Negotiating Realtor Commission?
Investor · Austin, TX · Member since 2020 · 3 posts · 9 votes
Negotiating Realtor Commission?
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Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes@Luke Johnston
As others have said it is paid by the seller. A 4plex is actually more work than a SFH. I think it's besides the point. The last thing you want to do is try to cut the commissions/profits of people working with you. You want them to bring you more deals in the future and not be the guy who nickel and dimed them.
29 Replies
- 6yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
If these are MLS properties the commission rate is written into the listing agreement probably not going to work but you can try. Off market you can do what you want, they can just say no Curious what the relators say.
- Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes6y
Like many places my agent charged 6% and half went to the opposite party. He came down after I started dealing with other properties. The effort CAN be different between a fourplex and a sfh - lease agreements, more things to negotiate after inspection, finding those buyers that are pre approved for large sales, etc...
when you get larger and start dealing with $1M+ is when you can get it to 4.5 or maybe 5. - Real Estate Agent · Sandwich, MA · Member since 2014 · 974 posts · 636 votes6y
@Luke Johnston
It sounds like you're on the buy side of the transaction. If these are MLS properties, the buyer agent fees are getting paid for by the seller.
@Luke Johnston
You need to learn how commissions are paid out.
The listing, ie the sales listing, is an agreement between the seller and their listing agent. Let's call it 6%. Part of that agreement says they will cooperate with other brokers (remember, all deals are broker to broker— agents work for brokers). If somebody else brings the buyer, the listing agent/brokerage will offer a predetermined amount of the commission as on the MLS agreement , usually 2.5% or 3%.
When closing occurs, the buyer brings the funds, they are put into escrow, and distributed to the seller less the 6% commission (and other related closing costs). When two brokerages are involved as in this example, two checks are cut (assuming paper transactions) where one goes to the listing agent and the other goes to the buyer’s agent.
So, this is the concept that the buyer’s agent is “free” to you. Now there are lots of opinions on this. But, the so called “legal” trail of money is that while all the money started with the buyer, the commissions are paid by the seller out of escrow.
Now you can go into all the things about changing your offer price and negotiate reduced commissions, etc... but the fair market price already has the commission baked in. That’s why fsbo occur because parties, usually both sides, are trying to save the commission. The problem is both are trying to save the commission at the same time...
Yes, it’s kinda screwy that a buyer’s agent’s gross commission amount is actually controlled by each individual seller. But that’s the system we have. You can always give your realtor more money, but that’s just more out your pocket.
Good luck
@Luke Johnston
Oh, I should add from a Realtor’s point of view, what you are doing is always kinda annoying. If the compensation system was intended to be a fixed transactional price, it would have been set up that way.
Or look at it this way.. there is an inversve relationship between price and quantity. For example, sure I’d love to be getting commissions brokering $1M homes. Unfortunately, there aren’t that many of them nor are there that many buyers. So, such an agent will probably be spending more time and advertising dollars than a faster moving $250k property. For some, their gross production is higher by selling more “lesser valued” properties than one or two multi-million properties. Or look at it another way, if it became a fixed compensation per transaction, few Realtors would want to service the high valued properties because there are so few, dont move quickly, and personally those clients can also be “demanding” which might not be worth it to me to pander a higher level of service. Although, it is interesting because it’s always the low dollar properties (not investments) that take the most work.
There are plenty of other arguments, but I just gave one.. honestly, the compensation system isn’t perfect, but it is what it is... and I’m in a position to change it
Good luck
- 6yLee RipmaPro MemberRental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
@Luke Johnston
As others have said it is paid by the seller. A 4plex is actually more work than a SFH. I think it's besides the point. The last thing you want to do is try to cut the commissions/profits of people working with you. You want them to bring you more deals in the future and not be the guy who nickel and dimed them.
- Investor · Austin, TX · Member since 2020 · 3 posts · 9 votes6y
Thanks for the feedback everyone.
I guess my thinking is that a 3% commission on a 550k 4-plex comes out to over $16,000.
