What should be the commission of real estate agents?
The real estate industry is unique. Irrespective of the services provided or experience of the agent, there’s a narrow range that’s paid out as commission. It may vary slightly for different geographic regions, but it doesn’t exceed roughly 8% (buyer and seller agents split the commission so each one takes about half of the total).
This article explores the challenges with the standardized commission system and its effects on the industry. It also shares a way to meet the needs of prospective buyers or sellers and the agents they employ to act on their behalf.
Problems with a standardized commission
Real estate agents are compensated based on performance. If they help a client buy or sell a home, they get a commission. The seller agent is the one who collects the commission and is paid between 6-8% of the home price in the US and about 5% in Canada. If there’s a buyer agent involved, they’ll negotiate with the seller agent for a percentage of the commission which is usually around a 50% split.
This system doesn’t take into consideration the experience of the real estate agent you’ve hired or any added services. Agents with 20 years of experience and agents with 6 months of experience will receive a similar commission percentage. The main reason for differences in commissions is the geographic region of the transaction.
This presents a challenge for junior agents. What incentive do buyers and sellers have to work with newer agents if all agents collect the same amount for a similar service? This creates a higher demand for experienced agents and almost no demand for the inexperienced ones.
This supply and demand problem happens in every industry but there’s one major difference. In other verticals, organizations are able to set their prices. If there’s a new consulting firm, they’ll lower their prices to attract clients. If it’s a new software platform, they’ll price themselves below their competitors to take market share. Real estate agents aren’t usually able to do this because it’s frowned upon by their boards.
In another scenario, agents perform modified services for their clients. Instead of only helping a client buy or sell a home, they may add services such as a virtual tour, a neighborhood analysis report, or more. Other industries would allow the service provider to command a higher fee but that’s not the case with real estate. The boards, which regulate licenses, frown upon raising fees for add-on services connected with buying or selling a property.
Solution to standardized commissions
The solution to this challenge is still in its early stages but is making considerable progress. Traditionally, agents relied on referrals and similar means to generate new business. This process, coupled with interference from governing bodies, made it difficult to alter commission rates.
Today, the internet has expanded the sphere of influence of almost every professional. Agents are no different. In Canada, there’s a startup which allows agents to market themselves with more freedom. Property buyers and sellers can see the commission an agent will receive, their experience, and the region they cover.
Junior seller agents which don’t have many years of experience can market themselves as low commission real estate agents and even the playing field. Buyer agents can take a slightly different approach. The seller agent receives the commission and shares it with the buyer agent. The buyer agent can then share a part of their commission with the buyer as a cash-back incentive. They’re lowering their effective commission and attracting clients who may have otherwise passed them over. In both cases, the agent is able to build a track record and work their way up to the standard commission while still closing a lot of property deals.
Like other industries, agents should be compensated in a way that’s in line with their experience and expertise. Currently, that process isn’t as simple as it should be. Because of this, junior agents aren’t able to compete with their experienced colleagues but platforms are springing up that give individual agents more control of the commissions they’re paid.