If you're a first-time home buyer, calculating how much your dream house is going to cost you over a lifetime, you can take some solace from the fact that the seller pays the commissions for both sides in a home transaction.
Most of us have come to accept the custom that those commissions are generally the same percentages no matter what the home's selling price. Sellers will commit to a total of usually 5 to 6 percent of the purchase price in commissions -- with half, or 2.5 to 3 percent, staying in the pocket of the seller's agent, and the other 2.5 to 3 percent going to the buyer's agent.
But customs are made to be broken and traditions must adapt to changing times -- and it looks as if favorable alternatives are developing to the real estate practices of the past.
1. New startup has agents that will pay you
A new business model is being promoted by a startup called Listing Road. It's free to use, and consumers will be invited to post on Listing Road's portal "the right to represent them." Home sellers and buyers will simply hire an agent they like and earn money doing it.
With the housing market strengthening, many good agents are likely to pay a fee for the right to represent clients and consumers can maximize their return on investment by going that way. Since top real estate agents often pay thousands of dollars a month marketing to potential clients, why not pay for a guaranteed client when there's still a healthy profit left in the commission?
Listing Road says it stands behind its services to home sellers and buyers by guaranteeing the money the agent pays. And it says it stands behind the agents by guaranteeing they obtain the seller or buyer as a client.
Listing Road launched its services on March 2014 in California and is now planning on expanding nationwide January 1, 2015.
2. More options to save on real estate agents
For buyers, there are several discount real estate brokerage chains that work on the "discount commission" model. Agents for these companies offer their clients a rebate percentage of the commission earned at the close of the deal.
For sellers, one real estate agent working in an upscale market offers an hourly rate. He says many home sellers, especially those with expensive homes, don't understand why an agent should be paid more for selling a $1 million home than a $500,000 home. They see the agent's task as virtually the same, regardless of the price of the house.
This agent charges $125 hourly for some services and $250 hourly for others. The total fees average $6,000, compared to more than double that for commission sales. To keep the fee rate low, homeowners pay out-of-pocket expenses -- such as for a photographer -- directly to the service provider. If the agent hires out to get the photos, he'll charge $125 per hour for that and any other tasks, such as printing, the seller could otherwise do.
For tasks that require licensing, the charge is $250 per hour. And the bill is capped at 5 to 6 percent of the home's selling price, so there's no chance the client would pay more than the commission rate.
3. The flat-rate fee option
Another option for sellers is a flat-rate fee. In another upscale market example, a brokerage charges a flat fee of $10,000 a listing for homes selling at the market's average of $500,000 or more. A seller's agent working on a 2.5 percent commission would receive $12,500 on the average home sale.
The flat fee, however, equates to about $2,500 less than a commission on the same average home transaction. Since changing to a flat fee structure, the brokerage has more than made up for what it's lost in higher commissions because listings have tripled -- making the business model far more profitable than the commission approach.
It's still providing full-service representation for its clientele -- just at less cost. The roughly 50 hours involved in selling a home typically breaks down into the following components: 15 hours for a listing specialist, five to 10 hours for staging, 15 hours of administrative time, and 10 hours of marketing. Those 50 hours equate to about $200 an hour in the $10,000 flat fee.
Obviously, in a seller's market, it takes little time to sell a home -- just the reverse of what prevailed only a couple of years ago.
By the way, there's also the traditional option to save on real estate agents. The seller simply negotiates a lower total commission with his/her seller's agent when the listing contract is signed.
Safety can be an issue
As far as selling a home yourself -- also known as "for sale by owner" (FSBO) -- it's not recommended unless you have lots of spare time on your hands, possess exceptional patience, and welcome the potential for expensive litigation. Another concern with the FSBO scenario is your exposure to strangers contacting you or coming to the door to see the house.
Agents are becoming more aware of the potential dangers of showing homes to strangers after recent violent incidents. A group of agents and brokers has signed a “Realtor Safety Pledge” promising to limit business practices that could potentially put them in harm’s way. The spontaneous Sunday tour for a casual "look at a few listings" may become a lot more complicated as agents insist on proper identification screening and paperwork checking beforehand.
In an industry adapting to new economic and social norms, real estate agents who find ways to roll with these changes and still serve their clients without high commissions, may be setting the trend for the future.