As you’re probably already aware, most real estate agents are paid on a percentage-based commission structure of the overall sale value of the associated home or real estate. Typically, this percent commission is around 6%, with 3% going to the selling-agent’s firm and the other 3% going to the buying-agent’s firm.
Begin mild-ranting about the current real estate agent commission structure…
Due to the very nature of this commission structure, an immediate conflict of interest presents itself for the buying-agent. This is due to the fact that the buyer wants to pay as low of a price as possible for the property investment, but the agent will receive less money if he or she secures his or her buyer a lower price. Of course, if you find a professional agent, the expectation is that the buyer’s agent will act in your best interest instead of solely for monetary gain. In fact, when I purchased my condominium last year, my full service buying agent acted very responsibly in trying to find me a reasonable place for the best price possible. End complaining.
So, the bottom line is that with regular real estate agents, the seller can expect to give away about 6% of the money he or she receives from the buyer to pay for real estate agent services (this does not include closing fees of course). While 6% may not seem like a ton of money (after all, we pay waiters and waitresses 15% commission on the food we buy), if you are selling your $500,000 McMansion house, you’re looking at shelling out close to $30,000 to the real estate agents in one transaction. Looking at numbers like this, you can really see how potentially lucrative being an effective real estate agent can be!
Recently, while driving my car around town or riding my bike through the countryside, I’ve begun to see more and more “FOR SALE” signs popping up advertising that the seller of the property is using a 1% commission real estate agent to assist in selling the property. Here in Virginia, one of the popular 1% commission companies I often see is Equity Saver USA.
Clearly, these sellers weren’t all too willing and anxious to fork over the hefty 6% real estate agent fee and were looking for an alternative. In seeing these signs, I began to wonder several things that I wanted to examine in today’s post –
- 1) Do these 1% commission agents offer similar types of services as regular real estate agents, and if not, what services do they take shortcuts on in order to save money?, and
- 2) Are these 1% real estate agents able to negotiate good prices for the property sellers?
What Services Do 1% Commission Full Service Real Estate Agents Offer?
All of you have most likely heard the age-old adage that states, “You get what you pay for.”
Translating this to the current investigation, my initial thought would be that if you decided to use a 1% commission agent to sell your home, you’d get a worse service with fewer actions taken on your behalf. However, according to 1% commission agent websites, they are able to offer the same services as 6% commission agents for a lower cost because they use a model that takes advantage of technological resources that were not available 20 years ago when 6% commissions were the norm.
Because of this potential discrepancy, I feel it’s important for us to take a look at exactly what types of services 1% commission agents offer. The following services were listed on 1% commission agent, Equity Saver USA’s, website. The description of some of the services are adapted slightly for increased readability.
- Upload 10 minutes of full speed online video showcasing your property.
- Broadcast up to 5 minutes of AM audible sales information to potential buyers listing from their car radio.
- Automated and extensive use of all real estate and social networking sites, including MLS & Realtor.com.
- 24/7 dedicated phone support and tour scheduling.
- Mobile office with Internet access, GPS, TV, DVD, satellite radio and leather captain chairs.
- Use of larger 24″x36″ FOR SALE signs for greater visibility.
- Online access to all Virginia Association of Realtor approved contract forms.
- Custom websites dedicated to showcasing your property.
- Utilize “old fashioned” print, radio and TV advertising when needed.
- We are designated Realtors. Realtors subscribe to a strict code of ethics and are expected to maintain a higher level of knowledge related to buying and selling real estate.
How Effective are 1% Commission Agents?
Looking at the list of services that 1% commission agents offer above, it seems to me that at least officially, these 1% commission real estate agents offer all of the services that I would need in an agent if I were to ever sell my condo. They even offer full MLS listing, which is a key feature in today’s “online” real estate shopping market.
However, my worry in blindly using a 1% commission real estate agent to sell my condo lies in the unsaid importance of the “unofficial” services that real estate agents/brokers offer. In other words, I would be concerned about whether or not I’ll be forced to end up selling my home below market value if I don’t obtain these unofficial services.
