worth the time to show a home for $10. Similarly, if the buyer's agent cost is too low, no agent will want to show the house. However, there's a lot of wiggle room on these costs - especially when it comes to the higher-priced properties!
Is Paying Less the Best Option?
Is paying less money the best option? This question might sound bizarre (who doesn't like to save money?), but it is quite valid within the context of real estate.
You may have heard the term "for sale by owner." FSBO means someone tries to sell their home without the help of a real estate agent. In this model, you'll pay the least commission. You'll only pay for the buyer's agent since you are the seller's agent - effectively cutting the traditional commission in half. The NAR did a study three years ago and found that the median selling price was $190,000 for FSBO properties, while it was $250,000 for ones sold by a real estate agent. Even factoring in the standard 5% commission, the agent properties would have netted the seller $237,500, which is still significantly more than the $190,000 with only the buyer's commission.
In that case, paying less is not the best option because real estate agents will help your property sell for more.
Instead, what if you could maintain the same level of expertise and experience but pay a little less? That's the business model that works out best. On a $1 million property, there's no reason to pay $50,000 in fees. There are plenty of real estate agents out there who would probably be happy to show and sell your home for less.
SimpleShowing Embraces This Concept
Most real estate technology companies look at ways to reduce real estate commissions and other costs. Few companies want to eliminate agents since there is something valuable about selling your property with an independent third party who has a fiduciary duty to you.
For example, SimpleShowing has a 1% listing fee. You'll get a dedicated real estate agent, contract and negotiation support, MLS listings, an open house, and more. Everything that you've come to expect from a professional, quality real estate agent, you'll get with SimpleShowing - it'll cost you less money, though! That's a win for you!
Similarly, for buyers, SimpleShowing offers a commission refund of up to 50% at closing. For example, let's say the typical commission is 3% in your area. You buy a home for $250,000. Your buyer's agent would typically pocket $7,500, but if you worked with SimpleShowing, you'd get half of that, $3,750, as a commission refund! Imagine what you could do with that extra money! Depending on where you purchased, it could be two or three mortgage payments, for free!
Ultimately, SimpleShowing embraces discount real estate agents in the best way. You still get all the benefits. They just cost you a little less.
And that's a complete win for you!
If you're interested in buying or selling with SimpleShowing, please contact us!