Why are commissions so high?

The issue at the end of the day is the system is rigged. If a buyer had to pay their own broker maybe the system would change, but since there is no cost to a buyer he/she will always get one involved. Which then makes it impossible for a FSBO listing because no broker will want to bring a client there on the hope of somehow getting a commission. Remember normally they would get the cobroke, but no FSBO wants to pay a cobroke.

That being said there is no reason that people can not start to take a stand and want to sign with a broker at 3-4%, but i think it will take a long time to get these changes to happen.

I for one even when i was buying found that having a broker really at the end was not much help. With being able to find most if not all listings now it is pretty easy to do on your own. Then you are not left with someone who is working on your behalf who may or may not be giving you all the information. But then again so the same goes on the seller side. At the end of the day the broker is trying maximize their commission.

While i agree coop transactions can be complicated, the forms are self explanatory and just require gathering a crap load of info which you need for mortgage anyway. There is no way that 6% is needed to help you through the process. I understand at a lower price point home, otherwise you are earning nothing, sell a 200k home for 2% and if you spend any sort of real time on it you get nothing, but 6% of a 1 million home, just to much money.

never understood how it could be more than 4%

6% is not high when you consider the structure of a typical firm and all the related costs, splits etc..
Lets take the "super brokers" out of the equation and look at a reasonable scenario;

$1,000,000 dollar apartment=$50,000 dollar commission(5%), split between two firms leaves $25,000 then the agent gets 1/2 of that $12,500. So if you can do 10 of these a year you earn $125,000 pretax. So even if we take this scenario and double it we get $250,000.If we factor in higher splits, less than 1 million dollar deals it will still average out to approximately the same gross numbers.

That said I started a company that has focused on dealing with clients who do a great deal of the research and want to be compensated for it. I currently am focused on working with buyers and use commission rebates to maximize value and buying power. I have experimented with a "hybrid fsbo" listing and have had some success with it as well as straight full service listings at a discounted rate.I have learned quite a bit about what works and what does not.

Another part of the model addresses the complaints from buyers that feel there is a lack of transparency. For the most part I consider what I am doing is more consultant than salesperson, I am not afraid to tell a seller what I really think their home is worth(I only want the listing if it is priced correctly) and at least 50% of the time I advise my buyer clients not to purchase. I also work hard to balance the emotional component of home buying with the financial.

What we do is not for everybody, some want the prestige of a marquee firm representing them and don't have any qualms with the current commission structure. I don't think The Burkhardt Group is going to ever dominate NYC real estate, but we have found a space in it and my clients are quite happy with the process and level of service they receive. We are approaching our 3 year anniversary and as soon as I have some time and have saved a little more money, I hope to expand to the next level, as they say. I currently have two kids in college...nuff said.

Keith Burkhardt

http://theburkhardtgroup.com/agents_details.php?agent_ID=7619

Keith,

I don't think looking at it from a 'what a broker makes' perspective is meaningful - as we all know from studies, the supply/demand curves for brokers is extremely elastic, so if commissions dropped, there would be fewer agents - 10 transactions per year is certainly not any type of natural limit on what a broker can handle.
But what I can see is that the area which is clearly overcompensated here is the firm. Let's compare to a financial services broker. A broker who does $250k of gross commissions will have a greater than 50% split. And the costs (compliance, systems, insurance, legal etc.) for the firm are substantially higher. And thinking about it further, the emergence of ACRIS and sites like SE should make it substantially easier for brokers to market on their own. I don't see why there should be much of a 'brand premium' for a name brokerage firm.
Further to compare to financial services, the only products that you pay anywhere near a 6% commission on would be annuities - the kind loaded with surrender charges and riders and all types of things that make them very spurious products.

Keith you are doing what should be done with all firms, fees structures that people can feel comfortable with.

I for one feel that there is no reason that a broker should be different then any other professional and be accountable for their time. A lawyer, an accountant, etc, that a company hires sends an itemized bill describing time spent, hourly rate etc. While a broker tells you that you will pay x%, which maybe sometimes if the homeowner is unrealistic and they spend a long time trying to sell, maybe they have earned that much money. However if you have an apartment in good shape, priced at market, etc, that sells within a few weeks to a month, a person is way overpaying for the services received.

