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Why are Commissions So High?

Working on commission is a numbers game. Work with enough people over enough time and some of them are bound to turn into closed sales producing commissions. For a real estate agent, that can translate into x number of free market analysis turn into y number of listings that lead to z number of closed sales. Or if you spend enough weekends providing free home tours to retirees considering moving to the Triangle (along with 3 or 4 other areas), eventually one of them is going to come back and buy a nice house and make it all worthwhile. Or…, well I think you get the idea. The way I have always looked at it is that good customers (the ones who close) end up having to overpay in order to make up for the time spent on the bad customers.

Another way to look at it is who takes the risk. If a real estate agent works for free, spending time, money and resources with no guarantee of getting paid unless a client closes on a property, that agent is taking a pretty substantial risk and needs to have a good rate of converting leads into closed sales or they will go broke. And the closed sales need to pay well enough to make up for the time and resources spent with people who end up not closing for whatever reason (and there are many reasons that are not the fault of the agent). This is the system that has dominated in real estate for generations. It remains popular because it requires no upfront outlay of money by either a buyer or seller seeking real estate services and the payment when rendered at closing is buried into the price of the property. If a property does not sell because the owner insists on a price not supported by the market or a potential buyer decides to rent after looking at 30 properties for sale, the agent who marketed the listing for the owner or the agent who showed the potential buyer all of those houses is out the time and resources they spent and will need to make that up somewhere else or go out of business. The agent is taking on all of the payment risk and must price their services with that in mind.

On the other end of the spectrum, a seller who pays an agent a flat fee upfront to market their property or a buyer who pays an agent by the hour in return for getting to keep the buyer’s agent commission built into the price of the property is taking on all of the payment risk as the agent is guaranteed to be paid whether a closing happens or not. Since the agent is guaranteed payment, the fees involved can be substantially less because those fees don’t have to also pay for time and resources expended on other deals that don’t close. While the seller or buyer can save thousands of dollars by guaranteeing their agent payment, these types of payment arrangements are much less popular than the more expensive pay at closing models because consumers do not generally like the idea of coming out of pocket for real estate services, preferring to have the fees built into the sales price.

There are also hybrids of those 2 business models where the consumer pays an upfront retainer plus a closing fee. That system shares the payment risk between the parties and seems to be a good middle ground. Agents are guaranteed some payment for their services and consumers willing to make a financial commitment upfront are usually serious and motivated, making them good clients to have. The financial commitment required of the buyer or seller is significant but not so large as to break the bank if things don’t work out, the agent still has the prospect of making the larger closing fee as incentive to work hard to help the client achieve the sale they desire, and the total fee is less than it would be on straight commission.

Goddin Real Estate has been offering alternatives to straight commission real estate services longer than anyone else in the Triangle area and combines over 30 years of real estate experience with cutting edge brokerage programs for buyers and sellers. To learn more, contact John Goddin at 919-968-2100 or John@GoddinRealEstate.com. To learn more about real estate brokerage and fee options, read the blog at www.GoddinRealEstate.com