When 6% Real Estate Commission is closer to 30%

30_CommissionLet’s do some simple math.  The traditional real estate model has charged Sellers 6% of their home’s value dating back to the 1940’s.  Today, consumers just accept that to sell a house, it’s going to cost them 6% of their home’s value.  It’s how it’s always been, and if the real estate industry had its way…It’s how it always will be.
I won’t lie, the 6% commission is a brilliant way of charging fees by making big dollars look like small percentages, and it’s a modern marvel that real estate agents are still able to charge based on commission in a time where transparency and value are so important to consumers, but that’s neither here nor there.
What very few home owners do however, is a simple bit of math to figure out just how much 6% is to them.
Let’s look at a quick example here:
Bob is a Seller.  He is selling a home worth $400,000 and he is going to pay the traditional 6% real estate commission.
Funny how agents never lay this number ($24,000) on you, but rather the puny 6% isn’t it?   Still, when comparing $24k to $400k, it doesn’t seem like an obscene amount of money, but this is really only 6% to a Seller who owns their home outright and does not owe any money on it, which is rarely the case.
Let’s say of the $400,000 that Bob’s home is worth, his equity is just $80,000 (20% of it’s value) and the other $320,000 is owed to the bank which will have to be paid back at closing.  The bank doesn’t help out with the real estate commission unfortunately, so Bob has to pay the commission out of his $80,000.  So what percentage of Bob’s equity is he paying to sell his house then? The math looks like this to Bob:
By this math, while Bob is technically paying a 6% commission, he is actually giving up 30% of his equity in the form of commissions.  That’s some serious money.  Do you think your agent earned it?
The point here is not that you should run out and try to sell your home without an agent.  Agents provide a critical service and breadth of experience that can save you far more than 6% on most deals.  I’m not saying that agents should be paid a percentage of the owner’s equity either, that’s as arbitrary as the current system.
The point is that the percentage commission structure doesn’t make sense at all, unless the amount of work and value increases with the home’s value.   As a Seller, you need to do the math and ask good questions.  Don’t talk percentages, talk dollars and cents.  Break down the listing agent’s side of the commission and ask them what you are getting for $12k that you wouldn’t get for $6k?  You won’t get very far asking your traditional agent this, but it will certainly be entertaining.
Here’s the equation to figure out how much of your equity you are paying your agent or your “Effective Commission Rate”:
Effective Commission Math
Terrace 24 is a new Real Estate model that does not charge a real estate commission.  The price of our services to sell a home is based on the value of the service, not the value of your home.  Resulting in a flat rate structure that allows the Seller to choose which services are right for them, and which things they can do without or do themselves.  Learn more…