Tag: real estate agent

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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.

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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!