Why High Commissions?

Do you ever wonder where all the commission money goes in a real estate transaction? With prices so high in our area, it is a significant amount of money.

 When a seller signs a listing agreement, they agree to a commission rate with the listing broker, which is typically 5-6% in this area. That commission generally gets split evenly between the seller’s and buyer’s brokers, and the brokers split the commission with their agents.

 With the median single-family home sales price in San Francisco at about $1.8 million, the total commission at 5% would be $90,000 with $45,000 going to the seller’s broker and $45,000 going to the buyer’s broker. Then those amounts get divided up again according to the agents’ split with their offices. In general, the newer agents are at a lower split and the more tenured agents have a higher split. This traditional brokerage model also relies on the agents obtaining their own leads, clients and business.

 Since the seller pays the commission, there is often the perception that hiring a buyer’s agent is free. However, one can argue that the buyer’s commission was added to the price of the home, which would have been lower without the commission. I look at it as a package deal that both buyer and seller contribute to the total commission.

Most people think real estate commission is really high and it is! It seems that taking a real estate agent out of the equation may cut your costs and save you money. However, a good agent is vital in the process to facilitate the negotiations, manage the paperwork and maximize the chances for the sale of the home through repair work, staging, professional photography, virtual tours and other marketing activities.

 When a real estate agent represents a buyer, they bring a whole wealth of knowledge and experience to the process and increase the chance of a successful search and purchase. Likewise, when an agent represents a seller, that ensures the seller’s best interests are met, obtaining top dollar for the home, avoiding costly litigation, while also making sure that all governmental requirements are fulfilled.

While an agent’s job on the surface looks easy, it is not. There is much behind-the-scenes work, such as doing research, looking for homes, refining values, meeting with contractors and inspectors, finding the right lender, resolving title and escrow issues, understanding all the paperwork, negotiating the best values for buyers and sellers, and countless other tasks the public does not see. 

 Agents ensure that the process moves along smoothly, providing expertise, advice, counseling and guidance along the way. After all, this normally is a person’s largest transaction in life, and if not done correctly, can cost a lot more money at a later time than it needs to.

 There are other less expensive ways to sell a home. Some companies offer a commission rebate back to buyers and sellers. Some offer limited services, and the owner has to do more of the work. Some agents even offer to only list the property into MLS and the owners have to do all the work, like a “for sale by owner.”

 I would just be careful of these companies as one mistake can cost you lots more than the regular commission paid. Also, the good realtors are excellent negotiators and should be able to negotiate for a better price for you.

 Lastly, you might ask: “What about all those internet companies offering valuation models and taking listings at reduced commissions?” All I have to say is, be very careful. I will just give you one current example. If you Google 1531 46th Ave., you will find that it is a four-bedroom, two-bath home with 1,402 square feet. You will also find that Zillow values it at $1,555,555 and Redfin at $3,032,954! Why such a discrepancy? I often wonder the same and think that these computer valuation models work pretty well in the areas with tract homes. But in San Francisco, our homes are unique, and the auto-generated values can be way off!

 Yes, real estate commissions are high. But good real estate agents will earn their keep, can help you buy or sell properties, and can make all the difference in the world with the final sales price and making sure that the sales process goes smoothly.

John M. Lee is a top broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at (415) 465-0505 or email at johnlee@isellsf.com.