While i understand that the typical fee gets split, that is not my problem that these mega realtors exist with to much overhead. I just feel that anyone could in theory become a realtor, i am not trying to degrade good brokers, but it is not as if there is an advanced degree, however brokers are compensated as if they have gone to school forever to justify making it a high earning job.

At then end of the day a broker is a saleman, and i know of plenty that earn their commission, but do not get anywhere near this type of money. You are basically saying for making 10 deals at 1 million $125,000 in compensation is fair? It just does not make sense to me. I think the issue revolves around the fact that there are just to many brokers so in order to earn a living you need to make more for each sale. Cut down the number of brokers and the commission and they will earn just as much.

I'm sorry that so many people here have had lousy experiences with agents. I work in the field so I certainly understand that there are morons in it. But a good agent is worth his/her weight in gold, just as a good lawyer or doctor is.

Let's say on average that 6% on a million-dollar home generally works out to around $100 an hour.

Consumer demand for that service generally comes from people who do something else like law/banking/entertainment/technology, and realize that while they probably could move through the process themselves, 1) their time is even more valuable than that and 2) they'd rather have an expert.

That expert knowledge includes a longer and broader market knowledge than a buyer or seller gets from just jumping in for a few months, a set of relationships with everyone from contractors to bankers, a sense of how to move the process along and how to avoid hazards.

Despite Mikev's assertion that "the forms are self-explanatory," this forum, for example, is littered with posters who are shocked, shocked that they were turned down by a co-op board.

With good agents, that shouldn't happen.

ali r.
DG Neary Realty

Actually a RE Broker doing $250k a year gross would probably be receiving a 55% to 60% split.
I agree there are just too many agents in this city and I think we will see continued consolidation. Take it from me, it's hard to roll out a new model in this city. But every client I work with always says the same thing, "Why wouldn't someone work with you?" Baby steps, don't want to bring to much attention to myself...but enough to keep the engines firing, for now.

Ali in order for you to say a million dollar home at 6% is $100 per hour that is 600 man hours based on a $60,000 commission. Lets say you split, that is 300 hours on each end, which is 37.5 days based on an 8 hour work day. I am sorry but that is crap if you want any one here to believe that is how long you spend on selling a home.

I will use my coworker as an example she looked at two townhouses in Jersey, bought one, closed about a month later. Her broker probably spent 20 hours helping her out.

Don't give me crap about how tough a coop package is, because even if i say it takes 2 days, 16 hours to put it together and make sure you have i's dotted and t's crossed that is a lot of time. Figure you spent time showing the place adn did some open houses, which are what 2 hours in length. So lets say you took a while to sell and did 2 a week, that is 4 hours, so we have 300 hours, less 16 for board package, now we are left with 284 hours, so you can show the place for 71 weeks, but if it listed for that long i would say you are not a great agent because you priced incorrectly and gave bad advice.

Ali i am not trying to attack you as i have read some of your other comments in other streams and sometimes i readily agree with you. However on this point there is just no way a 6% fee can be justified.

Also please do not take into account overhead of a corcoran, elliman, etc. it is built in. So i do not care if you only get 1/2 of the total, that is just how you are paid.

And regarding the people who are shocked here, that would be more a buyer's broker issue not explaining things to them, not a sellers broker.

Either way I like Keith and his method of actually working with a seller to pay a reasonable commission and not some arbitrary 6% of total price.

Mike, some people shop at Sears and some people shop at Saks. As my dad would say, "that's what makes horse races."

I am sorry that you disagree with how long it takes me to do my business thoroughly and professionally, but that's how I do it. I know that my clients are happy because they keep coming back.

ali r.
DG Neary Realty

Ali,

I don't disagree that for some people it clearly makes sense to pay you $1,2 or 300 an hour b/c they are earning $500, or because they value the expertise, but there seems to be two models - full service, full commission or FSBO. If I'm looking at investments, I can do it all myself (discount brokerage), have a little help (fee-only advisor), a full service transactional relationship (broker), or a full service overall relationship (advisor model). Transparency has increased markedly over the past 10yrs, especially the past 4 since ACRIS came out, and the 'expertise' is not as valuable as it once was, yet the cost has not come down. I'm trying to figure out why that is.

