How Much Commission Should You Pay an Agent?

By Neil Jenman

In Australia, the average commission earned by the average agent selling the average home is about fifteen thousand dollars – that’s excluding advertising costs which are mostly unnecessary, but that’s another subject.

There are several important points home sellers should know before choosing an agent based on their rate of commission.

THE PERCENTAGE: The first point is the percentage. Rates can be as low as half a per cent or as high as five per cent.

But this is where sellers need extreme caution. Sometimes the agent who charges the lowest commission sells your home for the lowest price.

I often help people buy at auction because that’s where homes are constantly under-sold. I recently bought a home for $101,000 below what I was instructed to pay. The seller effectively undersold their home by $101,000.

As I was signing the contract, the agent recognised me and said he did the sellers “a really good deal” – he only charged one per cent ($13,000 on $1.3 million). Yes, sure, he gave them a discount of almost twenty thousand dollars (compared with an agent who charged, say, 2.5 per cent) but he undersold their home by more than a hundred thousand dollars.

The above scenario – homes being undersold – is the ‘norm’ not the exception. It happens with most home sales. And in almost all cases, the sellers never knew it.

NEGOTIATION ABILITY: The second point is the ability of the agent to negotiate. You are not hiring an agent to “find a buyer” – any fool can find a buyer and indeed many fools do. You are hiring an agent to get you the highest price.

There is an old but very true saying: “If they can’t negotiate a good fee for themselves how can you expect them to negotiate a good price for your home?” That’s often true. If you want a discount agent, think carefully. As one savvy seller once commented, “If they give their own money away, what are they going to do if they get their hands on my money?” Lowest fee rarely means highest price.

VALUE: The third point with commission is value. Is $15,000 good value to sell your home? The truthful answer is this: In most cases, no; in some cases, maybe; in rare cases, yes.

Real estate prices – and therefore agents’ commissions – have quadrupled in real terms since 1970 whereas wages have doubled. If what we paid agents was tied to our wages rather than our houses, the average commission would now be $7,500 not $15,000.

When you look at commission in amount of dollars rather than percentage, that’s when you often see the terrible value. If you say it quickly, two or three per cent sounds small, but consider what fifteen or twenty thousand dollars would look like on your kitchen table.

HOW MUCH IS TOO MUCH? Not long ago, I was presenting a course on negotiation to agents. A young woman was being lauded for her ability to do two things: First, to get high prices for sellers and, second, to earn a high commission for her office. The audience gasped when they heard how much she was earning for a single sale. But, to be sure, she did present a video testimonial from a seller saying she sold his home for five hundred thousand dollars more than other agents quoted. Naturally he was delighted, and he didn’t seem to mind – or indeed even notice – the fee which, from memory was five per cent. He paid this young agent something like a hundred and twenty-five thousand dollars to sell his home. Now, of course, if he was expecting two million and he got $2.5 million, that’s an extra half million less the fee which still gives him three hundred and seventy-five thousand dollars more than other agents quoted.

But something didn’t feel right. The more the audience cheered, the more this young agent lapped up their adulation. Although she was glowing, I didn’t feel right – this was starting to get a bit like that “greed-is-good” scene in ‘Wall Street’; this was not supposed to happen at my conferences. I invited the young lady back to the stage – she bounded up the steps to more applause. I told her I was uncomfortable and I needed to ask a question.

“Go ahead!” she grinned.

“Tell me,” I asked, “Do you think there could ever be a point where both your percentage and your fee could be too high?”

She spat out two words, “No way!” Her grin grew wider. But the audience was starting to quiet down, they could sense where this was going.

I then asked her again, deliberately and slowly, “But surely there is a point that we must not cross, where we have got more than enough – or even more than we deserve – and we must call a halt somewhere, don’t you think?”

“Oh no, if you get the sellers a good price, you can charge as much as you like.”

By now the applause had stopped. My questions hard turned the mood for joyous to sombre. I asked a question for which I felt sure she’d give me the answer I sought, “So you believe that if a seller agreed, it would be okay to charge them ten per cent or 20 per cent commission and earn, perhaps, a million dollars for one sale.”

“Absolutely,” was the reply. Now the audience was hushed. It was blatant – there was no limit to her greed. I am sure her boss and her teammates were feeling uneasy. I muttered something such as, “I am sorry, but I can’t agree with you. It doesn’t feel right to charge so much.” She skipped back to her seat, seemingly oblivious to the impression she created.

Yes, there is a point where I believe an amount of commission simply cannot be justified.

For example, it takes the same amount of work to sell a home for one million dollars as it does to sell a home for ten million dollars – indeed, it often takes more work to sell lower priced homes than mega-million-dollar homes. So please, never pay ten times as much because your home is worth ten times as much. I have seen agents charge sellers a quarter of a million dollars to sell a home. But those agents would have accepted a hundred thousand dollars to sell the same home – if only the owners had asked! There can rarely be any justification for charging a quarter of a million dollars to sell a home.

JUSTIFICATION. And that brings me to my most important point about paying commission to an agent: Can the agent justify their amount of commission?

Here are some points you must consider.

Do you believe the price you got was due to the agent? In other words, without this agent, would you have got a lower price?

The best agents pay for themselves. For example, because of their great negotiation skills that we mentioned earlier, an agent may get you, say, an extra twenty-five thousand dollars for your home. In such a case, paying a commission of fifteen thousand dollars is justifiable.

But if the agent has only done what most agents could have done, that agent should not be charging you any more than the cheapest agent in the district.

There are two reasons you employ an agent: First, to find you a buyer and second, to persuade that buyer to pay their maximum.

The first point, finding a buyer, is the easy part. It’s the second point where the agent really gets tested. And this is where you need an agent who is skilled at negotiation.

How do you know which agents are great negotiators, as they all claim to be great negotiators?

The first point you need to ask yourself is: Has the agent said anything that impresses you that they have great negotiation skills? Or, has the agent just trotted out lines used by most agents? Such as: “We have to see what the market says.” Or, “It’s only worth what a buyer will pay.” The truth is that your home is worth what a good negotiator can PERSUADE a buyer to pay.

Research shows that most homes are undersold. Most buyers freely admit they would have paid more. When asked why they didn’t pay more, they will say something such as, “We thought we would try an offer and we were surprised it was accepted.”

If you are selling your home, remember this: If buyers want your home, really want it and really love it, most will pay “your price” – if your agent is a good negotiator.

Only a good negotiator can truly justify their commission because they sell your home for a higher price than anyone else could sell it thereby covering the cost of their commission.

Please remember something else: The best agent to sell your home is not necessarily the agent who sells the most homes and it’s rarely the agent who does the most advertising. The best agent to sell your home is the agent who can get you the best price. In other words, the best agent is the best negotiator. If you find such an agent, a commission of 2.5 or three per cent could be great value. Conversely, if the agent is a poor negotiator, a fee of one per cent is far too much.

Here is the bottom line: The best agent is the one who puts the most money in your pocket.

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