Fair and Reasonable Commission Rates

Our clients don’t pay for cheap service. They have high expectations of us and any professional who they trust. People who trust us to guide them through the sale of their homes are most likely to be fair and reasonable people. I think they see our intent to increase their profit and keep them safe as fair and reasonable.  

You get what you pay for. So, pay for fair and reasonable.

Placing a high price on mediocre doesn’t make something less crummy. The phrase, “you get what you pay for,” suggests otherwise. So, what are you paying for when you pay for real estate brokerage service? I know what I expected when I hired REALTORS. They needed to show me they understood the contracts, possessed ideas to make the market work in my favor, and they would keep our interaction confidential. I’ve never paid a broker six percent commission to sell my house, and I’ve never been disappointed. If that’s what I expect and what I pay for, it makes sense that I deliver the same to my clients. 

Essential Real Estate’s business plan is different than other firms. We intend to guide home selling clients to higher profits, safer contracts, and less worry. Higher profits are a product of eliminating unnecessary expenses and using the strength of the market to increase a seller’s bottom line without depending on just getting a higher price on an offer.

Look at real estate brokers across the country. You can easily find a broker who charges more or less than we charge. I don’t think you will easily find a brokerage firm prepared to show you how they intend to increase your profit and eliminate risk. Essential Real Estate brokers are ready to show you how we increase profits for our clients and eliminate risk and worry. More profit, less worry. That’s what you get when you pay us to sell your home. 

The fee we charge and how we guide you through negotiating the selling costs and terms of the sale are fair and reasonable. You will pay lower commissions with us. You’ll get more of what you pay for. 

Prepare to WIN the hottest properties without overpaying.

Ask most buyer agent brokers for their best ideas to win the accepted offer for their clients this year, and you’ll hear something like: Outbid Everyone.  If that’s their best idea, they’ve got no idea. After three years of markets extremely advantageous to sellers, REALTORS should have more ideas to help their clients win in the home buying competition. 

Eight years ago, long before the market turned sharply against buyers, we started looking at ways to give our clients ideas to negotiate the competition out of the way without overpaying. We enjoyed a unique advantage for years while most agents continued to write offers the way they always had. By knowing the terms of purchase agreements, contingencies, and the transaction mechanics better than most agents, we guided our clients to outsmart the competition. We bet that home sellers are more likely to accept contracts that carry the least risk when the price is close. We were right. The good news for 2022 is that this strategy still works. 

Structuring an offer to appeal to the seller’s security needs is easy, provided the buyer does their part. Do these things first to win an accepted offer in competition without being the highest bidder on price. 

  1. Find a lender who will underwrite your loan application before finding a house to buy. Lenders will work with you and your agent to draft a letter for you to include with your offer that accomplishes the objective of the commitment letter most buyers promise to provide 30 days after acceptance. With this strongly worded letter, you level the playing field with many buyers who don’t need the protection of the commitment letter contingency. 
  2. Gather the evidence that you have access to all of the funds you need to buy without taking a mortgage. Most people who think they got beat by “cash buyers” are wrong. They got defeated by people who took a mortgage but showed the seller that they had access to enough money to buy if they didn’t get the loan. Consider all of your options before deciding you don’t have access to a half-a-million dollars. Many “cash buyers” don’t have the cash, but a relative does, and often the relative is willing to promise to provide the funds if the buyer cannot qualify for financing. Don’t rule this out. I’ve seen buyers discover they have trust funds they were unaware of or had a parent or grandparent who considered them a reasonable risk to promise to provide the funds with no strings attached, knowing they would never need to do more than give the letter. 
  3. Understand the limited value of contingencies. When the market favors the buyer, you can include any number of contingencies, and the seller probably won’t object; not today. The protection of some contingencies isn’t worth the cost or the risk that the contingency will discourage the seller from accepting your offer. Testing, inspecting, investigating, getting another person’s opinion aren’t helpful to your goal of getting your offer accepted. The seller’s goal is to get to closing with no worries. When you show you are the most committed buyer, your value goes up even when your price is less. 
  4. Select an agent who knows how to make the Offer work for you. The practice of real estate is a contract negotiating business often left in the hands of people who don’t like contract work or think they can protect a buyer from every possible risk. The State approved forms are dummy-proof. But, if all you do is check the boxes and fill in the blanks, every offer will look risky to the seller, regardless of the strength of the buyer. Prepare yourself by finding an agent who can show you how they can structure your offer to fit your tolerance for risk and best show your commitment to close. 
  5. Let the skilled agent lead. You’d think I would be wise enough to take the advice of my REALTOR when I tried to buy in this market. Eventually, I was, but my first efforts got the same results I helped my clients avoid. Trust the skilled agent. If they have a plan to get your offer accepted without depending on you outbidding the crowd, go with their program. Moving into your first choice home is more enjoyable than living and learning a few times over. 

Our clients expect fair value and exceptional skills.

Raise Your Expectations and Profit.

We take on clients who expect us to be exceptional. No one asks us to reduce our fees. And still, our clients pay thousands less in commission than their neighbors, and they never pay 6% broker fees.  

