How are Realtors actually paid?

It’s the question that everyone has, but they’re too afraid to ask… How are you paid?

I’ve been waivering back and forth on how much I want to reveal in this post and I’ve settled on discussing the mechanics of agent compensation, along with a general personal discussion. It’s important to note that every real estate agent runs their business a bit differently. Much of these differences hinge on personal values and what someone will or won’t do or accept in their business dealings. There will always be someone that is willing to work for free, it’s up to clients to decide what the value of having a knowledgeable agent representing them is and negotiating compensation accordingly. There are good real estate agents and there are bad ones, and we all have our war stories from our time in this career.

Before I move forward in this discussion it’s important for me to CYA from a legal sense and say that everything is a negotiation. If you are hiring someone to do a job for you or represent you in some capacity you need to come to an agreement on compensation with them first and foremost. There are no hard-and-fast rules here, so make it a discussion.

Generally, in a residential transaction the seller’s agent and the buyer’s agent are both compensated by seller. Both the seller and the buyer come to an agreement with their respective representative on compensation, but that fee is generally then covered from the seller’s proceeds from the sale of the home.

The seller decides what they are willing to pay for both their listing agent and for the services of a buyer’s agent in finding and bringing forward a qualified buyer before listing their home. For example, the seller offers to pay 6% of purchase price with 3% going to the listing agent and 3% going to the buyer’s agent. If the buyer’s agent has an agreement with their client for higher than 3% compensation it would be up to the agent to get the additional amount paid to them from the buyer. If the seller only offered 5% of purchase price they could split the compensation 2.5% and 2.5% or they could pay their agent 2% and the buyer’s agent 3%. It’s really however the seller wants to set it up and they discuss this with their agent as part of the listing agreement.

There are some things to keep in-mind if you’re the seller who is deciding compensation. Aside from the normal adage of “you get what you pay for” when it comes to your own representation, if compensation is too low for the buyer’s agent 1) you’re putting the buyer in a tough situation to fund the difference for their representation during an already costly financial transaction and 2) agents may decide not to present your home to their clients. I’m not going to debate the ethical implications of steering a client away from a home for the agent’s personal financial gain. I’m just saying that it’s up to each agent how they choose to run their business, and no, I do not agree with where everyone lands on the ethical spectrum.

With compensation often being a percentage of purchase price, that does mean that higher-priced homes come with higher commissions than lower price point homes. This does not mean that higher price-point homes are more difficult to sell, in my experience it is actually quite the opposite. A $100,000 home is oftentimes much harder to transact because the buyer and seller have less money available for things like repairs, there’s more first-time homebuyers at lower price points and there can be agents who don’t want to deal with lower priced homes.

When closing a higher-priced home, what ends up happening is that the bump in commission dollars ends up helping to float time and expenses spent working on lower price point transactions that need more of my time and attention. It may be because there are more nuances within a specific transaction, more legal hurdles, or simply because a client needs more time to talk through ideas or need to view more homes with me before they’re sure of their decision.

It’s also very natural within the real estate business to spend time working with clients that aren’t ready to buy for whatever reason. Because an agent is only paid if a transaction closes, there are many hours spent meeting and working with clients that simply won’t close. Believe it or not, there are costs associated with showing homes to someone who doesn’t end up buying or selling a home with you in time spent, along with wear-and-tear on your car and the necessary gasoline to get from place to place.

The commission number that you see on the closing statement does not go directly into the agent’s pocket. There are splits to pay to the brokerage firm and any team that an agent may be affiliated with. Then money hits an agent’s bank account, where they must set aside money for their own income taxes and self employment taxes, along with their costs of doing business (insurance, advertisements, supplies, car, office, etc).

Each agent is their own small business owner, so all the risks and rewards of being in business for yourself apply. Sometimes it can be lucrative, sometimes your expenses far outweigh your income, but it’s always worthwhile work if you love it.

Why New Construction is Your New BFF

Prices are high, inventory is low and offers in the market are walking a fine line between homebuying and becoming a Vegas-level professional gambler funded only by your life savings. To say that the market is crazy feels a bit like an understatement these days and Covid has compounded the issue. I’ve seen Realtors take keys out of lockboxes to keep homes their clients are interest in from being shown (that’s a great way to lose your license), and I’ve had a Realtor enter without having scheduled a showing (another way to lose your license) which is technically trespassing and a great way to make the seller really, really angry. So as the buyer, how do you stay above the fray?