This equates to a full month of 40 hour work weeks (160 hours) billed out at $100/hr.
Seems high if the realtor isn't a lead source and I'm finding the properties myself. - Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes6y
In OR, so TX may be different, but in 95% of the deals, the buyer/seller brokers split a seller-paid listing commission.
Having said that, sure you can negotiate a commission BEFORE you sign any sales agreement.
I guess my biggest question on amt of the commission would be how hard the guy worked to get the property. Calling 1000 owners off-market to find you want you wanted is a little bit more work than surfing the RMLS at his office.
Also, if you do need to pay a buyer broker commission and the guy is half-way good, he may not bring you the best deals if you start a"discussing" commission (i.e. another buyer may be willing to give him more).
I don't like it since commission and not value to buyer/seller is driving the deal, but, it's kinda the way things are.
- Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes6y
"Seems high if the realtor isn't a lead source and I'm finding the properties myself.""
Just read that, it is high. Find another broker or hire a RE atty if he's just filling in forms.
Well, you can't use a salary/wage comparison for a commission based system. Just for the sake of argument, if you walk into a designer clothing store and pick out the clothes yourself, do you think the commission for the saleperson should be reduced? Right, the salesperson didn't help you. He or she just took the notes from the tailor and took your payment...
While I don't disagree that it looks high from a salary point of view, but don't forget that you probably aren't buying a house with that agent every month.... Just like any other tradesman, downtime is also "baked into" this. Also, don't forget that the agent really isn't get that 3% / $16k. Its split with the broker, or really the broker is cutting the agent in. So, yeah its more like $50 to $75 per hour (less operating fees) that the agent is getting in your analysis. Don't forget, agents have their operating expenses (not a tremendous amount, but some).
trust me I know its as little wacky. I was a W2 employee for many years as an engineer. But you really can't compare commission compensation with a salary compensation. The reason for commission basis is because its apples and oranges. Look at companies like Redfin who are trying to pay agents salaries. Sure, there are reports that they are doing really well, but they are also cutting agents like crazy whenever the market turns down. meanwhile, you never meet these agents because they are at their regional/national call center. The agents that "open the door" for you are paid "per meeting" and are randomly assigned.
Personally, I think the Redfin model isn't necessarily that good because it cuts out the "personal" side of the business. Granted, supposedly in this day people communicate electronically and no longer in person or even over the phone (i.e. by voice). But, that just screws things up. Besides, isn't everything in this forum still about find the right person, not the right system, to help you?
Think about it.. When you are done with your "x" deals with that agent, then what? There isn't a salary for the agent to fall back on. They can't bank on another "wealthy investor" to come along to bring more deals. Thats why I prefer to be more of an "investor with a Real Estate license;" active sales is hard, especially for a not-so-people-person engineer.
Otherwise, get your own license or learn the trade portion of doing the transaction and don't use a Realtor. If you know what you are doing then you don't need a Realtor to represent you as a buyer. The other Realtor will love you since they will double end the deal and get the full commission (don't expect them to give you any favors, though, since they still work for the seller).
Good luck with your deal.
- Real Estate Agent · Atlanta, GA · Member since 2015 · 359 posts · 158 votes6y
Originally posted by @Luke Johnston:
If you are doing all the work and the agent is getting 16K then you have every right to be annoyed. Many times I have asked some agents making offers on deals that I found "what exactly did you bring to the table"? One time the lady got so offended that I would even ask that and quit. Same day I called a few other agents and told them the situation and one guy said they can't give me the commission (legally), but they got a estimate on a roof and got the guy to drop it by $2500. DEAL!
Since then he regularly brings me deals. I bought 2 more with him and sold one of them. He has made over 20K in total commissions from my deals and earned every penny.
Don't be ashamed or embarrassed to have these discussions.
If you're looking at this as a one-off deal and don't plan to use this agent again, there isn't as much downside. However, if the long-term relationship is valuable to you I'd recommend not bringing it up.