The average real estate commission charged by brokers to sell a house in the United States hasn’t changed much in a hundred years. The six percent commission has survived every possible market condition. Its immunity is being tested today by the US Department of Justice. The lawyers want to dig deeper to see if the reason commissions hold steady is related to a lack of fair market competition. 

Some estimates figure real estate commissions cost the American home sellers $100 billion annually. The money we use to pay closing costs and real estate commissions comes from our home equity savings. If the average American homeowner has $153,000 in equity in their home and pays $30,000 in broker fees, they’ll use 20% of their equity savings before moving on to their next big plan. 

Is 20% too much?

I don’t know if 20% of your equity is too much to pay for broker fees. It’s more than I spend. We do know if the broker’s cost to sell your home is related to time on the market; an average of three days compared to 30 days might generate higher profits at lower costs. Can some of those cost savings be passed on to consumers?

Facts are Key to Commission Negotiation 

The following is just my opinion, and I could be wrong. There is no conspiracy among real estate licensees protecting the 6% commission. Real estate agents have persuasive information to make a case in favor of top-of-the-market commission rates. (To keep the lights on is just one argument you might hear) For consumers to successfully negotiate commissions with professional real estate brokers, they need to know how the MLS works. They must understand that they can structure their commitment to pay a commission at a time and in a way that leaves them room to decide to pay a top-market rate.  Facts about compensation and cooperation will dispel the myths that homeowners pay to avoid.

With facts in hand, consumers will spend less of their home equity paying our utility bills and keep more money in their own hands.  The economy doesn’t suffer when less home equity is spent on broker fees.

The Problem With Home Selling Costs is Information.

Information about real estate purchase agreements, the thousands of contingencies, and how real estate transactions and negotiations work is the key to reducing home sales and acquisition costs. 

In some ways, the information problem has improved. It wasn’t so long ago when REALTORS held all of the information on homes for sale, sales prices, and market statistics. Today, anyone with a smartphone has access to more real estate sales data than any previous generation. Access to the data that once was confidential and privileged for the eyes of REALTORS-only allows consumers to be more intelligent, savvier, and wiser. 

Better informed consumers struggle less with negotiating decisions. They make commitments based on facts and data. Emotions will always play a role in negotiations. Having information helps temper the emotion or offset disappointment when emotions overrule logic. 

If consumers had a better understanding of how the commission sharing among members of a multiple listing service works, they would not concede their ability to negotiate commission quickly. Left to believe it is to their benefit to promise to pay the highest commission rate to a buyer’s broker before seeing any offers, home sellers lock themselves into commitments that increase their selling costs by thousands of dollars. 

Commit to paying less and reserve the right to pay more. 

Since January 2020, Essential Real Estate brokers have compiled evidence to prove that home sellers spend more home equity than necessary to sell their homes in this red-hot market. Our clients see how the commission-sharing component of the MLS works. We show them how to commit to paying less to a buyer’s broker and reserve the right to spend more AFTER they see the offers. 

An easy example is the $400,000 home sale. When our clients sign their listing contract with us, they may agree to pay a buyer’s agent 2% of the sales price to work against them on behalf of the buyer. That’s a peculiar concept, but that’s how it is today. The Seller agrees to pay X% for a broker to represent the buyer to gain an advantage over the Seller. The typical X% is 3.0%. But for our clients, the X% is 2.0%.  

By promising to pay something, but not the top rate, our clients have room to negotiate to pay more depending on the quality of the offers they have to consider. An offer may be so good that a seller is willing to pay $4,000.00 more to accept it. The Seller will know how good the offer is once they see it and can compare the offer to their choices on the table.

What makes an offer better than another? It’s not the price that matters most; it’s the net. And the net is the result of contingencies, credits, costs, and price offered for the property. 

Besides knowledge of the commission sharing process, homeowners will be in a better position to squander less equity when they learn how the contingencies work. 

Ambiguity Kills Your Opportunity

Your offer is more likely to get rejected because of a drafting deficiency than a price deficiency. Drafting an Offer to Purchase that will work as a contract is the highest responsibility of real estate licensees. A well-crafted offer will guide the parties to stay on track from the time of acceptance to the date of the closing. Ambiguities left unattended may cause problems that someone has to pay to overcome. I’ve often been challenged with: “I’ve never heard of that happening.” There are plenty of REALTORS who doubt my opinion about the need to be specific and thorough. Their clients have paid or will pay the price to hear about what they’ve never heard. And the agent may never know what happened.

Errors. Ommissions. Ambiguity.

Each line of an offer to purchase describes the responsibilities of the buyer and seller. Who is going to do what, by when must be written in a way that a reasonable person can interpret the intentions and the action steps. When things go wrong, there must be a clear process of next steps to allow exploration, negotiation, or termination. Real estate contract lawyers know what can go wrong, and they probably can give you examples of when the most obscure problem occurred. When problems occur during a transaction, agents get the opportunity to see where the problem started. Problems that arise after closing give agents the opportunity to see how the legal system operates.

I’ll give you a few examples of some common drafting deficiencies.

