(Please note that the following remarks apply to those of you who bought your home before the gold rush of 2003-2005, have been making payments and have equity. These comments do not apply to short sales).
There’s a fundamental inefficiency in real estate.
Because of this inefficiency:
- You pay more for real estate service than you have to.
- A lot of what you pay for is designed to make you feel good about how much you paid.
What’s even worse, because of this inefficiency, when you negotiate with your agent on the cost of her services, you can actually be helping to ensure that your house doesn’t get the attention it deserves from buyers.
What is this fundamental inefficiency? It’s this:
The 50 / 50 Commission Split is broken.
A lot of consumers already know that commissions are split 50 / 50 between the agent representing the seller and the agent representing the buyer. Sounds like a fair deal, right? Half the money goes to represent you, and half goes to represent the buyer.
But hold on a minute. There are two facts that most consumers don’t know, and it’s these two facts that explain what we mean when we say that real estate is inefficient, and the 50 / 50 split is broken.
- According to figures published some time ago by the National Association of Realtors(r), the average agent working with buyers spends four times as much time working with a buyer (32 hours on average) as your listing agent will spend on listing your home and representing you (8 hours on average).
- Agents representing buyers are more than ten times more likely to find a buyer for your home than your listing agent.
The Big Money’s Not In Selling Homes, The Big Money Is in Selling Sellers
So what this all boils down to is this. On the one hand, we have hundreds of eager and hard working real estate agents doing the incredibly time-consuming work of working with buyers who may not even turn out to be buyers, so that one of those hundreds of agents can sell your home. On the other hand, we have, we have an absolutely outstanding salesperson who is working primarily as a listing agent.
But make no mistake. This is an outstanding salesperson, but this salesperson — this accomplished persuader of humans that you’ve allowed into your home — is not in the business of selling homes. The real business of this selling superstar is selling you on the idea that somehow their experience and “sales numbers” justify being paid an equal amount of money to the hundreds of agents who each are going to work four times as hard as a listing agent and who collectively have more than a ten times greater chance of selling your home. (And of course, in “the listing agent’s” sales numbers, they include the credit they get for all the homes where they stuck a sign in the ground and the buyer’s agent did all the heavy lifting).
I’ve created a chart of where your sales dollars go. Is it approximate and does it represent my opinion? Well, it’s definitely approximate, and yes, it is an opinion, but it’s an opinion formed after almost nine years of experience in working with buyers and sellers both directly and with my agents. It may be a motivated opinion, but it’s definitely not naive.
(If you click on the image you can see a larger and easier-to-read version):

How do You Discount Price Without Discounting Value?
Ask any successful listing agent and they’ll warn you about the dangers of working with a discounter, as though somehow if you saved money on what, after all, are a rather limited (but very important) set of core services that the listing agent provides, you’d somehow be losing out.
And the way most listing agents work, there’s a case to be made for what they’re saying, because the listing agents know that you as a seller have been trained by every real estate agent and broker you ever met that the split between a listing agent and the seller’s agent is 50 / 50, is now and always shall be, world without end, amen.
Says Who?
So where does this 50/50 rule come from? Well, it comes from the thousands of transactions that have been done that way. There isn’t a rule about it. It’s not in the Magna Carta (you can check Wikipedia — I did, just to be safe), nor is it in the Ten Commandments. It’s just “the way we always do things”.
So what’s going to happen if you negotiate with a listing agent on price — are they going to discount only their own side, or are they also going to reduce the advertised commission to the buyer’s agent in the Multiple Listing Service, thereby making your home less attractive to these hard working agents?
Well, I don’t want to speak for them, but I know in my case I’d be inclined to discount my side, because that’s where there’s fat that I know I can cut — all that superfluous activity that are the non-green portions of the chart. If anything I think you should be paying your buyer’s agent more than 3% to make your home stand out, because buyer’s agents work their tails off. On the other hand, as a listing broker, I can afford to take a a deep cut on my side, because a lot of arm-waving and magazine ads aren’t going to sell your home. The right price in the right condition and hundreds of eager buying agents are going to sell your home. The fee on my side covers free a price analysis up front, photos, listing the home in the MLS, price review as needed, full representation (by the broker of record), and the best transaction coordinator in the business.
How much does that cost?
Call me and I’ll tell you. (530) 672-9160. I’m not trying to be coy, and if you don’t like the quote, I won’t twist your arm. But a lot of agents read this blog, and those who are working the listing side pretty heavily are probably already mad at me for talking about this stuff.
Woops.
If you don’t call, I’ll try something else. Like telling you I’m the next best thing to Nordstroms, or giving away free train whistles, or running a Memorial Day Sale.
As you can see, my business model is in flux a bit.
Was I not supposed to tell you that?
Woops again.