You Have More Power than You Think When Selling Your Home
One question that often comes up when discussing real estate commissions is, "Can the established norm of paying 5 or 6% in commissions really change?" Our unequivocal response at Listwise is "Yes." Homeowners have the ability to set the terms of the agreement, and they have a stronger negotiating position in this relationship. Contrary to common perception, real estate commissions are not legally fixed; they are at the discretion of homeowners. However, many homeowners have been complacent and accepted the status quo, inadvertently foregoing possible commission savings and often settling for a lower selling price because they failed to align their agent's financial incentives with their own.
You Have Choices in How You Compensate Your Agent
As a homeowner looking to list your home on the MLS, it's a legal obligation to hire a licensed real estate agent and provide a commission to the buyer's agent. Technically, you could fulfill this requirement by engaging the most economical flat fee MLS listing agent, which costs around $99, and then offering a $1 commission to the buyer's agent. For $100 in total commissions, your home could be featured on the MLS. To be clear, we don't think this is a smart approach, and we wouldn't recommend it. A high-quality real estate agent can make life easier and help you sell your home for more money, but that doesn't mean adhering to a traditional flat percentage commission of 5 or 6% is a wise choice. The point is that today you have a great deal of latitude in how you compensate agents when you sell your home and using that power wisely can help you achieve better results.
The manner and amount you choose to compensate the agent selected to list your home will impact the types of agents interested in working with you. While paying less than the standard 2.5 or 3% to a listing agent could lead to commission savings, it might also reduce the experience or skill of agents willing to work with you. Similarly, offering a lower commission for the buyer's agents could lead them to steer their clients away from your listing, prioritizing listings with higher commissions. The choices you make will have an impact on the results you achieve when selling your home. However, not all deviations from the standard practice of a fixed 5 or 6% commission are negative or involve extra risk. In reality, these deviations can be a valuable tool to filter out agents with lesser skills and lower confidence in securing the best price for your home.
Why You Should Consider an Incentive Commission
As an example of this, consider the incentive commission structure that we use at ListWise. The commission structure we utilize involves a base fee of just 0.75% of the sale price plus an additional incentive payment of 20% of the amount that the sale price exceeds an agreed incentive price1. In this innovative commission setup, the agent's percentage commission varies based upon the final sale price they achieve, as well as incentive price they agreed with the homeowner. The incentive price is established by the homeowner meeting a few high-quality, local agents, each of which give the homeowner an incentive price. This competitive approach encourages agents to set an incentive price that will be attractive to the homeowner and strong relative to rival agents' offers. Furthermore, the agent's commission is also dependent upon the final sale price, so listing agents that have more confidence in being able to generate a high sale price will be more likely to participate in such a commission structure and more inclined to provide a higher incentive price. By adopting an incentive commission structure that is set in competition, you not only give whoever you hire an incentive to work harder and smarter to get you the best price, you also credibly differentiate between agents based on their skills as well as their confidence and ability to help you sell your home for the highest price.
You Have the Upper Hand
In addition to homeowners having the power to determine the terms of their agreement with agents, they also possess influence due to the relative supply and demand dynamics for realtor services. In terms of demand for realtor services, there were roughly 5 million homes sold in 2022, yet the supply for realtor services is huge, with over 3 million licensed real estate professionals in the US.2 3 Given the high supply of agents relative to the number of homes needing to be bought and sold, the competition among agents to secure new clients is intense. This competition drives agents to spend considerable time and money advertising and proactively soliciting clients. Surprisingly though, despite homeowners' strong negotiating position, they don't do much to leverage this power. According to the National Association of Realtors, 80% of homeowners typically engage just one agent for listing their property.3 By hiring the first agent they contact, homeowners give agents little incentive to compete or offer better terms. This behavior also rewards agents with higher advertising activity, which sustains elevated costs. Rather than hiring the first broker they meet or are referred to, homeowners could generate better terms and get the best agent for selling their specific home if they asked agents to compete for their business in an open, transparent way.
How Will You Use Your Power?
As a homeowner, you possess the authority to decide compensation terms when selling your home, placing you in full control. However, the decisions you make have substantial consequences. The standard practice of paying 5 or 6% in commissions, split between listing and buyer's agents, is both expensive and has been shown to produce sub-optimal outcomes. Embracing an incentive commission structure, coupled with fostering competition, can enable you to secure better terms, filter out less skilled agents, and incentivize your chosen agent to get you the best price. ListWise has created a streamlined process to help you implement just such an incentive-based approach, but ultimately, the choice is yours. Selling your home is a pivotal financial decision, and we hope you will use your power to shape the home selling process in a way that works for you.