Before becoming licensed, I negotiated an agent's commission on a big deal, using the logic that you're using: her commission was so big due to the size of the deal. She was polite enough about it but I could tell she wasn't happy. After that, things were never quite the same between us. I still regret taking that approach because she had brought us some really good off-market apartment deals, and was a stellar agent all around. I learned a lot by working with her, and could have learned a lot more if we had worked together on subsequent deals. But she basically cut us off, and I don't blame her because in retrospect that was kind of slimy to cut her out of the deal. Messing with her commission ended up being a costly mistake in the long run.
Real estate is a relationship business. A good agent is an extremely valuable member of your team (quite possibly the most important one). I'm sure many investors think about negotiating their agents commissions, and some probably make a successful practice of it. I think it's especially common for people who only do an occasional deal such as home buyers to think that negotiating a commission is normal. However, if you're an investor looking to build strong long-term relationships, just know that it may also backfire on you.
For one, as others have said, agents don't usually even have any control over their commission on the buy side anyway. If the property is listed, both commissions have already been written into the listing agreement. If it's off-market, or a large commercial deal, there may occasionally be a different commission structure than the usual amounts. You can always ask your agent for a rebate on their commission post-sale, but it's not customary. It's like asking for part of someone's paycheck. Do you find it common for people you do business with in your day job to ask you to pay them out of your own pocket as a side-deal just to get their business? You probably wouldn't like that. Your agent (and their managing broker who is actually the one receiving the commission and then paying the agent) will not like it very much either.
Additionally, your agent is not putting that whole $16k in their pocket. They most likely have to split it with their employing broker (typically 70/30, 75/25, 80/20 etc.), and then pay income taxes on the remainder. The amount they actually take home will be a little over 50%. Out of that, they have to cover their expenses like E&O insurance, Realtor association fees, MLS fees, and all the expenses that come along with being an independent contractor like health insurance, car insurance, vehicle maintenance and gas, clothing, laptop, phone, etc.
You're also not just paying for this one transaction, you're paying for their knowledge. If you have a great agent, what you learn from them will be the biggest value they bring to the table. For that reason, while it may seem like a savvy move to try to negotiate a commission, in my opinion it's actually more of a beginner's mistake. I'm sure some investors do it successfully, but more often the end result is that the agent says "No", and doesn't want to work with that person anymore.
If you don't feel like your agent is earning their commission, find a different one who goes above and beyond for you. If you have a great agent, they're probably in high demand and you want to incentivize them to work with you, doing bigger and bigger deals. The last thing you want to do is dissuade them from doing deals with you. If you don't think any agents are worth what they make in commissions, get licensed yourself and see how things are from the other side.
One last thing: if your agent drops their commission for you, what does that say about their negotiation skills? If they can't negotiate their own money, how well do you expect them to negotiate yours? Good luck!
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes6y
@Luke Johnston slightly off topic: I have the greatest respect for and have partnered with real estate brokers who have been experts in their field and a true asset.
I think the approach you suggest is penny wise and pound foolish. Treat the people you work with and who work for you (they do work for you) well.
But, Personally I’m holding the line at 5% overall commission as a seller though, partner or not 6% is a relatively recent phenomenon and not fully accepted in most places (happy to be corrected here). And with the pressure on realtors from the lower end you don’t need to.
- 6yDan DiFilippoBusiness MemberReal Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
@Luke Johnston broker, here. No. I mean, as some people are explaining, it's not exactly determined that way. And arguably, you could ask your agent to bonus you. But asking them to take 1.5% is downright insulting. If I had a client asking me to discount them, the steepest I'd probably cut them is down to about 2.25% and they'd have to essentially write me a compensation agreement for $1.5MM in deals. In fact, $2MM. Essentially guaranteeing me $45,000 in commissions. And I'd require it in an *at most* 18 month period or I'm paid the difference. And I'd also need a share of it up front.
You have to keep in mind, we pay 20-35% of each deal in commission splits and other fees. And then there's MLS memberships, professional insurance, electronic keys, marketing costs, licensing fees, continuing education, and other incidental costs like gas and car usage. And we have to pay our employer share of payroll tax, so that erases another 15.3% in total. Definitely do not.
