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In the US, each state sets it's own guidelines for licensing Realtors and the general rules for how they run their business. In New Jersey, commissions are typ

In the US, each state sets it's own guidelines for licensing Realtors and the general rules for how they run their business. In New Jersey, commissions are typically 5% to 6%, depending on the level of service the agent representing the seller performs. My wife charges 6%, and spends a lot of her own money on cleaning the house, moving extraneous furnishings out to de-clutter the house, moving her own furnishings in to stage (decorate) the house, and providing boxes and other packing materials to help the seller move out. There are no-frills agents in NJ as well; at least there used to be. They were paid a salary by their broker, and the broker charged a very low commission, 1%-2%. These agents provided NO services that weren't absolutely necessary to the transaction. I don't think these agents are around anymore. About that commission: in NJ there are generally always two agents, one for the seller and one for the buyer, and they split the commission. Sometimes, one of my wife's buyers would make an offer on a house of one of her sellers. Generally she would reduce the commission to 4% in that case; she's still doing more work than she would representing just one side of the transaction, but less than she'd have to do when there is another agent involved. (There are strict rules regarding this situation to avoid conflicts of interest, btw.) About that $1m transaction: yes, the overall commission is $60k. The two agents split that, so they get $30k. Except they don't; their brokerages take almost a third, so they get about $22k. That's gross income; federal, state, and employment taxes take another third... down to about $14500 now. That's the net income for 3-5 months work, and it has to cover the out-of-pocket business expenses for the items I described earlier to properly market the home. Your friend couldn't do what he did in NJ. Getting a license in NJ isn't difficult if you're reasonably intelligent, but that's not enough to do business as an agent. You need to "hang your license" with a brokerage, which means signing a deal that will generally require you to pay monthly office fees and a chunk of your commissions, with varying rules about how to handle commissions on your own sales and purchases. (Typically waived for your primary home, and not waived on investment properties.) There's also the second agent involved in most transactions; they're going to get their commission even if you don't take one, so at most you're going to save 2.5%-3%.

