If you’ve been tinkering with the idea of listing and hopefully selling your home, you may have come across the infamous “zero listing fee” option.
While it obviously sounds too good to be true, seeing that no one works for free, there’s a big catch that allows a real estate brokerage to offer this service.
These companies promise to use an experienced and professional real estate agent, and to sell your home fast, all for zero dollars. Sounds pretty good, right?
It’s certainly a lot more appealing than paying the standard 5-6% to list your home, that’s for sure.
But there’s no free lunch, as you probably guessed. Rest assured, the agent will get paid…
How the Zero Listing Fee Works
- A real estate agent will sell your existing home for free
- But get paid on your next home purchase
- And perhaps future deals too, while also getting referrals
- So it’s worth it to them to do a one-time freebie
The trick to the zero listing fee isn’t what happens when you sell your existing home, but what happens when you buy your next home.
You see, instead of charging you a fee to sell your home now, these discount real estate brokers are banking on making money on your next transaction. And probably the next one after that.
When you sell your current home, there is an expectation that you’ll purchase another home in the not-too-distant future, and ideally immediately. This is when the company will make their money.
Let’s Look at an Example
- Imagine you sell a home for $300,000
- You’d normally pay around $7,500 to $9,000 to the listing agent
- Instead you’d only have to pay the buyer’s agent commission
- But the listing agent would then represent you when it comes time to buy a new home
For example, let’s say you agree to sell your current home with one of these zero listing fee brokers.
It sells for $300,000, and you’d normally have to part with anywhere from 2.5% to 3% of the sales price to the listing agent. That would be $7,500 to $9,000 in this case, nothing to sneeze at.
Because you elected to use a zero listing fee agent, you wouldn’t have to pay this $7,500 to $9,000 fee, though you’d likely have the buyer’s agent fee deducted from your home sale’s proceeds.
So you’d still have to pay their half, which could be 2-5% to 3%, but you’d save quite a bit on the listing agent end.
However, when it came time to purchase another home, the agent who represented you on your home sale would be representing you as the buyer’s agent for the new home.
This is where they would make their 2.5% to 3%. Let’s pretend the new house is an upgrade, as many home buyers are often move-up buyers.
You find your dream house priced at $500,000 and go under contract. Once escrow closes, your zero listing fee agent makes a whopping $15,000 because they agreed to a 3% commission on their end.
And guess what? You still didn’t technically pay your real estate agent. That 3% came from the sellers of your new home.
Sure, it could be argued that the sales price reflects that commission, but it still technically came from the sellers.
Why the Zero Fee Listing Can Be Successful
- As long as you work with a good real estate agent
- The zero listing fee arrangement can be a good deal
- You just don’t want a bad agent representing you twice
- Once for the sale of your home, and a second time for the purchase of another home
The takeaway is that the agent is willing to forego some early earnings for a larger payout in the future, and hopefully a longstanding relationship.
There are also other possible wins, like new business from referrals you send them, assuming they do a good job.
The downside is if they happen to provide poor service, and/or are bad at what they do, you won’t want them representing you a second time. That’s where this whole thing can backfire.
You really need to look at the fine print to determine if you’re locked in to using them and what the penalty is (if applicable) for going separate ways. You may also want referrals from them to ensure they’re a quality agent.
Sure, they have an incentive to do well so they can get more and more business, but there’s no guarantee they’ll be a good fit.
If you’re not quite sold on this setup, there are discount brokerages such as REX and Redfin that charge less than the standard 2-5% to 3%, without the future contract.
Of course, just about any real estate agent will have some expectation to work with you in the future, but having the right to say “No” is pretty important.