- Investor · Louisville, KY · Member since 2017 · 23 posts · 20 votes6y
@Luke Johnston
Considering that this would be a public deal I would 100% ask for a reduced commission. Worst case is you end up back at full price! Oh well
Maybe be fair with the structure, 1.5% + $100 over 20hrs or something. No hungry agent would refuse easy money.
Don't ask don't get!
- Investor · IN (indiana) · Member since 2020 · 109 posts · 53 votes6y
@Luke Johnston
Its kind of like buying steak. You get what you pay for. If you pay sub-standard rates you get sub-standard work. In my experience a good Realtor knows his/her value and an agent that is willing to negotiate their commission is not confident in their own value. Would you do your regular job and work twice the hours for half of your current rate? You want someone that will be devoted to your deal if not it could come back to haunt you in the long run if 1 of many things are not addressed up front. Not to mention it is the sellers agreement with the listing agent. The work it would take to have everyone to go out of their way to rewrite a contract that doesn't have your name in it is not a good look. There are agents that will do it but those are not the agents you want.
- Investor · IN (indiana) · Member since 2020 · 109 posts · 53 votes6y
@Steve K.
Well Said!
- 6yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
The seller pays it and while your agent may not have done a lot of work this time, the seller's agent may have, not to mention the extra costs that you don't see. Where I am, the commission is tiered, so it is a certain percent up to a set dollar amount and then the commission decreases as the listing price increases.
Originally posted by @Shawn Long:
@Steve K.
Well Said!
Thanks, you too!
- Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes6y
@Luke Johnston creekview realty rebates 2% use your realtor on the sfh and creekview on the others
- Realtor · San Jose, CA · Member since 2018 · 184 posts · 71 votes6y
@Lee Ripma
Exactly well said. Successful investors and Realtors understand it’s more than 1-2 deals. We’re working in hopes to close multiple deals together for many years to come. That’s how it’s suppose to work. Everyone’s happy. I have a large network of clients who invest, constantly I’ll get inquiries from investors I haven’t met yet, if one of them right off the bat wants to discuss a pay cut or devalue my services, I won’t bother. Arrangements like that come with doing multiple deals together. Not someone you just starting speaking with. There’s many people who know the unwritten rules of business. People who try to nickel and dime will never get to where they need to be. I’ve witnessed many do that in many industries for years.
- 6yAvery CarlBusiness MemberReal Estate Agent · USA · Member since 2016 · 909 posts · 1k+ votes
Let me preface this statement with the fact that there are a vast number of scenarios where I am happy to reduce commission for a client.
I am also the top agent in the markets that I am in, and I have a lot of relationships, which results in access to a lot of deals that others don't have. When I get those great ones, the guy that penny pinched me on his first deal because he found something on zillow that I didn't happen to send, is not the guy that's getting the phone call.
- Real Estate Agent · Kansas City, MO · Member since 2019 · 23 posts · 10 votes6y
@Luke Johnston You get what you pay for. If this agent is just doing paperwork for you, your suggestion might work. If they are the ones finding the deals, running the numbers, walking the properties, putting you in contact with contractors property managers etc, I don’t seeing them taking half of what they would normally get. I like what Avery said, if I have a client that is going to penny pinch or try to negotiate my commission, I’m not going to be sending them the great deals first.
- 6yMike CumbieBusiness MemberREALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
Generally speaking (Because everything is negotiable in Real Estate). The only times I lower on the buy side are if they are offering less than my standard fee (ie 2.5% instead of 3). I may not have my buyer pay the difference. Sometimes in the 11th hour something happens and me throwing a few bucks into the deal helps it get done. If we have moved to every penny on trying to create the deal, it will never make it to the end.
Generally (again generally) if I am discounting it is on the listing side. We have done some work together, we have a good relationship, your daughter is selling her personal residence "Mike I need a solid on this one". Yeah I got you covered. But I never kiss on the first date, you gotta buy me a lobster first, not the promise of one later down the road :)
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