rahimnathwani 12y ago
Thanks for the additional detail. A few random thoughts which struck me as I read through: - it's hard to believe it's 3-5 months' work to sell a home (unless you mean duration rather than effort) - why does the 'brokerage' get so much? What value do they add, or is it just like taxi medallions? - yes, we all have to pay taxes - why do the no-frills brokers no longer exist? I've read elsewhere that full-service agents refused to steer their buyers to homes on offer by discount agents (to the detriments of the buyers they purported to represent) - why do realtors need licensing anyway? Nothing you've said suggests that the 6% is the result of a competitive market. Again, the strongest evidence is the large difference in commissions vs. those in other developed markets.
- DougWebb 12y ago
  I do mean duration, from getting the listing to closing. It's not 9-5 work every day during that time, but there are some days that are fully dedicated to that one listing and some time spent nearly every day paying attention to it. The cognitive load of daily attention to each client and the scheduling necessary for those longer days means that an agent can only manage a handful of clients at the same time. That's the opportunity cost inherent in each client, and why agents need to earn as much as they can from each one. The brokerage gets a big chunk because they're running an office for all of the agents: they need to rent property (usually in a prime location), build out the office space, and pay all of the costs for running that space. My wife's office has grown from 30 agents to over 100 in the past 4 years or so, and has needed to take over two neighboring spaces in the building it occupies. Different brokerages have different policies; some charge a fixed monthly fee and take a lower cut of commissions, some charge no monthly fee and take a bigger cut of commissions. Most have a 'cap' on the brokerages cut, so that if you do well in the spring and pay out your cap, the brokerage won't take any cut from you for the rest of the year. Taxes: yes, we all do pay taxes, but most of us only think about our after-tax net income rather than our pre-tax gross income, because the taxes come out before any money goes into our pockets. So people forget that those commissions are gross rather than net when they compare what the agent is getting to their own earnings. I think the no-frills brokers don't exist anymore because their service was awful. "You get what you pay for" may not always work for full-rate agents because they may not be very good, but "You're not getting what you don't pay for" definitely applies to the no-frills agents. A full-service buyers agent gets paid out of the commission that the seller pays to the listing agent. If the listing agent is a no-frills discount agent charging 2%, then the full-service agent might get 1% rather than the 3% they would otherwise get. They have fixed costs that aren't covered by that rate, and can't afford to provide their buyers with the level service they want to provide for those homes. But there's more to it than the money: shepherding a deal through from offer to closing requires a lot of work and a lot of coordination between the agents, and the discount agents just don't care to spend any time on that. It's extremely frustrating for the full-service agent to work with a discount agent who's not paying attention, and that causes a higher risk of the deal falling through or having long delays which can impact the buyer's sale of the home they're moving out of. So guiding buyers away from homes listed by discount agents can be in their best interest. (For Sale By Owner homes are also higher risk, often worse, for the same reasons.) Realtors need licensing because there are strict laws and ethical codes that they must adhere to; there is a high risk of being sued when there is any hint of improper behavior. Agents sue each other, agents sue brokerages, brokerages sue each other, and buyers and sellers sue everyone. The licensing is there to make sure agents know what all of the rules are and the importance of following them. (By the way, insurance for all of this litigation is one of the big fixed costs for being an agent.)
ars 12y ago
> There are strict rules regarding this situation to avoid conflicts of interest, btw. And those rules don't work in the slightest. Both agents have incentive to increase the cost of the house, but really the buyers agent should help reduce that cost. Additionally both agents have incentive to get the deal done, even if it's not financially right (for either party) so they'll tell the seller to reduce the price, and the buyer to increase it, even though they should each really be working in the other direction.
- DougWebb 12y ago
  Increasing the cost of the house works against the agents too, because of the banks. There are two gates that have to be passed through: the buyers must be pre-approved for a mortgage that is sufficient to pay for the house, and the bank will send an inspector to the house to value it before approving the final mortgage. A seller won't accept an offer from a buyer that doesn't have evidence that they can afford what they're offering. The buyer's agent wants the offer to be accepted, so they won't let the buyer offer more than they're pre-approved for (and often somewhat less, to reduce risks that the deal will break down before closing.) Once the offer is accepted, the bank inspection has to happen, and if the bank determines that the house is not worth as much as the buyer offered, the deal will fall through and neither agent gets paid. So, both agents have an incentive to keep the cost below what they think the bank valuation will be. So it's really the bank that's in control of property values, not the agents. In a housing bubble that's a bad thing, because the bank is lenient in both pre-approvals and valuations, and agents incentives are to follow the bank upwards. But in the current climate when the banks are cautious and risk-averse I think the incentives are working well, because the banks and agents are countering each other. As far as what the agents tell the buyer and seller about the price: - If the house is sitting on the market and no one is making any offers, the price is too high. So yes, the sellers agent will tell the seller to reduce the price, because they want the seller to sell. (Getting the house to sell is the agent's job, after all.) Just sitting and waiting at the same price is bad for the seller, because it makes other agents and buyers think there's something wrong with the house if it has been sitting on the market for a long time with no offers. - If a house is priced correctly, multiple buyers will want to buy it, and they'll all make offers. The buyer's agent knows that the seller will choose one of the higher offers (though price isn't the only factor), and they want their buyer's offer to be accepted (that's their job), so yes, they will tell the buyer to offer more. My wife will tell her buyers how many other buyers they're competing with that she knows about (agents can't discuss details, but can give vague impressions to help each other out), and that they should offer more than the list price but not so much that they would regret the amount afterwards. In other words "Offer what this house is worth to you, so that you won't wish you had offered more if you don't get it, and that you won't wish you had spent less if you do get it."

rahimnathwani 12y ago

Thanks for the additional detail. A few random thoughts which struck me as I read through: - it's hard to believe it's 3-5 months' work to sell a home (unless you mean duration rather than effort) - why does the 'brokerage' get so much? What value do they add, or is it just like taxi medallions? - yes, we all have to pay taxes - why do the no-frills brokers no longer exist? I've read elsewhere that full-service agents refused to steer their buyers to homes on offer by discount agents (to the detriments of the buyers they purported to represent) - why do realtors need licensing anyway? Nothing you've said suggests that the 6% is the result of a competitive market. Again, the strongest evidence is the large difference in commissions vs. those in other developed markets.

