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Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Is a 6% real estate commission fair?

6-percent-commission-rip-offFew topics in real estate elicit more passionate opinions than real estate agent commissions. "Rich Dad, Poor Dad" guru Robert Kiyosaki recommended making a real estate agent part of your investment team and paying him or her top dollar.

Others, like real estate brokerage Redfin, say that real estate sales, even with a full-service experience, should cost less than 6% (as low as 1% for certain transactions, according to its web page).

Who says they can't both be right?

Is 6% real estate commission reasonable?

Perhaps the difference of opinion exists because the average homeowner doesn't really know how to differentiate between agents at the top of the profession -- whose experience, education and work ethic add value -- and those whose main asset is a pretty smile.

The United States General Accountability Office said in a statement that "despite the intensely competitive local real estate brokerage markets, broker fees are usually set without regard to either the quantity or quality of service rendered. Rather, fees are based solely on the price of the home."

Is the 6% model flawed? James Dingman thinks so. He's the chief development officer at Help-U-Sell Real Estate, a fee-for-service real estate company that bills itself as "offering a set-fee alternative to paying the traditional broker commission."

"The truth about percentage-based commissions," he says, "is that they just don't make sense. Think about it: You have a four-bedroom home on Elm Street worth $300,000. A 6% commission would be $18,000--a lot of money. A three-bedroom two doors down worth $250,000 would pay just $15,000. What did you, as the seller of the larger and more expensive four-bedroom house, get for the additional $3,000 you paid? The answer is 'nothing.'"

In Europe, where the commission-based system has been nearly replaced by fee-for-service structures, selling costs average 1.5% to 2% of the property's sales price.

Realtors respond to critics: Do you work for free?

Alethea Smock, a former agent in Colorado, says, "There is a huge investment a person makes to become and continue to be a Realtor with absolutely no guarantee of an income. How many people have called a Realtor to drive them around to look at houses for 'decorating ideas' or called a Realtor to list their house for a month only because they wanted to 'see if the house would sell?' And how many people would invest over $10,000 to become a Realtor with no guaranteed income?"

Smock continues, "Do I think 6% is a rip-off? As a homeowner who is oblivious to the real cost of being a Realtor, yes. As a person who was a Realtor for over eight years and finally quit to find something more lucrative, no, 6% is not a rip-off to find a person who can make a living in the housing industry."

What do you get for your real estate commission?

Nathan Letourneau, a real estate investor in the Twin Cities area of Minnesota and western Wisconsin, says hiring a real estate agent helps his bottom line.

"I use a real estate agent and I personally feel that a great real estate agent is well worth 6%. Great agents, like the one I use, have expert local knowledge and lots of contacts to help you sell your house quickly for the maximum profit."

He adds, "Just remember that 'maximum profit' does not always mean highest price. Selling quickly for less money can be more profitable once you figure in monthly mortgage payments, interest, insurance, taxes, heat, water/sewer, electricity, etc. every month that it sits on the market waiting to be sold."

According to the National Association of Realtors 2018 Profile of Homebuyers and Sellers, "FSBOs typically sell for less than the selling price of other homes; FSBO homes sold at a median of $200,000 last year (up from $190,000 the year prior), and significantly lower than the median of agent-assisted homes at $264,900."

However, does this mean that you'd be able to sell your median-priced home for nearly $65,000 more by using an agent instead of doing it yourself? Probably not. Often, say experts like Forbes.com contributor John Wake, lower-priced offerings like mobile homes, condos and rural smaller houses change hands between people who know each other. So no agent is involved.

Another experienced real estate investor, who conducts hundreds of annual transactions and wishes to remain anonymous, remains unconvinced that Realtors add real value.

"What are they [Realtors] doing to earn that hefty commission? In many cases, not much," the investor states. "The reason we continue to use Realtors is for the buyer's peace of mind. Buyers--particularly inexperienced ones or those searching in a new market--like having a middleman or woman on whose advice they can rely. The only thing a Realtor adds is a comfort factor for the buyer that the Realtor, as middleman, is acting on the buyer's behalf."

Study: Realtors don't get higher prices

Researchers at the National Bureau of Economic Research found that using a real estate agent did not increase seller prices at all. 

The study concluded that there was no price difference between comparable properties sold directly from sellers to buyers without real estate agents (FSBOs), and homes sold with the help of real estate agents.

However, the findings may not be as clear-cut as they appear. For example, the researchers speculate that people who feel confident enough to sell their own property might be better negotiators and thus may get a better price than the average homeowner likely would.

In addition, the researchers found that Realtors sold homes in less time than owners who sold on their own. As Letourneau says, costs can mount if you carry a property for extra months while hoping to get a higher price.

Bottom line: You don't have to pay 6%

Sellers, especially those in very hot or expensive markets, are learning that they can get full service for less--you can work with a full-service agent and negotiate a lower commission. Alternatively, you could go with discount agencies like Redfin, which offer MLS listings, access to licensed real estate brokers and marketing help. 

Or, you can do the advertising, showings, negotiating and contracting yourself. Just don't be surprised if it takes more time and effort than you planned, and yields less profit than you expected. 

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