Residential Real Estate Agents Discounting Their Commissions
A recent Redfin survey found that 60% of home sellers over the last year received a discount on fees received from their real estate agent. The average discount was 41%. In the same survey, 46% of home buyers reported receiving a closing cost refund or closing cost contribution from their agent. The average refund or contribution was $3,673.
Redfin reports that these results are not surprising and in fact, are part of a 10-year trend. However, in their Blog about the survey, Redfin attributes its own services as some of the primary reasons for these trends. Of course, this makes the survey a self-serving promotional vehicle. But, I don’t think that the results are wrong. There are valid reasons for agents to contribute to their clients. These reasons are not just financially driven for the agent. They are also ego driven for the sellers and buyers. Let me explain.
Buyers and sellers of residential properties almost always have unrealistic expectations. Nearly every seller thinks that their house is worth much more than market value, that they know more than the best of appraisers and their own agents, that the upgrades they have put into their homes make their house unique and that their house is the best and most valuable in the entire neighborhood. Sellers have an expectation when they list their homes as to a minimum sales price and a corresponding net cash in pocket at closing. Contrast that with the typical buyer. A typical buyer has a magic number in his or her head – a price ceiling. A buyer does not think about or understand how a few thousand dollars of purchase price amortizes to only a few dollars per month on a mortgage payment. If the maximum price is exceeded, the buyer would rather walk away from a potentially perfect property.
Then there is the problem of inspections and repairs. Egos get in the way here too. Buyers and sellers argue over costs of repairs and who is responsible for them. I am not talking about major repairs like the need for a new roof. Those need to be dealt with. I am talking about the small ones like the broken door knobs, torn screens and faulty light switches. These are things that every homeowner has to repair at some point. There is little to no cost, yet sellers refuse to fix or pay for them and buyers won’t close without a credit or without the repair. How many times have closings been delayed over less than $1,000 worth of repairs? On million dollar homes?
What about the high cost of financing? While interest rates remain low, the cost of credit is not. Points and fees are costly. And, the costs of the closing itself are also not cheap. When all of these factors are taken together, agents look to bring their clients closer to their initial expectations – what did they think they were going to pay or receive when they got into this deal? Listing agents reduce commission to get a little more cash to seller and procuring agents reimburse some closing costs to buyers to reduce out of pocket costs and the necessary cash to close. This is an ego stroking move by agents. A half a point in commission, or a couple thousand dollars goes a long way to making a client feel better and might get a referral or two for the agent down the road.
Finally, add to the mix the competition the agents must feel. Inventory is low. There are fewer deals to close and that means there is less commission income for agents. Good agents do what is necessary to close, including leaving a little money on the table. This is not a science. We don’t have to do broad market research to figure out the reasons. It’s about ego and it’s about the next deal. It’s what the market demands.