The real estate industry is a business that — like travel and hospitality and healthcare — offers different models and options for consumers to choose from. As you shop around for a potential brokerage and agent to partner with, you might come across firms that will offer to sell your home for a reduced commission (as low as 1%-1.5%) or flat-fee rate.
The opportunity to save money is enticing to say the least. But the National Association of Realtors (NAR) estimates that flat fees are paid to agents in just 2% of all home sales, while the national average commission rate stands at 5.8% nationwide and has hovered around 6% for decades.
Should you buck the norm and list with someone who will sell your home for a smaller commission or set fee, if such a deal is available in your area? Here we’ll explore what you can expect from signing up with a low commission real estate agent so you can decide whether it’s right for you.
Your home selling experience
When deciding whether to hire a low commission agent, you have to think about how you envision your home-selling experience going. Do you want the full package, white glove Ritz Carlton service from list to close, or would you prefer an ala carte approach with just the basics?
A low commission agent may pledge excellent service and even take quality photos, but their overall offerings and resources may be quite limited in comparison to those of a traditional agency operating with a larger budget.
You simply can’t expect the same level of undivided attention from an agent who’s making less with every transaction — if you think about it, a discount agent is likely going to need to sell a lot more homes to make what a full commission agent would.
“Low commission to me really means ‘no service,’” says Chiquita Pittman, a top-selling agent in Brunswick, New Jersey. “As full commission agents, we have a network. We have a network of inspectors, attorneys, contractors — we can help when there’s a problem. We have the solutions, and that goes a long way in navigating and managing the transaction.”
A real estate agent fully dedicated to your needs will go above and beyond, and you can hand them the reins entirely. Take Ryan Lidholm, a top real estate agent in Columbia, Missouri, who sold the home of retired couple Debbie and Carl Kindle — all while they traveled the country in an RV.
Lidholm booked repairs and improvements, set a competitive list price, and held open houses on behalf of his clients. The house was on the market for just 8 days, and sold within $4,000 of the list price.
Risk of dual agency
With low commission agents, you have to watch out for an increased risk of what’s called dual agency. Here’s an example to demonstrate.
Let’s say agent low commission agent John Doe has agreed to list your property for $300,000 for a 1.5% commission. What he may also tell you is that in addition to his commission, you’ll be responsible for covering a buyer’s agent commission of somewhere between 2.5%-3%.
If the house sells, John will collect $4,500 if he represents you as the seller. But due to the discounted commission, John may be tempted to try and represent the buyer of the sale as well, bringing his total commission to between 4%-4.5% — or $12,000 or $13,500.
This type of setup, where the real estate agent represents both seller and buyer, is called dual agency and it is illegal in six states. Dual agency is a risk even with a full-commission agent; however, when the agent is collecting so little on the sale in the first place, the incentive to double-end the deal grows.
It’s worth noting that the U.S. is one of few countries where most buyers are represented by their own independent agent. In most cases elsewhere, the listing agent is responsible for the entire transaction — including advising the buyer, which is inherently a conflict of interest.
Because the U.S. has buyer’s agents, the commission structure is set up so that a listing agent will split their 6% commission with the buyer’s agent 50/50. The Multiple Listing Service (MLS) is designed to encourage competitive cooperation, which is a unique way of doing business as agents are incentivized to share and frequently review data, which means greater exposure for your property.
When a listing agent is acting as your sole fiduciary — and isn’t looking for ways to make more money on the deal by claiming the buyer’s agent commission — they will be motivated and obligated to get you the best price on your home and negotiate on your behalf.
Possibility of underselling
Another risk of working with a discount agent is that your house ends up selling for less than you could have commanded with top agent’s expertise.
There are no fixed prices in real estate. You won’t find a Kelley Blue Book for your property. The amount that your home ultimately sells for can be influenced by making strategic improvements, pricing it in the sweet spot, and leveraging a well-connected agent’s network.
A competent agent brings a lot to the table as far as advising you on where to invest and how to ensure your home receives as much visibility as possible in your community and on the web. Whatever you saved in commission could very well end up resulting in a below-market price.
“Real estate is more than just writing up a contract,” says Pittman. “You have to be able to negotiate and give guidance to keep the deal moving forward. Every deal today is paper thin and if you don’t have the skill set to make sure everybody’s happy and create that win-win situation, you’re not going to get top dollar and you’re going to leave money on the table.”
Before you sign with a low commission agent…
Do your research:
- Ask to review the listing agreement in detail before signing anything.
- Don’t be shy to ask your would-be agent about their track record. Reputation is everything to a traditional agent, so there’s no reason a low commission agent should try to avoid scrutiny.
- Take to Google and search for reviews of the brokerage. While even the most reputable offices will have the occasional grumpy commenter, if there are multiple complaints about the low commission company you’re eyeing, heed the warning signs and look elsewhere.
Valuing your investment through the end
When you go to someone to receive specialized care, services, or expertise, price is one factor that you consider in your decision, and quality is another.
You might travel an extra hour to see a doctor if you knew she was top of her field, sacrificing a short drive for peace of mind because your health is paramount. Perhaps you’d be willing to hire a lawyer with a flawless track record or reputation, even if he costs a bit more per hour.
And would experienced professionals in either field be likely to settle for a reduced payout for their unique skills and services? Probably not.
The same logic applies in the real estate industry. Real estate agents who are top of their field are going to expect to be compensated accordingly.
It’s hard to imagine that a low commission business model would attract the highest-quality agents — a 2019 report from the Consumer Federation of America found that 73% of real estate agents would not lower their standard commission.
“In every transaction you’re going to have issues and you’re going to have problems,” cautions Pittman. “An agent needs to be a problem solver. When you have a track record and proven results, that sets you apart from the competition.”
With a house likely being the largest asset on your personal balance sheet, saving on commission fees is kind of like buying a high performance luxury car, but then choosing B-grade tires to drive it off the lot in order to save a buck.
Why wouldn’t you treat your financial livelihood — and this long-term investment you’ve made — with the utmost care, all the way through the finish line?
Header Image Source: (Claudio Schwarz / Unsplash)