Are Real Estate Commissions Built In The Fair Market Value?

real estate commission

You hear many people speak about how real estate agents are overpaid or don’t do anything.  Although just like in any industry, there are good and bad.  Most real estate agents earn their money and work hard for it.

Many people feel that they will “save the commission” by attempting to sell their home on their own.  Although in some instances that can happen, more times than not the home either doesn’t sell or has some level of disastrous results.  Why?  Because the commission is already built into the value of your home.  If you try to remove it, it will usually bite you.

Why You Cant Save The Commission

The most common reason someone would want to sell their home without a real estate agent is to “save the commission”.  There are some challenges with that idea.  Keep in mind, 89% of all residential real estate transactions use a licensed agent.  There is only one commission.  When a FSBO lists their home they are attempting to “save” that commission.

Any home buyer, who chooses to NOT use an agent and look on their own is also looking to “save the commission”.  So what you end up with are two cheap people, both attempting to beat the system and save themselves money.  There is only one commission to be saved and both “cheap” people are fighting for it!  You can see how this setup can cause problems in a transaction that is based upon mutually agreeing on multiple aspects of the home sale.  Its important to remember, there are many hidden costs in buying a home, the real estate commission is not one of them.

Commission is Baked Into Fair Market Price

NAR – The National Association of REALTORS puts out a set of real estate statistics every year.  Its called the Profile of Home Buyers and Sellers.  Although it is only available by purchase you can get the highlights here.  Those statistics show that 89% of sellers were assisted by a real estate agent when selling their home.  So with 89% of all residential real estate transactions including a commission, and fair market value is based off what is available for the same price, real estate commissions are baked into the price.

When an licensed appraiser does an appraisal, they look at recent sales of similar homes.   Those similar homes are called comps.  The appraiser will make adjustments to the sold price of a home in an effort to bring it as close to the subject property as possible.

For instance, if one of the comps had 2 1/2 baths but the subject only has 2 baths, they will adjust the sales price of the subject DOWN to bring it in line with what the subject is.  Keep in mind, almost every one of these “comps” have commission built in.  So when they are valuing your home, they are factoring in the value of that home being sold with the commission built in.

You may want to ask an appraiser, if a home that they use as a comp is sold without the benefit of a real estate agent, do you adjust the price accordingly? Keep in mind when you get a value of your home — the real estate commission is already built into that price. In the US, that average commission is about 5.5% – Canadian real estate brokers have a different system in which they charge over 10%. In either scenario, with the vast majority of homes sold in Canada or the US, they are with an agent.

That is why the typical home sale without an agent sold for $210,000 compared to $249,000 for agent-assisted home sales.  You cant save that commission, you can not pay it to the agent, but in most instances it will come out of the sales price of your home.

How Do Real Estate Commissions Work?

The Perils of A Real Estate Transaction

Anytime you are dealing with large amounts of money such as a real estate transaction, nice people can become not so nice very quickly.  People act differently when the largest investment of their lives is on the line.   When their children’s financial future hangs in the balance.  One of the most overlooked aspects of using a real estate agent is they keep the greed in line.  Meaning real estate agents explain to their sellers “you cant do that”.  When the home seller wants to not disclose a certain defect in the home or leverage some other aspect of the deal, its usually the real estate agent telling them they cant do that. So much for people saying that agents are the greedy ones!

Leverage Experience

Every real estate transaction brings new experience in addition to the courses taken and continuing education needed to keep a real estate license. Things that you never would have thought of come up.  If a particular non-licensed home seller has sold 2 or 3 homes in their lives, they feel like the expert.  Most successful real estate agents have sold more homes last month than most people sell in their lives.

When an issue comes up, they have a quick answer because they have seen it before.  When home sellers think back on the real estate transaction, they probably don’t remember that asinine question they asked, because of the quick response their agent provided.  What would have been the repercussions of moving forward with that? There is a lot of value in knowing that the path you are on (for your transaction) is one based upon experience.

You CAN Sell Without An Agent

You can get through a real estate transaction without an agent.  You can drive a car without full coverage insurance.  You can pull your own teeth.  A wise man once told me “everything is OK until everything is NOT OK”.  The value of an agent comes out when things get hairy in a transaction. There are 1 percent commission Realtors.  They would have systems in place that put your property through a machine, to maximize what they can do for 1 percent of the listing side of the commission.

There is also value in making sure that things simply don’t get hairy in the transaction.  Most real estate agents will tell you, very few transactions go smoothly.  Some do, but most have some type of challenge that needs to be overcome.

Use an agent.  Your homes value already has their commission built into the value of your home.  Its not worth the effort and potential disastrous results of not using an agent.