Your clients keep coming back? What is it that you recommend to them that they buy and sell every 2 years so you get a commission?

And Sears and saks? At least rate yourself a bergdoff.

But honestly we are talking about apartment sales. while i appreciate there are different levels, at the end of the day you are all in the same listing. Most of the time besides maybe steering someone on how to clean up their home and correctly price, a buyers broker is the one bringing them in. You speak as if the job takes an exhorbinant amount of time. My point is that if you are SO GOOD, it does not take so long, take a reduced commission and everyone is happy.

Your point seems to be that you are wonderful so you have no issue telling people that they need to pay over $60k to sell a million dollar apartment, even if the listing sells quickly.

One day i hope that when the economy is better and they want to go after an industry for price fixing they will go after realtors.

And when people feel they have no choice but to pay 6% define happy? I am sure if you polled everyone here and asked whether or not they feel 6% was fair, the only people who would say yes are the majority of the brokers, the rest would say hell no. But unfortunately the game is fixed right now.

Ali,

I missed your last response - yes, some people shop at Saks and some at Sears, but there is only the Saks model available. I'm sure your clients do like you - you seem like a great agent, and I'm sure you are a great choice in a price-fixed system, but that's not to say that they think the price is fixed at a fair rate - they don't have a choice.

Printer that is the point, Keith clearly stated there is another way. Ali comes back and says my clients like me.

Ali my last thing i will say is my clients like me to, but that does not mean i have not lost some because they feel they can get the same service for less.

Printers point is correct, these days with all the information more or less at your fingertips, why has the model not changed along with the level of service necessary. I will not argue that people need help with board packages, but assuming people are rational and look at the same comp sales to price correctly, your job is easy as the buyers also know the comps and realize that the price is reasonable.

So Ali once again please explain to me how many hours you are really spending, because you are not getting $100 an hour, i would guess closer to $300 or more.

I think the issue isn't so much what the commission is - as it's been said, when an agent is good, the money isn't an issue. The problem is that the commission is the same for ALL agents. Front_Porch - you said a good agent is like a good lawyer or doctor. I agree. But a good lawyer or a good doctor has a different fee then someone just out of school. Yet commissions are the same all around. That's neither far to the buyer, seller OR the agents. Someone not doing a darn thing is being compensated the same way that someone busting their butts are.

You wouldn't tip a horrible server at a restaurant the same as someone outstanding would you? And don't we sometimes get annoyed that there's a "straight tip" added to our bill at some places - what's the incentive for the server to do well then?

I'm not opposed and haven't been opposed to paying a commission. In the interest of the profession though - it shouldn't be "one fee to rule them all"

Yeah a good broker is the same as a good doctor, talk about delusional...

Sam i disagree, a bad doctor could cut you while doing surgery, so definitely worth a high premium to get the doctor that does not cut.

What is the worst that a bad agent will do to you? price you a bit to high to begin with?

When you say money is not an issue, maybe to you it is not, but to me it surely is. If i need to sell and buy a new home and i am being told i have to give up 6% of the sales price when i need it for the next purchase that means a lot. That 60k on 1 mil is a lot especially if your home price does not increase as in the past.

Sure maybe when the market was going up 100% you do not care, but if you own a home for 10 years and it is worth close to what you paid and then you have to give some broker part of the cash you put in the home for doing hardly any work, how would you feel?

When i eat in a restaurant and give an extra 5%, we are talking maybe an extra $5 on my meal not $50k.

The issue is no broker will ever discuss what they really do and why they are worth it. Ali claiming her clients like her, well they have no choice but to pay the percentage because everyone they called asked for the same thing.

This is basically what would happen if all lawyers got together and said no matter what lets all stand firm and charge $500/hr without adjusting for the level of work we are doing. Write a will for $500 per hour would you pay?

Well that i what is going on here, no matter what they do or how much time they spend they get 6%, my question is why? the answer you get is BECAUSE with no substance behind it.

I have asked this question of Ali before and she has never given a detailed answer. She came back and hid behind sears and saks response. She has not and will never detail the time she actually spends on a deal because it would then become apparent that she is getting more like 300-500 /hr and when people really start to understand this they are going to demand change.

i think maybe the real estate market being dead may be the best thing because sellers may start standing firm in asking for a very low commission as there is no reason that if they are not making money some broker deserves to make big money.

