How are real estate agents paid?
A lot of sellers don’t realize how many people get a share of that 6% commission. Typically, it’s split four ways, between the listing agent and their broker, and the buyer’s agent and their broker. How the agents and their brokers split their 3% depends on their agreements; some split it 50/50, but others may go for a 60/40 or even a 70/30 split. For a seller, that means your listing agent might actually only pocket a quarter of the commission, or 1.5% of the sale price.
Most agents don’t make salaries, so their share of commission is all the compensation they receive. They also have to pay expenses like marketing and advertising, license fees, and insurance out of this.
When can you negotiate commission?
Technically, you always have a right to negotiate your commission. Federal antitrust law prohibits two or more parties from engaging in a conspiracy to restrict or eliminate competition; this is called price fixing, and price fixing is a crime. What that means for home sellers, in real world terms, is that your listing agent and the buyer’s agent cannot legally get together to agree on what commission they’ll accept.
Of course, as in all negotiations, just because you can negotiate doesn’t mean the other party will agree to concessions.
So when should you negotiate commission?
Successfully negotiating a lower commission depends on how much leverage you have. If you’re using a smaller local brokerage, you’ll have much better luck negotiating down your commission than if you’re using a big, national brokerage. The blunt truth is, the big national brokerage gets plenty of business at the standard commission rate, and doesn’t need your business enough to take less money on your sale.
Another circumstance where you might not have the best luck negotiating a lower commission is if you have a unique, hard-to sell property. If an agent is going to have to put in a lot of time and effort marketing your property, they’ll be reluctant to take a pay cut. On the other hand, if you have a desirable property in a hot seller’s market, where you can expect multiple offers above ask soon after it hits the market, the agent might be more amenable to taking less than normal.
When it comes to the buyer’s agent commission, though, reducing their 3% could potentially complicate your home sale. Since the buyer’s agent’s role is to match their clients with potential home purchases, they would likely show homes offering the standard 3% commission before they took their clients to homes showing, say, 1% or 2%.
There are other situations where you could make a strong argument for a lower commission; if you’re buying a property through your listing agent, you’re an investor selling multiple properties through that agent, or you’re selling in the off-season, when agents need more business.
How to negotiate, according to the experts
With that in mind, here are some strategies you can use if you do decide to negotiate your real estate commission.
Know your specific needs
Find out what, exactly, the listing agent is offering for that 3%. If they include services like staging, photography, listings, and other marketing, you can use that as a starting point in negotiations. If you need less services, it follows logically that you should pay less.
Bring in the competition
Solicit bids from multiple agents. If your agent knows another agent is willing to work for 1.5%, they’ll likely agree to a lower commission rather than lose your business entirely.
Understand the circumstances
As discussed above, a big portion of your chances at negotiating a discount is going to depend on circumstance— i.e. is it a seller’s market or a buyer’s market? If it’s a seller’s market, and demand outstrips the supply of homes, you’ll have a lot of leverage. After all, you’ll probably get an offer, or several of them, very quickly, with minimal marketing or staging.
On the other hand, if it’s a buyer’s market, where the supply of homes exceeds the demand, then you’ll likely have a hard time convincing the agent to take less money. They know they’ll have to hustle, do extra marketing, and leverage their network to stir up interest, so they won’t want to take less money for more work.
Use 'anchoring' to Your advantage
Research has shown that the first number thrown out in a negotiation effectively “anchors” the rest of the conversation— every subsequent offer will be made in relation to that initial number. Make sure you put the first number out there, and make it favorable to you.
Try a contingent contract
Negotiations can reach an impasse when the two parties fundamentally disagree on how a situation will unfold; in this case, a contingent contract could satisfy both parties. Let’s say you’re asking for a lower commission based on the assumption that your home will sell quickly, while your agent is resistant because they’re convinced it will take a long time to sell. Propose a contract that spells out a lower commission if the house sells within a certain time frame, and for a higher commission if it takes longer than that.