When does 4% equal 6%? When the internet is twenty years old. Let’s break it down.
In the bad old days, real estate commissions were often 6%, and they still are in many places where sellers haven’t got the memo that commissions have been trending down for years. Typically, the commission was split 50-50, but could also be shared unevenly. For the sake of simple math let’s say that each brokerage (buyer & seller) splits the 6% commission. So what happens to the 3% on each side? Well, first the agent will be lucky to see half of that commission. First the agent pays his or her “desk fee” which is the portion that goes to the house/brokerage. This is generally one-third of the commission. So that leaves 2% on each side. Then the agent has annual fees to maintain his or her license (maybe $1,500 to $2,000 per year). If the agent is representing the seller, there is advertising and marketing, and if the agent is representing the buyer, there is driving around, lunches, coffee, and closing gifts. And, oh yes, the agent wants to earn a living.
Then when the end of year comes around, agents have to pay FICA and SSI since they are independent contractors, and local, state, and federal taxes. Now you know why agents become disillusioned after about a year. So who supports holding the line on 6% commissions? Obviously it’s the big national brokerages. They can’t take a third of 4% and have any agents left. Fortunately there is a new solution. Technology-oriented, internet-based companies who are glad to strip away the top third of overhead, reduce internal brokerage fees to almost nothing (software + internet + work from anywhere) are leading the charge to 4% commissions; usually 1.5% for the seller’s agent and 2.5% for the buyer’s agent. And the result? Higher incomes for agents. Same net income and lower cost of doing business. Companies like Smart Seller are stripping out the friction of the real estate process and helping buyers and sellers get directly connected to qualified local agents.
