So much has changed in our industry over the past several years. And with these changes has come a downward pressure on commissions unlike anything we've ever experienced. While the market's been hot for quite sometime now in many different areas, the sizzle has created a desire in many people to reduce or eliminate commissions whenever they can. And this in turn has caused a great many agents to feel very frustrated.
What's both interesting and understandable is that so many principals feel that offering lower commissions will cause no negative impact on the ultimate price that they'll receive for their property. While this may be true in areas where 6 percent is considered a full commission by agents, and the owner is offering a 5 percent commission, it certainly may not be true when the owner is offering a commission of only 4 percent, 3 percent, or less.
The problem, though, is that owners normally don't recognize this. They're so focused on saving on the commission that it can become the literal manifestation of the metaphor about being both pennywise and pound-foolish. And in this situation, a real estate owner can end up losing a lot more money by selling their property for less than they may have received had they offered a more reasonable commission in the marketplace instead.
In a market where owners may be thrilled to have two or three buyers to negotiate with, they might not realize that they could have had 5 or 6 buyers instead if they had offered a full commission or close to a full commission to all the agents. If an agent has three properties they can present to a client, two of which offer to pay them a 3 percent co-op commission, and one that offers them only a 1 1/2 percent co-op commission, in what order do you think the agent will submit the properties to their client? And if the client makes an offer on the first or second property before seeing the third one, the owner of the third property may really miss out.
So what are agents supposed to do about all of this? Unfortunately, telling owners that they may be costing themselves money by offering a substandard commission for their properties is usually not something that owners will believe. They tend to think that it's just a bunch of hot air. So instead, how about conducting a survey of the agents in your area and asking them their opinion on the matter? Or even better, maybe your real estate association will want to get involved in conducting a survey of all the agents in the area. Do you think maybe that some of the agents have an opinion or two they'd like to express about this reduced commission environment?
As an example, agents can be asked what their interest level will be towards showing a new property on the market based upon the offering commission rate from the owner. The survey could ask them whether they'd show a property to one of their prospects if the offering commission was 5 percent, 4 percent, 3 percent, or 2 percent. The agents would have one individual response for each level of hypothetical commission being offered. You could even include half percentage commission levels such as 4 1/2 percent and 3 1/2 percent also if you thought it would bring value to the survey.
And in addition, you might ask these same questions multiple times on the survey within different price ranges of properties. For example, more agents may be willing to show a $1,500,000.00 property to their clients when a 3 percent commission is offered, as compared with the number of agents who may be willing to show a $500,000.00 property at a 3 percent rate.
And if you believe it's even more relevant, you may want to structure the survey based upon the commissions being offered on properties to the co-op agents in the marketplace, as the commission the listing agents will be earning themselves may have no impact on a co-op agent's desire to show a property. Co-op agents are interested in the commissions they'll get paid by successfully closing transactions on properties, not the commissions that the listing agents will earn and get paid.
And if you're a buyer or tenant rep agent working with clients on an exclusive basis, and your exclusive agreement calls for your clients to make up the difference between the commission being offered by the owner, and the commission you and your client agreed would be fair for their transaction, what I've been discussing here may not be relevant to you. You're going to receive the commission you and your client agreed to no matter what commission is being offered through the listing agent. But unfortunately most agents aren't operating with these agreements in place.
And if you're wondering whether or not it's fair for you to not work on properties that only offer low commission rates to co-op agents, here's a quote from Florida real estate attorney Hank Sorenson on the subject:
"Obviously no business should be required to represent clients at a loss, and having brokerages continue to work for ever-decreasing commission schedules will cause, at some point, a loss to be sustained by the brokerage and/or agent because of the reduced commission schedule. Therefore, it is up to the individual brokerage or agent to determine when they are potentially going to cross this line, which will result in the agent not showing a specific property solely due to the cooperating compensation offered in the MLS."
As mentioned above, Hank practices real estate law in Florida, so it's important that you check with your company, your real estate association, and the authority issuing your real estate license to make sure that you're practicing both ethically and legally in your area.
And once you have the survey of the agents in your area completed, you now have a document you can show to property owners who insist on offering a reduced commission in the marketplace. So when you hand them a document that says that 92 percent of all agents surveyed in the area will show a property if it's listed at a 5 percent commission, but only 36 percent of those same agents will show the property if it's listed at only a 3 1/2 percent commission, you now have more leverage.
When you let the voices of all the agents in your area speak for you collectively it might just make your job a little easier.
