How Much Should Investors Pay In Real Estate Commissions?

Two hands holding a percent sign

How much is too much to pay when working with a Realtor? How can real estate investors get better deals on commission rates? Should property investors even be considering working with real estate agents at all?

Should Investors & Realtors Work Together?

Some of those reading this may be confused at the prospect of working with real estate agents at all. They only see agents as their competition, a pain that plagues them with persistent and unwanted phone calls, a steep and unnecessary expense, and people to be avoided at all costs. We’ll dig more into the benefits and dangers of this relationship in a moment, but it is important for each investor to avoid being trapped and limited by popular misconceptions. Do the math for yourself to determine whether or not working with a Realtor is right for you.

How Realtors Can Help Investors

Both Realtors and investors need to decide for themselves if they can and should work together. There are definitely situations in which Realtors can help investors. In fact, they can be absolutely necessary for accessing some types of properties, like HUD home auctions. If they gave it a shot, Realtors would also find investors to be one of their best sources of business, and a steady stream of income. Unfortunately, agents are often hit by swarms of new investors that have no clue what they are doing, aren’t really serious, and haven’t invested in their real estate education.

On the other hand, Realtors can offer investors just as much value. A good Realtor can serve as an investor’s best asset. They can pick up a lot of tasks, can save investors money and management headaches, and can bring in a ton of referrals. If you are still working on building your team, need more deal flow, or need help with writing offers and negotiating, a Realtor may be a helpful partner to have. There always situations in which having a buffer like an agent can be beneficial in negotiations and protection from liability.

Of course, this only helps when the numbers work. So how much do Realtors really cost?

How Realtor Commissions Really Work

There are a lot of misconceptions about real estate commissions, and they are changing fast. The typical commission for selling a house may still be  six percent of the sales price. However, there are many hybrid options available. Luxury home sellers, landlords seeking renters, and those selling commercial real estate can actually often expect to pay 10 percent. Discount brokerages may ask for about half that.

By law, the listing commission is paid to a listing agent’s broker. This commission is then split between buyer and seller brokerages. Next, each broker has their own split with the individual agent. This figure is still gross, and does not account for taxes or operational and marketing expenses. So on a $100,000 home sale, the listing agent may get a check for just $1,500. Then they have to pay all of their own costs out of that. They may be left with just a few hundred dollars.

There are also flat fee services to get investor listings on the MLS. However, it is important to note that in order to get any action sellers still have to offer a competitive rate of commission to buyer’s agents. This amount can vary over time and by transaction type and area.

The Pros and Cons of Discount Brokerage Services

The Real Deal recently debated whether discount services were even ethical or legal due to the fact that they can be a disservice to sellers. If sellers are not educated enough, this can lead to longer marketing times, and properties selling for less. Quite simply, you often get what you pay for.

If you know what you are doing, a discount service may save you money. Those savings normally mean having to take the DIY approach to negotiations, contracts, disclosures, etc. Can you hold your own here? Do you need extra help?

How to Get Real Discounts on Realtor Commissions

Most real estate investors feel that paying 3% to 6% commissions is obscene. These may be perfectly reasonable fees for the average seller. But if you are a master of the process, need very little help, and can bring a strong stream of business to a Realtor which saves them marketing money, then may be you offer enough value to deserve a discount. It never hurts to ask. If you can bring 4 to 10 deals a month to an agent, and do most of the work for them, then maybe you can negotiate listing fees as low as 1%.

Another way to achieve the best of both worlds is for investors to get their real estate licenses, and to become Realtors themselves. There appears to be increasing pressure to do this form a legal standpoint as well. However, being licensed also brings another level of responsibility and restrictions. It means a legal responsibility to clients and the interests of other parties. This has resulted in lawsuits and worse for those that cross the lines. This has specifically been seen when it comes to short sales, and where Realtors have used their insider knowledge to invest in properties in developing areas. If you don’t put others’ interests first, or use your insider information to profit unfairly, you could be in a whirlwind of legal pain.

So will you work with Realtors, or become a Realtor? Have you successfully negotiated discounted commissions? Or have you made profitable deals happen at full commission rates?