Monday, February 4, 2008

RE: How do Realtors Get Paid?

I received the following comment from a reading posing a tough real estate question regarding Realtor commissions.
Selling a $250,000 house and selling a $500,000 house aren't all that different, but the commission is double on the $500K house. That makes no sense to me. What's the rationale behind it?
I wish I had a solid answer for you, dear readers, but unfortunately I don't. My only rationale behind comes from our friend Einstein's theory of relativity. This same argument applies to many professions and not just real estate. There are many people out there today with the same job description and responsibilities but are being paid unequal salaries across different companies and professions. Usually, the larger the company, the higher the salary. CEO's of Fortune 100 companies are getting $50 million dollars for simply resigning which doesn't make sense to the average person. This same disgust for overpaying someone unfortunatley applies to real estate for many people.

So what do I do differently for a $250,000 home versus a $500,000 home? Nothing. I work just as hard on the $250,000 home as I would on a $100,000. But why should the person selling a $100,000 home pay more than a person selling a $50,000 condo? This same logic can apply across the board. ($1 million dollars and up is a different story and the marketing level and dollars spent increase.)

There are many real estate business models out there offering discounts to the seller. They'll list your house for a flat fee, etc. But almost always, they will offer the agent that brings the buyer 3%. This is what doesn't make sense to me. Someone is willing to pay an agent 3% to bring a buyer whose job it is to help that buyer negotiate the LOWEST price for that home. Meanwhile the sellers want to give less than 3% - and sometimes nothing - to the representative that is there to help them negotiate the HIGHEST price for their home.

It is also important to note that many high end properties $1 million and up almost always utilize the assistance of a well known area Realtor. You rarely see these properties try to sell For Sale By Owner or hire a small real estate firm. (You will NEVER see a $3 million dollar FSBO or using a discount brokerage) Common sense would tell us someone who lives in a million dollar property is probably smart and more than likely business savvy and yet they choose to use a a Realtor to help sell their home. Even if they ask their agent to reduce their commission they are still being paid more than a $500,000 home.

So what's the answer? Is a new real estate business model needed? The current discount brokerages are not prevalent in Highland Park or Preston Hollow and are seen more in East Dallas in new construction homes. So this tells me the average consumer feels a good listing agent is worth what they are being paid regardless of sales price and percentage.

I should have an articulate and impressive answer but I simply don't. But I would love to hear your thoughts on the matter.


  1. Jeff, I love the insight, particularly about how many wealthy and intelligent people tend to use agents instead of FSBO or discount brokers. I guess you could say FSBOs are "penny wise and pound foolish". Keep up the hot sports opinions...

  2. Thanks Britt. Many people, including Realtors, can be penny wise and pound foolish when looking to save money and that's perfectly understandable. But when what's probably your largest financial asset is at stake it just doesn't make sense to try and cut corners.