The New Math

 

by James Stefanile, ABR, GRI, SRES, QSC, REALTOR/Associate, Prudential New Jersey Properties

I don’t usually write about commissions because I don’t want to appear whiney.  There is a lot of pressure on REALTORS to reduce the commissions they charge.  We, as REALTORS, are forbidden, by law, to even discuss the commissions we charge with other brokerages for fear of violating the anti-trust laws which forbid collusion among brokers in price fixing.  I mention this because I don’t specifically know what other agents or companies may or may not charge.  Because brokerages and agents cannot consult on commissions, if one REALTOR or company decides to give in the to pressure to reduce, there’s no protection for the rest of us against the perceived trend to concede on price.

I will not comment on my personal policies regarding commission rates.  We can discuss that one-on-one the next time you are thinking of hiring me.  The purpose of this post is to acquaint interested parties with the math we, as REALTORS, must live with.

Let’s begin with how your commission dollar is distributed.  Say, you’re a seller and you believe your agent is worth 6%.  That agent doesn’t keep, even close, to the full percentage.  You aren’t just paying your agent.  You’re paying his brokerage and the brokerage and agent who brings the buyer to your home.  True enough, if your agent or your agent’s company also brings the buyer they keep the whole 6% but, statistically, this occurs only 25% of the time, on average.  The other 75% of the time the math goes like this: your agent’s company gives, maybe, 2.5% to 3% of your 6% to the company who brings the buyer.  That leaves 3% to 3.5% with your agent’s company.  That 6% is becoming a distant memory.  Now, your agent has to split the remaining 3% or 3.5% with his local company and, most likely, the national brand.  Let’s say your representative brokerage gives 6% in a franchise fee to the national brand.  Now that 3.5% is reduced by the 6% fee.  The remainder is split between the local broker and the agent, typically 50/50 for newer or lower producing agents and, perhaps, 60/40 for higher producing agents, depending on the independent contract agreement in place and the brokerage business model.

Now we’ll put some real numbers to this formula.  On a $300,000 sale, the 6% commission you pay your broker as a seller equals $18,000.  I know some of you are saying “what in the world do they do to deserve $18,000?’  We’ll get to that in a moment after I mention that each transaction entails about 2-3 months working time.  Then there’s the buyer you’ve been showing houses to for 6 months and then you have the transaction time when they purchase.  Remember – I’m not complaining. 

Now let’s continue with our math lesson.  Your listing brokerage gives, perhaps, 2.5% of the 6% to the “selling” broker (the company that brings the buyer).  That’s $7,500, leaving your brokerage with $10,500.  Then there’s the 6% franchise fee of the $10,500 ($630) which leaves $9,870.  A 50/50 split between the listing brokerage and the listing agent leaves that REALTOR with $4,935.  That’s a long way from $18,000.

What would the numbers be at a 5% commission?  $300,000 x 5% = $15,000 minus 2.5% to the other brokerage = an even split of the 5% commission (the listing broker shouldn’t decrease the split with the selling broker because that’s not in your best interest), leaving $7,500 for the listing broker, minus the 6% franchise fee ($450) = $7,050 with a 50/50 split leaves the listing agent with $3,525 in commission.  That’s $1,410 less than the commission left on a 6% rate.  That’s a 28.5% cut in pay for the individual agent.  So, you see, it’s not just a point off the commission, it’s almost 30% out of the REALTOR’s pocket. 

Now let’s consider broker to broker referrals or relocation company transactions.  The math is really fun in these cases.  On a referral, the referring broker (the one that sent the business to us) gets 30% off the top of our side of the commission (in my company).  If we had accepted a 5% commission on the same $300,000 transaction, that means our $7,500 commission would be reduced by by 30% to the referring broker, or $2,250, leaving $5,250 minus the 6% franchise fee ($315) = $4,935 minus a 5% fee to the local brokerage referral department ($246.75)= a total commission of  $4,688.25.  A 50/50 split with the listing agent results in a commission to that agent of $2,344.13. That’s 47.5% less than a split based on a non-referral 6% commission.

Relocation companies take 38% off the top of the listing or selling side of the commission.  The commission to the listing agent, using the same formula as above, would equal $2,069.25 or a 58% reduction of commission from an unfettered 6% transaction.

Again, I don’t want to whine about the math in these cases.  It’s a sales job and volume = success.  We all knew that going into the business.  What I do wonder about is what the average person would do if their employer asked them to take a 30% to almost 60% cut in pay for the same work.  If you asked your plumber to do that while he was fixing your kitchen sink he’d be packing his tools and heading out the door before you could say “leaky gasket”.  And did I mention that that same average person would be offered no health or disability or retirement benefits?  Independent contractors (read REALTORS) have the priviledge of taking care of that totally at their own expense.

The perception among consumers is two-fold with regard to real estate, in my view.  Number one, REALTORS don’t really do enough to warrant full commissions and, number two, no one is charging 6% anymore.  Again, I don’t know who is and who isn’t.  I do know that neither of those assumptions is based on hard evidence but rather is based on perception and heresay.

Read some of my other posts in this blog and you’ll see how I have saved my clients time, money and heartache again and again.  I have made money for my seller clients as well.  When my marketing results in a seller getting $1,500,000 for his home from an asking price of $1,250,000, I will take a bow, thank you (a true story).  If this is a cushy job then I must be doing something wrong.  We won’t even talk about the transactions that fall apart through no fault of ours where our weeks of  labor results in no payment at all.

I have to keep reminding you (and myself, probably) that I’m not complaining.  I’m a big boy and can take care of myself.  I simply wanted to put the facts out there and see if it clears away some of the prevailing perceptions that may not be based in truth.