Why are real estate professionals paid on commission?

Several years ago, The Greater Baton Rouge Business Report published a story on real estate commissions. He discussed how commissions (the fee real estate professionals “earn” for selling a home) came to be, and what the future will bring. Needless to say, the way the real estate industry is structured and how professionals are paid is a bit of a mystery, particularly when you consider what “the norm” is (even though commissions are supposedly “negotiable”). it is taken for granted until you are faced with the possibility of selling a house. Perhaps sharing some insights into how we got to where we are today will give you a better appreciation of this side of the business, as well as shed light on why an agent makes a living that way and where the practice comes from. . originated, considering that this practice is described by many practitioners as a “feast or famine” way of making a living (and that’s not far from the truth for some!).

The “standard” commission, as we know it today, came into practice in the 1940s, when local boards of realtors came together to “set” the fees their members could charge for services leading to the sale of real estate. estate. Some of the practices prior to this “reorganization” were riddled with dishonesty and abuse of all kinds, particularly towards the uninformed consumer, who was sometimes the victim of deceptive practices, such as “net rate” arrangements, or the payment of a strong “fixed fee” and, at worst, unsuspecting and unsuspecting consumers would relinquish ownership in a type of deal where payment would come after certain events, leading to these machinations. While the practice of a unilateral percentage of the sales price quickly became the norm (the fee is usually a cost to the seller), there have been attacks on this practice by individuals and businesses that literally do not accept this agreement. for example, people who prefer to do it themselves avoiding a commission, or companies that cater to this type, where they charge some sort of consultancy fee or minimal brokerage for a minimalist menu of services (a breakdown of some of the typical services a broker full-service provider under the “traditional” model).

However, before we get away from the background of why the rate an agent expects may not seem appropriate to the consumer, let’s first review what any good agent does for a living, aside from putting up a For Sale sign and waiting for the buyer. to buy your house.

• Marketing: Includes advertising, promotion, traditional and through the Internet. This is a critical component in a good agent’s arsenal, he/she has all the tools to properly market the property to the most likely buyer (group) from which to get the best and highest offer your property can get, and you must expect (from research done beforehand).
• Representation – Includes advocacy for your best interests, knowledge of pricing strategies, ensuring you fully understand the factors that affect valuations; consulting on financial and tax implications of the transaction; advise on the best financial and tax options given your circumstances; ensure compliance with mandatory ordinance and due diligence obligations, for example, completion of disclosures, inspections, and the like; all the way keeping your interest at the forefront.
• Research – includes researching the competition, market trends, and factors influencing selling and attractiveness in relation to circumstances, for example, sellers sell for a variety of reasons and a good representative takes these reasons into account; also, depending on local and regional regulations, recommend strategies to improve the marketability of the property to specific target groups, i.e. staging, videos, etc.
• Negotiations: This includes presenting the best case on your behalf for what you expect, especially if the investigation is thorough and confirms your entitlement. Handling the actual agreements to buy/sell between you and the buying party, making sure terms are honored, generally working to make sure your end of the deal is honored, to the extent possible with and through other parties, etc.

Additionally, with the advent of complex and time-sensitive transactions, such as short sales, foreclosures and the like, the agent also negotiates with lien holders, achieving an effective transition and ensuring compliance with even more onerous activities and processes. .

• Transactional Management – ​​Once a buyer has been secured, in a “typical” sale (as opposed to a short sale), there will be a myriad of steps and coordination of processes, eg disclosures, signings, inspections, appraisals, appraisals Of applications. , plus negotiations of anything discovered along the way, escrow and title issues, ensuring all deadlines are met, etc. During this time, there is a delicate balancing act to get things done right and on time. Conversely, if things are not in line, the agent steps in to fix things, with his (the deal’s) best interests and intentions at the forefront, among other things.

These and many other tasks are the domain of a good agent and agency. If anything is typical of the process, it is that there is nothing so standard that one can lump any sale into an “average sale.” Yes, the standards are there, otherwise there would be no standard, but each transaction has unique qualities that require the expertise of a seasoned professional, if not knowing how to address them. Now that you have a little better idea of ​​what an agent does for a living, let’s get on with the topic at hand.

The original intent of real estate agents was to “standardize” rates to prevent abuse and/or disparities in how professionals would be compensated. However, in 1950, the US Supreme Court declared that this violated antitrust laws, thus adopting “suggested fees”, however, that too received an unfavorable response. The Justice Department sued in the 1970s rejecting that, too, stating that real estate agents made implied commissions, but local bureaus or departments (government regulators) mandated that all commissions be negotiable.

This brings us to modern real estate. There are numerous studies showing that average commission rates across the country remain fairly constant at around 6%, although market conditions have a slight impact on this rate. Lately, with the advent of model Internet companies where they offer great incentives, there have been some interesting results. While these companies aim to make enough of an impact on buyers and sellers to win them over, it has yet to show a profit or be a viable alternative. Furthermore, these cyber companies offer very little in the way of actual person-to-person dealings, relying instead on algorithms and the like, leaving much to be desired for the consumer experience.

There will continue to be an assessment of the way real estate is sold, however, one thing can be certain, any time two parties come together on something of such importance, unless there is unanimity on this event, there will be room for misunderstanding. . and such muses. As such, an agent, if only for this reason, serves as a good buffer to allay concerns and ensure compliance. Now the question is, what is that worth to you (in addition to all the other tasks and responsibilities described above)?

And, contrary to what some say that an agent is not worth as much as the percentage you are able to negotiate, one thing is certain, if you are dealing with a true professional, and not with a neophyte, you will soon discover that this person is your best resource for a variety of things, one of which is putting up a for sale sign to sell the house!