MikeV - I think you missed the point of my thread. I agree with what you said... I don't know how from what I wrote you thought differently...

In short - there shouldn't be price fixing (i.e. one percentage for ALL brokers) - because not all brokers do the same job. When I said money wasn't an issue I simply meant that if there's a top not agent working his or her butt off for you and has white glove treatment - then I would expect to pay more (not MORE than what they currently make) vs someone who is barely there in the transaction.

As I said - there's no range. And that's wrong. It's "socialized" real estate brokering. We all pay the same percentage regardless of the service we're getting. The only one that wins in that scenario - really - are the brokers.

Brokers, I'll give you SEVEN PERCENT (7%) if you sell my apartment. Pricing completely in line with recent comps. Yet, still up HUGE since I bought it, and not at all comparable to the new owner when compared to what they could rent for. So PLEASE, find some idiot to take my property at the current market price. 7%.

http://streeteasy.com/nyc/talk/discussion/22406

none of you actually have to pay anything, do it yourselves and stop bitching about it. or alternately, look around (and it probably wouldn't take that long) and you'll find someone to show your property.

but here's the catch. that listing broker will have a hard time getting ANY other broker to look at your property.

I can't speak for other people. My commissions are flexible and my rate varies from deal to deal. Sam, I agree that it burns me that I can't charge much more than some really bad agents, but at least I have enough of a strong reputation that I generally get a nice and pleasant class of clientele.

corlearshook, if I stop someone from making a stupid million-dollar mistake, I'm certainly worth what a good doctor is worth. Sheesh.

However, I don't make $500 an hour. If I did I would be on a yacht somewhere, not in NYC in August.

If you want me to justify my time, let me say this: customers can hire me at a flat hourly rate and receive billing updates, just as if they were hiring an attorney. That's an option. But the last customer who hired me at a flat-fee rate -- a client who came from these boards, in fact -- converted to a percentage commission as he started to realize how much work I was doing.

ali r.
DG Neary Realty

Wow you are delusional. No matter how much money you save someone, a middle man on real estate transaction will never have the same value as a good doctor.

corlearshook
7 minutes ago
ignore this person
report abuse Wow you are delusional. No matter how much money you save someone, a middle man on real estate transaction will never have the same value as a good doctor.

corlearshook, i can understand why the commission structure being what it is might bother some people. solution: don't pay, and do it yourself.

next time your ill, instead of going to get antibiotics that will cure you in two days, why don't you try home remedies?

more or less the same thing isn't it?

I think commission-splitting itself tends to blunt price competition, even without explicit price-fixing.

A big chunk of each firm's revenue comes from buy-side splits that reflect (a) the competition's pricing and (b) the competition's willingness to co-broke. Partly as a result of this industry-wide interdependence, most competition takes the form of "We do a better job for roughly the same price" rather than, "We can do the same work (or better, or nearly as good) for less money."

As Keith said, the high overhead of the large firms is also a major factor. He can compete effectively on price (lower commission rates for sellers, rebates for buyers) because his costs are so low. The question for the next few years is the scalability of that model - especially if the industry giants take notice and start to react.

It wasn't all that long ago that most brokers were selling apartments in the $150K - 350K range. Even after taking into account inflation, the bubble is responsible for a massive raise in broker salaries.

One reason we haven't seen any push back on broker commissions is that until recently most sellers were selling their properties at enormous gains. These were basically windfall profits that they probably never expected when they originally bought those apartments. The situation is different now that many sellers will be just breaking even or seeing losses on their apartments, and they're going to find it much harder to write that five or six figure check to a broker when it's coming directly out of their bank account.

Exactly

http://streeteasy.com/nyc/talk/discussion/22406

My commissions are flexible and my rate varies from deal to deal

I think a lot of real estate shoppers go in thinking that the commissions are fixed in the industry. That is called price fixing and is technically illegal. Commissions are always negotiable and buyers and sellers should never lose sight of the fact that are not just negotiating the price of the property, but the percentage of the commission.