Errors. Purchase agreements are 99% prewritten. All you have to do is fill in the proper blanks with numbers or words to make complete sentences and check the boxes to indicate that you intend for this or that provision to be part of the Offer. Some errors are easy to see when you read the purchase agreement. A line preceded by a $ sign calls for a number, not words. The number is not intended to become a percentage and if the drafter makes a dollar amount space a percentage, the sentence will make no sense.

Ommissions. Real estate firms have their own additional contingencies written on the addenda. There is a line on the Offer to Purchase that identifies the addenda which the buyer intends to be included. When the drafting agent fails to include a reference to the addenda where the reference is called for, the addenda may not be considered a part of the offer by the seller. Buyers who expected the protection of a contingency will be concerned to discover the contingency was committed.

Ambiguity. This is my favorite example: Closing Date: The buyer agrees to be flexible as to a closing date. Your idea of flexible might be, you meant moring or afternoon. My expectation might be this month or some date next month. My second favorite: In the event that XYZ occurs, the buyer and seller agree to negotiate a mutually acceptable solution. Who decides whether or not the parties negotiated? How do we arrive at a mutually acceptable solution when the parties do not mutually agree?

Purchase agreements are completed by licensees, lawyers, non-professionals, and paralegals. The range of skill and interest in precision is vast. Most purchase agreements have deficiencies. It’s true that the kind of issues I described may not be a problem in many transactions. But, when one becomes a problem, the problem will be costly.

At Essential Real Estate we take contract drafting seriously. A well-drafted offer can be accepted whereas a poorly drafted offer requires a counteroffer to clean up deficiencies. We’ve been told the difference between our offer and second place was the quality of the drafting. That’s not surprising. I’m sure people often think they got outbid on price when they lose in competition. They’d be displeased to know their offer could have been accepted had the simple Errors, Ommissions, and Ambiguities been fixed before the offer was submitted. The problem is unless the drafter knows better, the errors aren’t seen as errors and the buyer will pay the price.

Multiple Listing Services. Do they help or hurt American Consumers?

Some people see the real estate multiple listing service (MLS) business model as a great benefit to the American consumer. Others (Not-REALTORS) have doubts. The Department of Justice and some judges are on the side of the doubters. I favor a competitive environment that allows more brokerage service and fee options for the consumer; the MLS model has room for growth. Essential Real Estate has proven long-held beliefs are myths.

The essence of the issue is that MLS systems are designed for the Seller to pay one commission to the listing broker, and the listing broker then commits to paying half of the commission to a cooperating broker. More often than not, that cooperating broker is working diligently for the buyer’s advantage to the Seller’s detriment and then collecting their fee from their opponent, the Seller. The rules of membership in an MLS result in listing brokers obligating their home-selling clients to promise to pay the highest typical rate of commission to the buyer’s agent in most cases. (I estimate that rate to be 3.0% in 90% of all listings)

Paying the other side to work against you is unprecedented. The closest example might be losing in court with the obligation to pay court costs and attorney fees for the other side. The Seller isn’t losing in a home sale, but they still pay the buyer’s broker. That’s peculiar. 

This article in the New York Real Estate News summarizes the complex issue. I’ll offer a solution suggestion. Split the commission in two. 

The MLS is a Private Club

To understand how the MLS works, consider it similar to a private club for people with specific credentials. In this case, it’s a real estate license. Licensees apply for membership and pay dues to join the MLS. The members promise to cooperate with all members in exchange for the privilege of access to every member’s inventory of listings. Cooperation is guaranteed, while meeting standards earn compensation.

One rule of membership in the MLS can not be an obligation to pay a set price commission to members. Over time, some practices become Standard Operating Procedures. About 88-90% of all listings in an MLS will include a 3.0% offer of compensation to be paid by the Seller. That’s not a rule; it’s the way it is. The following most likely number below 3.0% is 2.5%.  

Split the Commission. Let the Free Market Decide. 

Cooperation between MLS members will not change, and the consumer will not suffer if the practice of one commission paid by the Seller ends. My proof is two years of running an alternative business model with more options for the home seller’s advantage. Instead of obligating the Seller to pay a 6.0% commission expecting half of that commission will be delivered to a buyer’s agent, listing contracts with clients of Essential Real Estate are signed with commitments set less than 6.0%. 

Where the same Seller has an option to sign a listing contract at 6.0% with another broker member of the MLS, Essential Real Estate Clients might sign a contract committing themselves to no more than 4.0% commission and promise to pay the buyer’s agent 2.0% commission instead of 3.0%. This way, our selling client retains the opportunity to agree to pay a higher commission and can decide after seeing the quality of offers. The results are compelling. An uncommon member is a broker who demands a 3.0% commission from the Seller in exchange for their buyer’s Offer to Purchase when the Seller offers 2.0%. 

It’s a Seller’s Market. They should get all of the advantages.

The compensation method we use is the kind of advantage owners deserve in this market. Locking a Seller into an obligation to pay top rate commission for any offer artificially supports the highest commission rate placing the seller at an avoidable disadvantage. Free markets drive prices up and down. The commission is the price of the service. There might be some artificial support for the commission to hold firm at 3.0% in any economy. Splitting the commission into two sides might remove one of those supports.