Over many generations, we’ve come to take it for granted that if we want professional help with selling our home, we must pay a real estate commission. Paying a commission is so deeply ingrained in our western culture that even though we may grumble about it, we don’t think to question it. There are actually three reasons why commissions are extremely unfair and the worst possible way to reward anyone who is going to help you to sell your home.
Not a Real Reward
Firstly, a real estate commission is not tied to effort, time spent, skill, knowledge or experience. It simply reflects a percentage of the value of the home being sold. A $2,000,000 home does not necessarily require more time, effort, skill, knowledge and experience to sell than a $500,000 home, yet the owner of the $2,000,000 home will pay four times as much as the owner of the $500,000 home. Even though there is a stark contrast between the home values in the above example, it applies to any value. At 2.5% commission, the seller of a $700,000 home will pay $5,000 more commission than the owner of a $500,000 home, despite the fact that the more expensive home may be sold sooner by a less experienced agent, who needs to spend very little time on the campaign. What is worse is that even if the real estate agent who is marketing the more expensive home does a poorer job than the agent marketing the cheaper home, and sells the home for less than market value, he will still walk away with a greater reward. The simple fact is that the value of a home has no bearing on the time, effort, skill, knowledge and experience required to market it. The reward for marketing a home should never be tied to its value.
A Disincentive to Achieving The Highest Sale Price
Most people believe that a real estate commission gives the agent a strong incentive to achieving the highest possible sale price. Nothing could be further from the truth. The theory is that the higher the sale price, the more commission an agent receives. At 2.5% commission, a real estate agent would receive an additional $250 by fighting for an extra $10,000. Is this a strong motivator? Again, looking at a $500,000 home, where a 2.5% commission would be $12,500, how much incentive does an agent have to earn an additional $250? Put another way, if the agent found a buyer for $10,000 less than what the owner expected, then it would only cost the agent $250 to convince the owner to accept the lower offer for a quicker sale so that the agent could pocket the $12,500 commission sooner. Contrary to popular misconception, a real estate commission is a very poor incentive for an agent to achieve the highest sale price. If anything, it is a disincentive. Commissions are a reward to sell at any price, not for the highest price.
Unfair Pay Rise
Most of us would expect a pay rise in exchange for greater responsibility, better performance or more hours worked. At the very least, we expect our wages to keep up with inflation. Real estate agents don’t have to worry about any of these things to get massive pay rises. All they need to do is wait for property prices to increase, which generally do so faster than inflation. Over the last twenty-five years of uninterrupted economic growth in Australia, some real estate prices doubled, tripled and even quadrupled, and with them, so have the commissions that agents have been pocketing. In exchange for this, they didn’t necessarily have to work longer hours or take on more responsibility or even become better at what they do. Even the percentage of the commission doesn’t have to increase for real estate agents to take home considerable pay rises. The above three reasons are why real estate commissions are a terrible form of reward for successfully marketing someone’s home. The fairest reward for helping someone not only market their home, but achieve the highest price is a low fixed fee. Even this should only be paid when the result achieved is one that has been agreed to at the outset.