Full Commissions Make a Comeback
The tough market for home sales may be spurring a surprise side effect on real estate commissions: For the first time in years, the average commission rate on closed sales nationwide rose slightly last year.
According to a review of revenue and cost data from hundreds of brokerages by the industry publication Real Trends, the average commission rose by nearly one-fifth of a percentage point last year, to just under 5.2 percent. That turnaround came despite the growing number of real estate firms that offer discounted standard commissions or limited-service options in which consumers pay lower fees but perform some of the tasks traditionally handled by full-service real estate agents.
Although a study released this week by the Consumer Federation of America found that many Americans are not aware that real estate commissions are negotiable, they are. You can always bargain for a rate lower than the quoted standard, but agents and brokers are also free to reject your request and turn down your listing.
During the 1980s and early '90s, 7 percent was considered the standard full-service commission rate in many large metropolitan areas. During the late '90s and into the housing boom years, average commissions dropped steadily through the 6 percent level and stabilized around 5 percent.
One key reason for the decline was the relative ease of selling houses at ever-billowing prices. In the hottest markets, buyers lined up and waged bidding wars for houses. Some sellers asked: Why pay 6 percent to a real estate agent when houses almost sell themselves, often for more than the asking price?
Now the market is starkly different -- sales are down, inventories up, prices anemic -- and a different approach to commissions may be gaining ground. More agents are refusing listings that don't come with full 6 percent commissions. A handful of high-octane agents are even charging 6.5 to 7 percent as their standard rates -- and doing well.
Take Jay Coles of Realty USA in Orchard Park, N.Y. He heads a five-person sales team active in the suburbs of Buffalo. Although the local market has been sluggish, Coles's sales volume has jumped by 40 percent in the past 12 months despite his insistence on 7 percent commissions.
How could that be? Coles is blunt: "We aggressively sell houses, we put a lot of effort into it, and people know that we will sell their house at the best possible price."
Among the extras clients get: "Premium positioning" on popular Internet sites such as Realtor.com, Homes.com, HarmonHomes.com and RealtyUSA.com. Premium positioning means Coles pays the Web site operators extra to ensure that his listings pop up prominently whenever consumers shop the site.
He estimates that 30 to 40 percent of his new sales clients are generated through his team's heavy Internet marketing presence.
Gina Piper, an associate broker at Prudential California Realty in Pleasanton, Calif., charges a commission of 6 percent in a market where the unsold inventory is up by 60 percent. Though some clients object to the full commission, she argues that her "enhanced services" give sellers a far better chance of bringing in ready and willing buyers. Among her enhancements: "I professionally stage every listing, and we use only professional photographers" to produce full-color brochures that she distributes widely. Piper also pays premium prices for enhanced listings on major Web sites.
Another reason for higher commissions: In slow-moving markets glutted with homes for sale, listing agents seek to entice buyer's agents with higher "co-op" commissions. Most commissions are split between the listing agent and the selling agent who brings the buyer to the table.
Jane Fairweather, who leads a sales team for Coldwell Banker in Bethesda, describes the co-op issue this way: "You've got to have incentives in there for the buyer's agent."
In a market flooded with unsold listings, she said, a 3 percent co-op split "is always going to attract more attention than 2 percent. We call [inadequate splits] 'getting eliminated at the office.' " Given all the properties available that fit a buyer's criteria, the agent may be more inclined to show the listings with the 3 percent split before the competing houses with lower splits.
Not all agents agree that tougher times justify full commissions, however. Erin Campbell, a spokeswoman for Assist-2-Sell, a discount franchisor that operates in 45 states, said her firm's agents provide "full service" representation for fixed fees ranging from $2,995 to $4,995. "One of the biggest misperceptions consumers have," she said, "is that you need to pay full price to get great service in challenging markets."
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.