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Are Realtor Commissions Negotiable?

Philipp Albrecht

Aug 08th 2020

There are a lot of costs associated with buying or selling a home. In particular, closing costs like legal and home inspection fees get a lot of attention and for good reason. The average homebuyer in the U.S pays $4,876 in closing costs. While it’s important to be aware of closing costs, the largest cost associated with any real estate transaction is the commissions paid to the real estate agents. Many people believe realtor commissions are set in stone. What your realtor does not want you to know is that these commissions are negotiable.

What is the standard real estate commission?

Real estate agents get paid a commission when the sale of a home is finalized. Typically, this commission is 6% of the sale price of the home. This commission is paid to the agent representing the seller, who then splits the commission with the agent representing the buyer.

The realtor commissions on the sale of a $500,000 house would typically be $30,000. This $30,000 comes off the $500,000 sale price leaving the seller with $470,000 after commissions are accounted for.

Since the commission is taken from the sale price of the home there is a common belief that the seller pays the full cost. However, realtor commissions are factored into the sale price of a home. This drives up the price that the buyer must pay for the home. In this way, buyers indirectly pay for realtor fees even if it is the seller who signs the check.

Realtor fees rise with home prices

Since most realtors collect a flat 6% commission, their compensation rises and falls with the price of real estate. As you are probably aware real estate prices have been rising dramatically over the past 10 years. The hotter the market, the more you pay in realtor fees.

If you bought a house in Nashville in 2012 you would have paid about $10,000 in realtor commissions. If you sold that same house today, you would pay nearly $21,000 in realtor commissions. The realtor does the same amount of work on the deal today as they did in 2012, but they collect over twice the commission.

If you are happy paying that amount of commission when you buy or sell a house, then read no further. If you want to discover an easy way to save thousands of dollars in realtor commissions, keep reading.

Real estate commissions are negotiable

The standard 6% commission has become so ingrained in society that many people believe that there is some sort of law mandating a 6% commission fee. This is not true! No law says that real estate commissions need to be 6% of the selling price. All real estate commissions are negotiable.

Just because realtor fees are negotiable does not mean realtors are compelled to lower their commission below 6%. It is your legal right to ask a real estate agent to lower their commission. The realtor is free to refuse your request–which most do.

Are there any other options?

A model that is quickly gaining popularity is the 1% commission. Under this model, the listing agent only charges a 1% commission fee instead of the typical 3%. With the 1% model, it is still recommended that you offer a buyer’s agent a 3% commission to incentivize them to show your home to their clients.

This model is made possible due to technology which has made the job of a real estate agent much easier. Since technology has made the listing process more efficient, many real estate firms are passing their savings onto the consumer.

How much can you save with the 1% model?

Let’s say you wanted to sell your house for $500,000. If you used a real estate agent at a traditional brokerage, you would pay $30,000 ($500,000 X 6%). This $30,000 would then be split between the listing agent and the buyer’s agent.

If instead, you decided to use Felix Homes, you would pay $20,000 ($500,000 X 4%). Of this $20,000, $5,000 would be paid to Felix Homes and $15,000 would be offered to a buyer’s agent. By using Felix Homes, you would save $10,000.

What could you buy with $10,000?

If you want to have your mind blown, consider this. If you took $10,000 and invested it, after 30 years you would have more than $100,000 assuming an 8% average rate of return on your investment. If you don’t think that is a life-changing amount of money, consider the fact that the average 401k balance of Americans between the ages of 60-69 is $195,000. If a 35-year-old invested the $10,000 in savings and never saved another dime, they could have more than half the amount of money in retirement savings than the average American.

When it comes down to deciding whether to use a Traditional agent or Felix Homes, think about the true cost of those commissions and ask yourself if your realtor is providing enough value to justify those commissions. If they aren’t perhaps it’s time to consider another option.