Two words: New Construction.

While it can be fraught with it’s own set of difficulties, new construction is a great way to keep out of the trenches of full-out real estate warfare known as the multiple offers situation.

Working with a builder means working with a company so they’ve got a plan to handle roll outs of lots and floorplans. They are held to a higher standard than a residential seller and must abide by equal housing opportunity laws. This means that a kindly worded love letter to the seller are off the table for tactics to win a home. The builder usually has an interest list and any newly available properties are offered to those on the list using a first-come-first-served basis. There’s no way to buy your way to the front of the line and sales staff are salaried meaning that their ability to take a shady financial incentive from a homebuyer is essentially zero.

Furthermore, because the sales staff is a step removed from ownership, they have no incentives to select buyers planning to build more expensive homes. As long as the lot is sold and a house is built, then the sales staff is happy whether the ultimate price of the home is 400,000 or 550,000. Meanwhile, if it was a seller selecting offers there’s a clear winner in that race.

Buying new construction also means that there’s more than one home for sale, so if your first choice of building lot happens to be scooped up, there are still other options for you. If you miss out on a re-sale home there is no true backup plan and your house hunt begins back at square one after losing the bid.

With new construction homes and especially those built by larger companies the pricing is more streamlined. It doesn’t always feel like that when you make what you think is a small tweak in the design showroom and it hits your bottom line hard, but it’s true. Shifts in pricing take a while to take effect in larger companies, so their pricing for an equivalent home on the resale market can actually be substantially less. Also, with multi-state builders pricing is often calculated for an entire region, so whether you’re in a big city or a more rural location you won’t see a tremendous jump in the price to construct a home. The majority of the pricing difference is due to the cost of the land itself and not much else.

Getting on a builder’s VIP list can feel daunting because there might be a ton of names on the list ahead of you, but try not to worry. With so many people looking for homes it’s easy to see a really large interest list but then because of the time required to complete the construction process the majority of those who were originally interested either found a home by other means or decided to exit the homebuying market all together. A lot can happen during the time a community opens and a certain home is ultimately built, so try not to feel discouraged.

If you’re sick of getting beat out in multiple offers, you don’t have a ton a money to put down on a house, or you have a difficult form of financing, then it’s time to look at new construction to see what options might work better for you!

Real Estate and Your Income Taxes

Looking around Charlotte it’s easy to see that the market is appreciating, aka the home values are increasing. With more people moving to Charlotte and interest rates still low, there are more buyers than properties available. If you purchased your home even a year ago it’s worth significantly more in today’s market. This has many people very excited to cash out the equity this market situation has given them. But selling your home without having lived there for two full years has some serious drawbacks that most homeowners and even some real estate professionals DON’T know about.

Those drawbacks are related to your taxes.

Under the current tax guidelines, as long as a homeowner has lived in their home as their primary residence for any 2 of the last 5 years, they can exclude $250,000 or $500,000 worth of gain on the sale of their home depending on if you file as single or married filing joint.

… So, what the heck does that all mean?

Let’s say that you purchased your house in June of 2019 for $250,000 and you don’t make any major upgrades during the time that you own it. Later on you decide to sell you house and you sell it for $325,000. In this example, your gain, or the money you made on the sale, is $75,000. If you lived in the home as your primary residence for at least two years, you report the sale on your taxes but the entire $75,000 is excluded from being taxed. You received $75,000 and you didn’t have to pay any taxes for it. That’s a SERIOUS benefit.

What if you sold the house after living there only one and a half years? The entire 75,000 you made on the sale of the home is taxable by both the federal government and the state government. This would cost you more than $18,750 in state and federal taxes (depending on your tax bracket and other variables of course). Even if you turn around and buy another house, you will be held liable to pay the tax on the gain you received.

It’s important to understand the impact that your real estate transaction can have on your financial situation and also your tax situation for the year. Staying a few extra months in a home could mean big savings for you in the long-haul, and understanding this situation could also keep you from jumping into the next highest tax bracket by realizing taxable income that could’ve been non-taxable with a few small tweaks.