In the town in which I live, most of the condos for sale that are equivalent to the one I’ll be looking to sell when I finish graduate school are being offered through Better Homes and Garden Realty, a normal full service 6% commission real estate brokerage.
Now, let’s say that I put my condo on the market using a 1% commission broker. It doesn’t take much stretch of the imagination to expect that a powerhouse like Better Home and Garden won’t be too thrilled about my 1% commission broker “stabbing the industry in the back” by charging 5X less than they are for the same services. Let’s now assume that Joe Smo, a new person in town, is looking to buy a condo in the range of the list price of my condo, but doesn’t know the area and just wants a place that will work, be safe, and is in his price range. Joe Smo, at the advice of a colleague, obtains the help of a 6% commission real estate agent to show him around.
Since there are SO many places on the market now with the economy the way it is, it again doesn’t take too much of a stretch of the imagination to envision that the agent helping Joe Smo could merely opt not to show Joe my place, in favor of helping the cause of his or her other 6% commission agent friends who are still being “true” to the real estate community. Sure, the agent would gladly show Joe my condo if he found it listed on MLS (a service included with 1% commission agents) and specifically requested to see it. But, this might not happen since Joe is new to the area.
In my opinion, it is highly likely that this unsaid, unofficial stuff takes place every day in the real estate business. And, being on the wrong side of it can be quite detrimental to obtaining a high resale value for your home.
In order to find a more definitive answer to this hypothesis, I performed an Internet search to try to find any studies that have been conducted on the effectiveness/performance of 1% commission real estate agents compared to “normally” priced ones. However, there were no studies to be found. So, we are unfortunately left with only speculation at this point (sigh).
Are 1% Commission Agents Common in Other Countries as well, or just the United States?
As I was analyzing the situation above, I began to think back on the days that I spent studying abroad in Spain in 2008. During the two months or so I was there, I lived with a family that owned the majority of the small apartment complex in which they lived. And, I began wondering whether or not people (such as mi familia en Espana) engaging in an overseas property investment (outside of the United States) encounter and have to deal with the same types of real estate agent commission issues that we do here.
In general, from what I found in looking around various online resources, 1% commission agents are definitely available for selection in other countries. For example, I found several 1% agents operating out of Canada – one in Toronto and one in Ontario. I also found a 1% commission agent operating out of Falls Church, New Zealand (I’d really like to visit NZ someday by the way!). In these countries, the “normal” rate for real estate agent commissions seemed to be somewhere between 5-8%, which seems to be about in-line with the US.
However, I read that in some instances in Europe (Spain, Bulgaria, and Cyprus), commissions paid to real estate agents can be as high as 25%! Wild stuff! I just hope that my family I lived with in Spain didn’t have to pay this much!
Drawing from the various findings of this post, several key takeaways present themselves to me.
First, while I have no doubt that a 1% commission agent can technically provide the same MLS listing and property promotion services that a 6% commission agent could, I think that the “real estate society” isn’t quite ready to part with 6% commissions, which will make it difficult for now at least to use a 1% commission agent. This is especially true in today’s “buyer’s market” where property prices are going down and down, yet the properties seem to be unable to be sold. I know this is definitely the case right now in my neighborhood.
Second, I do honestly believe that eventually, real estate agent commissions will trend down and that 1% commissions will become “accepted” in the community. This would be similar to the downward shift in stock trading commissions experienced in recent years with the advent of the deep discount brokerage. Related to this trend, I’d also be interested in keeping an eye out for any data analyses/studies that come out comparing the performance of 1% commission agents to “traditional” ones. I think that would really provide a necessary insight in to the current situation.
How about you all? Have you ever used a 1% commission real estate agent? If so, do you feel there were as effective as a traditionally-priced agent? If you’ve stayed away from 1% agents, what specifically were your concerns?
Share your experiences by commenting below!