2013 Sep 11th

The Real Estate Commission Exposed

Here is something for you to ponder as I’m curious about the consumer’s take on this.  So read the following and feel free to comment with your opinion and thoughts.

How Real Estate Commissions Work

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The seller enters into a contractual agreement with the listing brokerage (not the agent, by the way, but the brokerage company) to pay a certain percentage of the sales proceeds.  Let’s say the property is listed for and sells for $500,000 and the agreed percentage is 5%.  While by law, real estate commissions are negotiable, most real estate commissions in Hoboken are 5% (see below). The 5% comes out of the proceeds of the sale.  If the listing agent sells the property himself, he keeps the 5% less whatever split he pays to his brokerage and that differs drastically from agent to agent depending on the deal they have with their agency.

Who Brings the Buyer?

Well, how does the agent who brings the buyer get paid, you might wonder.  By listing the property on the MLS, the listing agency offers to give a percentage of the commission to the agent (and brokerage) who brings the buyer.  That percentage  is stated right on the MLS.  It appears only on the agent copy so the general public doesn’t get to see it.  Any agent with access to the MLS can see what the listing will pay if that agent sells it.  Typically, commissions on condos in Hoboken are 5% total and that is typically split 50/50 between the listing agent side and the agent and brokerage who brings the buyer.

Right now, for example, there are 212 condos for sale on the MLS.  Of those, the breakdown of commission offered to the agent who brings the buyer is as follows:

9 – 2%

2 – 2.25%

181 – 2.5%

7 – 3%

10 – 4% (*All new construction Toll Bros. units)

The theory behind offering a higher-than-typical percentage to the agent population is to incentivize them to sell your property rather than someone else’s.  Toll Bros. sends agents emails all the time touting the 4% that they will pay if we bring our buyers to their sales office for their new condos.  Of course, the total they have to pay if 4% since they don’t pay themselves anything.  They are the sellers.

Even-Steven, Right?

One might assume that the total commission agreed to be paid by a seller  is split equally between the listing agent and the agent who brings a buyer.  One would also think that if a seller agrees to pay more than the norm, the seller would either receive some extra services from the listing agent or greater incentives to the agents who bring buyers or both.

For example, with a 6% commission, the listing agent might take 3% and agree to professionally stage the property by renting furniture and props, take professional photos, put up enhanced listings on the various websites (which costs extra) and make a video.  Similarly, offering the other agents 3% to bring a buyer  puts your listing in the top 10% of what is offered in Hoboken right now.  Human nature being what it is, an agent working with buyers might be sure to show your property and push harder to sell it over one paying less.

Some agents, however, don’t split 50/50.  Other agents wouldn’t know that initially but we find that out when the deal closes.  Every agent gets a copy of the “HUD” or the statement of money flow required by the Department of Housing and Urban Development to be provided to all the parties at closing.  The HUD shows the amount of commission paid to EACH of the agents.

The other day, I closed a deal where the listing agent charged the seller 6%.  He  kept 3.5% for himself and paid me 2.5%. The unit was vacant but he didn’t stage it with rental furniture or even props.  There were no open houses.  There was no video.   There were no flyers.  I don’t think the property even appeared on Trulia or Zillow.

Using the $500,000 example, the agent in this scenario would have made $17,500 to my $12,500.  Now I understand paying extra to get something extra.  What I really wonder is did the seller truly understand this arrangement?  Was the seller  explicitly told that the commission was not being split 50/50?  Sure, it’s on the listing contract but buried in legalese and fine print. Did the seller accept paying a 6% commission thinking that the listing agent was going to perform extra services?  Or on the basis that agents with buyers would have extra incentive to sell the property (which would not have been true)?  Or did the listing agent explain that he would simply get 40% more than the agent who actually found a buyer?  Was the seller told that this is not usual?

Making consumers aware of these issues is, in my mind, a useful and important task.  Consumers can make informed decisions and ask the right questions only when they understand how commissions are structured , why, and what difference it makes.

 

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  1. JC

    Simply put; many sellers know commissions are charged and its a fact of life. So when showed the paperwork they see a number (5 or 6) and just sign away. Its that simple. I think its noble of you to want to explain the commission structure to your clients. However, many agents wont and as long as they give the seller paperwork to read over they are in the clear. I think its the buyers duty to read the fine print and ask questions also. Savvy sellers know these things. The un-savvy know they pay x% commission and dont care how its split as long as the unit is sold.

  2. JC

    SORRY: NOT THE BUYERS DUTY…its the sellers duty to read the fine print of contract and ask questions..etc.

  3. Lori Turoff

    I agree with you JC. Most sellers don’t read the paperwork. Most agents don’t explain it, especially when they are paying themselves that premium. Hopefully some will read this and start to ask about it, though.

  4. Hoboken Resident

    Hi Lori,

    Can you do a quick search for any recent sales transactions on 1119 Washington St Apt 4? I understood this unit sold but I hadn’t seen it come across in your weekly sales updates over the last 2 months.

    Just curious what you are able to see in the MLS… Thanks!

  5. Lori Turoff

    Hoboken Resident you can go to the tax records, which are public, and look up any transaction in the state.

    Here is the link:

    http://tax1.co.monmouth.nj.us/cgi-bin/prc6.cgi?&ms_user=glou&passwd=data&srch_type=0&adv=0&out_type=0&district=0905

  6. Kate

    Thank you for sharing. This is definitely useful information.

  7. Sonny

    Thank you for all the great information. Have the percentages changed with market and/or the introduction of Redfin?

  8. Lori

    Hi Sonny,

    Redfin does not have a presence in our community. Maybe that will change in the future. Real estate commissions, by law, are negotiable. Even so, the bulk of the listed properties in Hoboken and Jersey City (resales – not new construction) are all the same.

  9. Ayelet

    Please advise if Real Estate Commission in NJ can be split between seller and potential buyer , as a negotiating tool or the fee of 6% always fall on the seller?

  10. Lori Turoff

    Nope – it comes out of the proceeds of the sale so, effectively, the seller has to pay it.

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