You may have seen ads for “4% real estate commission” on billboards or on television, wondering if you can save a buck or two (or a lot more) when it comes time to sell your home.
The usual real estate commission is 6%, so a 2% savings can certainly make it a lot cheaper to sell your property. For every $100,000 we’re talking $2,000. A $500,000 home sale would save you $10k. Not too shabby.
But what’s the catch here? Surely there has to be a catch if they’re charging you 4% as opposed to 6%. Who loses?
4% Commission Means the Listing Agent Takes a Haircut
If you aren’t being charged as much, it means someone isn’t making as much money. And that could mean someone isn’t working as hard as they normally would. Note that I used the word “could.”
They could also be working just as hard and fetch the same exact price (or higher) as someone charging you the full 6% commission.
With the 4% real estate commission structure in place, the listing agent takes 1%, or maybe 1.5%, instead of 2.5% or 3%.
Buyer’s agent commission: 3%
Listing agent commission: 1%
Buyer’s agent commission: 2.5%
Listing agent commission: 1.5%
In both cases, the listing agent is the one making the monetary sacrifice. They have to ensure the buyer’s agent still gets their standard commission of 2.5%-3%, otherwise they may balk at any sort of deal. After all, they never agreed to work for less…
The thing with these reduced real estate commission deals is that it’s on the listing agent and no one else. The buyer’s agent will still expect his or her typical commission regardless of what was worked out with the seller. And that’s perfectly fair.
1% Real Estate Commission
Another way you might see this pitched is as a “1% real estate commission,” which our math shows us in the first example above.
Even though the total amount of commission between agents might be 4%, the listing agent may only ask for 1%.
So they can advertise their services for “only 1%” commission in an attempt to make the deal look even sweeter.
But once you get to chatting, you’ll find out that the total commission is closer to 4%, though it could be 3.5% or less if they manage to get the buyer’s agent to take a little less too.
It should be noted that Redfin only charges a 1.5% commission, and is testing an even lower 1% in select markets. But that still doesn’t account for the buyer’s agent, who may still get 2.5-3%.
Should You Use a Discount Real Estate Brokerage?
Now that you know how it works, you might be wondering if you should use one of these discount real estate brokerages. It’s not an easy question to answer because it largely depends on the real estate company.
If they are good at what they do and don’t mind taking a pay cut to sell your home, then by all means why not save 2% on your home sale.
But you won’t really know for sure how motivated they are when receiving a sub-par commission. They may just want to get your deal done and move on to the next, higher commission. Or put your house on the backburner as they tend to listings earning the full 6% commission.
Some folks believe 6% commission is way too much, while many real estate agents seem to think they work way too hard to accept anything less.
If that’s the sentiment from agents, you might not get the service you expect, or the price you desire for your home.
But I suppose you could always try one of the discount guys first to see how they do, and if you don’t get the price you want, relist with a full-cost broker if you think it’ll make a difference.
At the end of the day, you want an agent that is determined to sell your home for a great price and if they’re still highly motivated when earning 1.5%, or even just 1% of the sales price, it could be a great deal for you.