Forbes Magazine

(reproduced below for personal use only in case Forbes archive migrates)
Seller Beware
Thursday November 20, 6:34 pm ET
By Ira Carnahan

You're not locked in to 6%. How to negotiate a better deal with a real estate agent.

If you sold a house a decade ago for $300,000, you probably paid a standard sales commission of 6%, or $18,000. Sell the same house today and you might get $750,000, with a 6% commission taking out $45,000. That's odd. It doesn't cost an agent two, three or even ten times as much to sell a pricier house.

Too often, house sellers find themselves on the short end, with high commissions and unfriendly contract terms. Sellers tend to rely on their real estate agents for everything. That's a mistake. Here are some tips to help you get a better deal.

Negotiate down from 6%. The more your house is worth, the less you ought to pay, advises American University finance professor John Benjamin, who has studied real estate commissions. For a $100,000 house, you may have little choice but to pay close to 6%. For a house worth $500,000 or up, look to pay 5% or even less.

Your agent will surely object. "Some things are too important to discount," one leading real estate book advises agents to warn discount-seeking sellers. Don't fall for such nonsense. Your agent is going to get paid thousands of dollars if he sells your house and nothing if he doesn't.

You can, though, increase your agent's willingness to cut his commission by setting a reasonable asking price. That will save a lot of time and hassle for your agent, who won't be forced to spend extra weeks or months trying to unload the property. In return, it's fair to pay a lower commission.

Pay less if your agent brings in the buyer. Most home sellers give the listing agent half the commission if he sells the house to a buyer with another agent and the whole commission if the listing agent brings in his own buyer (often by way of an open house). The problem: This gives the listing agent too strong an incentive to find and then favor his own buyer.

Certainly, you want to give the listing agent some incentive to find his own buyer. But double the payday is too much. The prospect of such a windfall can encourage your agent to hold at bay or deal unfairly with buyers represented by others, even if they might offer you more. And that's not the only problem. Your agent's loyalty to you, the seller, can be compromised if your agent or one of his co-workers suddenly represents both you and the person you're trying to sell to. You thought you had hired a loyal ally; now, you're not so sure.

Ilyce R. Glink, author of 100 Questions Every Home Seller Should Ask, suggests that when negotiating the listing agreement you might try cutting the commission by one percentage point if the agent's firm brings in the buyer and by two percentage points if the agent himself brings in the buyer.

Consider a variable commission. In nearly every listing agreement, the house seller agrees to pay the agent a fixed percentage of the sales price. This arrangement does have the virtue of simplicity. But the concept is also badly flawed, because it gives the agent little incentive to get you, the seller, the highest price. Will your agent put in vastly more effort to eke out another $25,000 on the sales price when his cut is just $750 (3% of $25,000)? Hardly.

This is not mere speculation. A recent study by University of Chicago economists Steven Levitt and Chad Syverson finds that when agents sell their own houses, as opposed to other people's, they sell them for thousands of dollars more. That's clear evidence the current commission structure isn't motivating agents properly.

A variable commission aims at ensuring that your agent is on your side. Assume, say, that the agents you consult estimate your house will probably sell for $500,000, but could go for anywhere from $450,000 to $550,000. Instead of just paying your listing agent 3% of whatever the house ends up selling for, you could instead offer him 0% of the first $400,000, and then 15% of anything beyond that. (The buyer's agent still gets the normal fixed-percentage commission.)

What if your agent is insulted by the suggestion he's not acting in your interest? Well, that's no more insulting than the countless incentive and bonus schemes used by employers everywhere. Some agents may even claim that a variable commission is illegal. But that's not so, says Craig Cheatham of the Association of Real Estate License Law Officials.

Keep the listing term short. Agree to an exclusive listing contract for six months or even longer, and you can find yourself locked in with an agent you've come to dislike. A long contract can also weaken your agent's incentive to work hard for a quick sale. If you're all his for half a year, why rush?

Still, notes Columbia University finance professor Christopher Mayer, if you insist on a very brief contract, your agent won't have an incentive to invest much in advertising or other marketing, since there's a big risk the listing will expire before the house is sold. Mayer suggests three months.

Skip the junk fees. Following the dubious lead of mortgage brokers, many real estate agents are now trying to collect extra "processing fees" and other charges on top of their already generous commissions. In Washington, D.C. the biggest agency's standard contract now includes a preprinted $225 in "administrative fees." Don't agree to such a charge. Thousands of dollars in commission is compensation enough.

Get a double-deal discount. If you're using the same agent to sell your old house and buy a new one, you should certainly request a cut on the commission. Sheila Leifer, a Chevy Chase, Md. agent with Long & Foster Real Estate, says she often gives sellers a discount of a percentage point if they use her to buy as well.

Don't pay twice. Listing contracts typically say that you owe your agent a commission once he delivers a "ready, willing and able buyer." Don't accept such wording, warns Columbia's Mayer, because if the sale falls through you could end up owing two commissions--one for the buyer who doesn't work out and one for the buyer who does. Avoid this problem by specifying that you owe a commission only if the deal settles. "Most brokers will go along with this if you propose it to them," says Mayer.

Listing contracts also typically include a broker protection clause that specifies the agent will receive his commission if someone who saw the house during the listing period buys it, even if the purchase is months after the listing period has expired. The goal, note Eric Tyson and Ray Brown, authors of House Selling for Dummies, is to protect the agent from unethical sellers, who might tell buyers to wait until just after the listing agreement has expired before buying, so the seller wiggles out of the commission.

Fair enough. But if you're selling, advise Tyson and Brown, you want to make sure this clause doesn't end up forcing you to pay two commissions if you switch to a new agent who then sells your house to someone who first saw it under the old agent. Solution: Make sure the contract states that the clause will not apply if you've signed a listing agreement with another agent.

Hire a lawyer. You should ask the same real estate lawyer who will vet your sales contract to look at your listing agreement. Winging it without legal advice, as sellers commonly do, is a mistake. These are complex contracts with big money at stake.