DougWebb 12y ago
I do mean duration, from getting the listing to closing. It's not 9-5 work every day during that time, but there are some days that are fully dedicated to that one listing and some time spent nearly every day paying attention to it. The cognitive load of daily attention to each client and the scheduling necessary for those longer days means that an agent can only manage a handful of clients at the same time. That's the opportunity cost inherent in each client, and why agents need to earn as much as they can from each one. The brokerage gets a big chunk because they're running an office for all of the agents: they need to rent property (usually in a prime location), build out the office space, and pay all of the costs for running that space. My wife's office has grown from 30 agents to over 100 in the past 4 years or so, and has needed to take over two neighboring spaces in the building it occupies. Different brokerages have different policies; some charge a fixed monthly fee and take a lower cut of commissions, some charge no monthly fee and take a bigger cut of commissions. Most have a 'cap' on the brokerages cut, so that if you do well in the spring and pay out your cap, the brokerage won't take any cut from you for the rest of the year. Taxes: yes, we all do pay taxes, but most of us only think about our after-tax net income rather than our pre-tax gross income, because the taxes come out before any money goes into our pockets. So people forget that those commissions are gross rather than net when they compare what the agent is getting to their own earnings. I think the no-frills brokers don't exist anymore because their service was awful. "You get what you pay for" may not always work for full-rate agents because they may not be very good, but "You're not getting what you don't pay for" definitely applies to the no-frills agents. A full-service buyers agent gets paid out of the commission that the seller pays to the listing agent. If the listing agent is a no-frills discount agent charging 2%, then the full-service agent might get 1% rather than the 3% they would otherwise get. They have fixed costs that aren't covered by that rate, and can't afford to provide their buyers with the level service they want to provide for those homes. But there's more to it than the money: shepherding a deal through from offer to closing requires a lot of work and a lot of coordination between the agents, and the discount agents just don't care to spend any time on that. It's extremely frustrating for the full-service agent to work with a discount agent who's not paying attention, and that causes a higher risk of the deal falling through or having long delays which can impact the buyer's sale of the home they're moving out of. So guiding buyers away from homes listed by discount agents can be in their best interest. (For Sale By Owner homes are also higher risk, often worse, for the same reasons.) Realtors need licensing because there are strict laws and ethical codes that they must adhere to; there is a high risk of being sued when there is any hint of improper behavior. Agents sue each other, agents sue brokerages, brokerages sue each other, and buyers and sellers sue everyone. The licensing is there to make sure agents know what all of the rules are and the importance of following them. (By the way, insurance for all of this litigation is one of the big fixed costs for being an agent.)

ars 12y ago

> There are strict rules regarding this situation to avoid conflicts of interest, btw. And those rules don't work in the slightest. Both agents have incentive to increase the cost of the house, but really the buyers agent should help reduce that cost. Additionally both agents have incentive to get the deal done, even if it's not financially right (for either party) so they'll tell the seller to reduce the price, and the buyer to increase it, even though they should each really be working in the other direction.

DougWebb 12y ago
Increasing the cost of the house works against the agents too, because of the banks. There are two gates that have to be passed through: the buyers must be pre-approved for a mortgage that is sufficient to pay for the house, and the bank will send an inspector to the house to value it before approving the final mortgage. A seller won't accept an offer from a buyer that doesn't have evidence that they can afford what they're offering. The buyer's agent wants the offer to be accepted, so they won't let the buyer offer more than they're pre-approved for (and often somewhat less, to reduce risks that the deal will break down before closing.) Once the offer is accepted, the bank inspection has to happen, and if the bank determines that the house is not worth as much as the buyer offered, the deal will fall through and neither agent gets paid. So, both agents have an incentive to keep the cost below what they think the bank valuation will be. So it's really the bank that's in control of property values, not the agents. In a housing bubble that's a bad thing, because the bank is lenient in both pre-approvals and valuations, and agents incentives are to follow the bank upwards. But in the current climate when the banks are cautious and risk-averse I think the incentives are working well, because the banks and agents are countering each other. As far as what the agents tell the buyer and seller about the price: - If the house is sitting on the market and no one is making any offers, the price is too high. So yes, the sellers agent will tell the seller to reduce the price, because they want the seller to sell. (Getting the house to sell is the agent's job, after all.) Just sitting and waiting at the same price is bad for the seller, because it makes other agents and buyers think there's something wrong with the house if it has been sitting on the market for a long time with no offers. - If a house is priced correctly, multiple buyers will want to buy it, and they'll all make offers. The buyer's agent knows that the seller will choose one of the higher offers (though price isn't the only factor), and they want their buyer's offer to be accepted (that's their job), so yes, they will tell the buyer to offer more. My wife will tell her buyers how many other buyers they're competing with that she knows about (agents can't discuss details, but can give vague impressions to help each other out), and that they should offer more than the list price but not so much that they would regret the amount afterwards. In other words "Offer what this house is worth to you, so that you won't wish you had offered more if you don't get it, and that you won't wish you had spent less if you do get it."