Understanding How Real Estate Commissions Work Before You List Can Lead To Substantial Savings

It's cold outside, and the housing market is in a decline, but the spring selling season, whatever it brings, will soon kick into full gear. For most home sellers, that means one thing — paying a lot of money to a real estate agent.

But there are ways to save.

You are not only allowed by law to negotiate, but consumer advocates encourage bargaining over the price of commissions paid to full-service real estate agents. 

Most start at 6 percent of the price of a home sale. Simply asking for a cut in that commission — even half a percentage point — can save hundreds if not thousands of dollars, depending on the price of the home.

And, along with Internet resources, there are a growing number of alternatives to traditional real estate firms that have long dominated the market. These options range from paying a few hundred dollars to add a house to a real estate listing service to a few thousand dollars for a limited set of services, such as holding open houses or negotiating with potential buyers.

But one warning: Although it can be done, barking down the price of selling a home by playing hardball isn't easy in a slowing market. That's because agents are working harder and paying out more money for advertising and other marketing to sell homes.

"Commissions today run the gamut because of all the different business models that are out there," said Bob Kennedy, executive vice president of the Connecticut Association of Realtors. "The consumers, like anything else they are purchasing, need to see what they are going to get for their investment or cost. That is extremely important in today's environment. They really need to look at the services being offered and the compensation being paid."

Real Trends Inc., a research and publishing firm based in Colorado that monitors the real estate industry, said commissionsto real estate agents dropped nationwide each year from 1990 to 2005 to an average of about 5.2 percent. But in 2006, when the housing market stumbled — with prices dropping and the number of listings rising in most parts of the country — real estate commissions rose slightly.

Despite the percentage cuts, real estate agents are making more money on each sale, thanks to the rise in real estate prices over the past decade. The Department of Justice, which has kept track of the industry because of antitrust concerns, estimates that the nationwide median commission paid by home sellers in 2006 was $11,672, an increase of about 28 percent since 2001, when the average commission was $9,110.

Part of the difficulty in negotiating a commission is that consumers don't understand the real estate business and the services offered. In a survey last June by the Consumer Federation of America, only 36 percent of those surveyed said they knew "a lot" or "a fair amount" about real estate agents and their services, and only 26 percent said that real estate commissions could be negotiated.

But they can and they should, said Stephen Brobeck, executive director of the federation.

"Yes, sellers can negotiate, and in fact, they can almost always knock a percentage point off the prevailing rate in your area," he said.

But Brobeck said sellers must understand how commission is split. On a 6 percent commission, 3 percent goes to the seller's broker, and 3 percent is paid to the buyer's broker. If you negotiate a 5 percent commission, you need to ensure that 2 percent is paid to the seller's broker, and the full 3 percent is still paid to the buyer's broker, he said.

"If you offer the buyer's broker a lower split than they could get on most other houses, they won't show your house," Brobeck said. "They'll deny that, but you are at a disadvantage. They have a greater incentive to show your house with a higher percentage split" of the commission.

"But — and this is really important — you have to find a broker you really trust, so you can discuss the issue of splits in a well informed way," Brobeck said. "If you have a broker who doesn't want to talk to you candidly about commission splits, find another broker."

Real estate observers said the percentage of commission being paid also depends on the location of a house, its condition and how difficult it will be to sell.

And by how much it costs. Brobeck and others said the more expensive the house, the lower the rate of commission — even as low as 4 percent.

Experts said home sellers should interview at least three agents from different real estate firms and ask specific questions about what is included in the commission price, including the number of open houses, who will show the house to potential buyers and how much and what type of advertising will be done.

"Consumers need to tell agents what they expect," said Steve Murray of Real Trends. "And customers need to listen to really good agents," especially about the selling price.

"The truth is, sometimes consumers get a little foolish," Murray said. "They call up the full service guys and say, 'I'm not paying full commission.' What they should say is, 'Convince me why I should pay full commission and understand I'm skeptical.'"

The consumer federation has conducted several studies on the real estate industry and offers some advice online at www.consumerfed.org. Recently, the antitrust division of the Department of Justice added new content to its website about the different ways to sell a house and how consumers can save money by using a nontraditional, full-service brokerage. For more information, go to www.usdoj.gov/atr/public/real_estate/index.htm.