Purchased a 2BR coop in a full service building directly from the seller without the benefit of a broker on either end. Although the application appears lengthy, it is no big deal and requires collecting bank statements, letters of endorsement, etc. An attorney, who is needed in any case, is there when needed. I see no need for a broker, and if you feel more comfortable having your hand held, it should not come at the current price tag. Agents & brokers simply must perpetuate the myth that their services are necessary to defend their inflated commissions. I think the "new normal" in real estate will require a close look at these ridiculous costs. If we can expect real estate to only keep up with inflation, then transaction costs such as commission and flip taxes, as well as high carrying costs such as maintenance, will all have to be re-examined and held under greater scrutiny.

Aren't the inflated commissions just a reflections of the inflated prices? For the longest time, prices tracked inflation, so did commissions. Broker income from a deal roughly tracked inflation. If you as a buyer think we're in a new land where it's reasonable for prices to have outpaced inflation, then why shouldn't commissions have outpaced inflation as well in this new land? This worrying about $60K vs. $50K vs. $40K vs. $30K on a $1M apartment seems like a whole lot of fiddling while Rome burns.

If you don't want to pay broker's fees, just learn what you need to know, do what you need to do, and do it. Buy your own advertising. Nothing is stopping you. Based on just a cursory look at sales data, many people buy and sell real estate in New York City without brokers every day exactly this way. I am not perpetuating any myths. I bought/sold my own property without brokers before I obtained my license, no one can tell me it can't be done.

Commissions are absolutely negotiable, by state law. There are firms, Nestseekers comes to mind, I used to work there, that I know for a fact have brokers who will list a property at a lower commission rate. If you want specific broker names to work with, email me.

Price fixing of broker commissions is absolutely illegal. However, no firm has to take business it doesn't want, at a rate it considers to be too low. That, people, is not price fixing. Price fixing requires collusion between firms. To my knowledge there is none.

You want to pay $1.25 for a vente mocha latte double shot frappacinco at Starbucks? OK, but you are going to stay thirsty at that price--unless you buy a regular coffee for that price at the deli instead.

I know of solo brokers who will never, ever list for under 6%. They just will not list your place for less. It's like a lawyer who charges $500 an hour and that's it, take it or leave it. They are plenty of cheaper lawyers out there; go to a cheaper lawyer.

Want to find such a cheaper broker? Very easy. Go to a brokerage firm's website, look for agents who don't have any exclusive sales listings or reported sales, and call them up and say you want to list, but you want the lowest commission rate you can get. Some places give their agents complete flexibility, some do not. A few phone calls and you will know.

Can an agent working at a commission of 2% do the exact same job for you as an agent working for 6%? Will their experience levels be the same? Will buyer's agents be motivated to go the extra mile to show that property to split that commission? What do you think? But don't tell me you can't get a lower commission, because I know for a fact you can.

Commissions aren't "inflated." There are sellers out there who will pay 6% to get a certain level of expertise and service, and to ensure that a buyer's broker is motivated to show and sell their property. I personally do think commissions will trend downward over time, but this is where we are now.

Regarding For Sale By Owner listings, I sold a property that way a few months ago. I took my buyer to a FSBO. I had a prior agreement with the FSBO that he, the seller, would pay me 3%. Deals like this happen all the time, every day. It's just misinformed to say that brokers won't tell buyers about these properties.

Most, but not all, FSBOs are over-priced compared to the market and under-advertised and that is what creates problems for FSBOs, not brokers.

I believe many sellers of real estate are not aware of all of this. That's why these discussions are great and why it's important to keep posting this information so the public will know.

However, individuals who are fully and honestly informed have every right to pay a brokerage 6%, or 8%, or 10% (which by the way is the commission I paid to sell vacant land in Michigan), or 2% to list their property.

All this reminds me of when the painters were painting our near-the-beach house yellow. Numerous people walking by would come up to our painting contractor and tell him he shouldn't be painting it that color, that nobody lives in a yellow house. Finally he learned to look them in the eye and say: "Ma'am/Sir, it's not your house."

For sellers it's their money, their property, their decision--and sometimes it's my property and my decision, if you don't mind. If that commission makes their property, or my property, too expensive for you as a buyer, that is your problem. It is not your property. No seller owes a buyer the opportunity to fulfill their real estate dreams at the seller's expense.

Karla Harby
kharby@crrnyc.com