Birthday Daze

Thank you to everyone that has reached out whether on Facebook, Instagram, video chat, phone call or text message to wish me a happy birthday. It always makes me feel so special and reminds me of how happy birthdays can be. Connection is really what life is all about, and I’m so happy to be connected in some way to each and every one of you. Thank you for being part of my circle and for being my family and friends.

This day is always one of reflection, which can be both positive and negative. I’m an inherently slower-paced human who tries to take that time to understand how I’m feeling, why I’m feeling that way and how those around me are feeling as well. I’m sorry if I’m distant today, that is very normal for me as I process through, but can be confusing for those around me.

My birthday has often been the marker in tough seasons of my life, which hit me today while on an elliptical machine as I started a workout. Being happy and sad at the same time is hard. I want to be that girl that throws a party and has this amazing, exhilarating day, but that wouldn’t be true to me and how I’m feeling. This day is a constant reminder of learning about things like what a drug overdose looks like and finding my brother in the depths of his struggle. It reminds me of the deep dark places I’ve been through during the loss of a marriage and the depressive spiral that came along with it. It’s a few short weeks from the anniversary dates of my survival of sexual assault while away on a business trip, and the almost sudden death of my husband a few years ago (yes, when he was my husband and we had been happily married for only a few short months).

Thank you for reminding me that birthdays are supposed to be joyful and that I can get out of my own way to enjoy it. I still move slowly through today, there won’t be a big raging party, and I’m surround myself with my closest friends and their greatest energy. There is so much to look forward to and so much to be thankful for, so please know that I’m thankful for you. All of you.

Where are all the basements at?

If you’d like to tell any Charlotte Realtor that you’re relocating from the North without actually telling them that you’re relocating from the North… Just say that you need a home with a basement. As a girl that grew up in the snow belt of New York State, I understand the confusion and the deep longing that some people have for subterranean storage space. However, basements just aren’t really a popular thing here, and quite simply it’s because of science! And they’re cost prohibitive, also due to science.

First, you can find a few basement homes around the area. These are most-often built due to the topography of a building lot. If there’s a large slope in the grading this could be perfect for a walk-out basement, which is the style you’re most likely to see around here.

Frost line and footers

Climate is a huge factor surrounding the great basement debate. When a home is built, for it to be structurally sound the foundation must be secured beneath what’s known as the frost line. This is the depth of the soil that experiences freezing during the winter months. In a colder climate the ground freezes further down, meaning that home structures must be dug deeper to ensure that the freezing and thawing of the ground doesn’t shift the home’s foundation.

A quick google search will tell you how deep an area’s frost line is into the soil. In the area of New York where I grew up the frost line is approximately 48 inches below the surface of the ground. With these homes needing to be anchored 4 feet into the ground, you’re already almost halfway to digging a useable basement as part of the structural requirements. Here in Charlotte, our frost line is only 12 inches down. That’s a lot less digging and a lot less costly to build. Hence, why we have a lot of homes on crawlspace foundations; we don’t need much more than that for a sturdy base to a home.

Ground water depth

Another piece of the climate discussion is the height of what’s known as the water table, which is how close to the surface soil is consistently saturated with water. Here in NC, our water table is relatively close to the surface, which means when you dig something like a basement it’s really, really difficult to keep it dry. I’ve heard someone liken building a basement to trying to build a reversed swimming pool; where you have to make the structure completely waterproof to keep water out of the pool instead of in the pool. The level of waterproofing needed to ensure that there aren’t issues with moisture, mold and mildew in your basement is extensive to say the least.

Soil composition

Here in NC you will see that our soil is a high percentage of red clay. Clay is heavy. Wet clay is even worse. Based on the high water table level discussed above and the clay composition of our soil, basements are REALLY expensive to build.

Given the high cost of constructing a basement, the potential moisture problems that they can harbor and the fact that there is no need for the depth of the support structure in this climate, most homebuyers don’t see value of having a basement and would rather spend that money elsewhere in their home. If you’ve had a basement your whole life you might feel like you’re lacking storage when you look at homes here, but know that you’re also saving money on building costs of your home and you’re dodging potential maintenance issues down the line.