Why does it cost so $#%!ing much to sell a home – Part 1 – Too Many Passive Hands in the Cookie Jar….

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People often ask me that question – albeit without the profanity – though in the back of my mind they are just trying to be polite…but that’s what they are thinking!

There has recently been a “round robin” of postings on Active Rain about compensation for agents, rebates and the (fading) rebate market.

The Round Robin of Posts on agent compensation:

1.The series started with a posting about Zip Realty ending its rebate system. The Zip Realty model was based on the idea that there was plenty of fat in the commission pie and that through a more “efficient business model” they would rebate some of the commission given to the buyers agent back to the buyer.   Some models like this still exist – however, the rebates are getting skimpier and skimpier as the housing recession drags on.  Many agents complain that the agents taking on these deals are not “on top of their game”  – which given what they are making per deal – makes sense.  Real estate is high-touch and labor intensive – if you have to make up the shortfall with volume – corners are going to get cut.  But the big elephant in the room is that few of these models are profitable – most are running well in the red and are breathing in the last fumes of VC (venture capital).  In other words – most never really turned a profit.

2.The next post was by Loreena Yeo  in Texas – who wrote about the expense involved in being an agent and where the bottom line was for any given transaction.  She was doing a transaction by referral – which meant she owed a referral fee to the agent that gave her the business.  This takes a significant chunk out of agents commission.  After working with the buyer for several weeks – the buyer suddenly announced that they expected a rebate of 1% to help with closing costs.  After running the numbers where 1/4 of the paycheck was going to the referral agent and 1/3 of the check was going to  buyer –  leaving the brokerage with 42%.

 

3. Then Jennifer Allen  wrote another post about whether or not giving up a referral fee and a buyers rebate was really too much.  Her answer was that it “depends”.

Let’s get down to some numbers….

But let’s go back to Loreena’s  situation because it is the most solid in terms of numbers and lets add a twist.  For agents  who have a broker and franchise fees – the numbers get even more problematic.    Generally about 50% goes to the broker with another 6-8% going to the franchise. Then you put in a 25% referral fee and a buyer rebate – and what’s left?  Practically nothing for the person doing the actual boots on the ground work.  Let’s take a purely hypothetical transaction of $500,000 at a commission of 6% paid by the seller.

Please NOTE:  That hard numbers and percentages are hypothetical and for educational purposes only!
Let’s assume that
The listing side  takes 3%, the buyers side takes 3%
So the buyer’s commission is a fat $15,000.  Sounds nice, doesn’t it?  Let’s see what happens to that nice fat paycheck….

For arguments sake let’s have 7% go to the franchise –  The agent portion of that might be  $525.

Many agents are on a 50:50 split with their brokerage – so $7500 goes to the broker.
Referral fees can be anywhere from 25-40% for some relocation companies – so let’s use 25%   – Agent portion of that is $1875

Finally – using Loreena’s numbers there is the 1% the buyer wants as a rebate –  $5000 (this is either split by the broker and agent or taken on exclusively by the agent)  Let’s assume the agent portion of that is $2500.

What is the agent left with?  $2600.   And this is assuming that the broker would swallow half the buyer rebate – which is very problematic.

There are so many problems with these numbers from the stand point of being an independent contractor working on commission –  that I won’t even touch on that.  However, given that it takes roughly 250 hours to complete on transaction – you are looking at about $10.50 per hour – which makes no sense at all for someone who is advising and facilitating the single largest transaction that most people ever make.

But looking at who gets what is instructive.

  • The Franchise gets $525
  • The referral agent gets $3750
  • The broker walks away with $7500 – $525 (franchise fee) -$1875 (referral fee) and perhaps -$2500 for the buyer rebate.  So the brokerage gets $2600.
  • The agent gets $2600.

So, this supposedly “reasonable” buyers rebate adds up to $2400 more than the agent actually gets.   The broker gets as much as the agent if they agree to share the buyers rebate.  And the referral agent who didn’t lift a finger in the transaction is getting $1150 more – which in fairness – they have to share with their broker as well.   However, referral companies including relocation services charge as much as 40% of the total gross commission.These guys are among my pet -peeves.  The glom on to an extortionary amount of commission and add nothing to the transaction.

But who is doing the actual work here?  The agent – not the buyer, not the broker, not the referral agent.  And that’s the problem.

 

© 2011 – Ruthmarie G. Hicks – https://thwestchesterview.com – All rights reserved.

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