Typical is Boring, but When Selling a Home, Effective

A recent Redfin Forums contributor raised the question: Does a higher buyers’ agent commission = faster sale? From Baltimore to Seattle to Southern California, real estate agents and journalists have endorsed the idea of offering unusually large commissions so buyer’s agents will recommend a listing.

Because we’re curious masochists, we decided to answer that question. But first we had to establish what constitutes a “higher” commission. Higher than what? While traditionally the seller has offered the buyer’s agent 3% of the final home price and reserved 3% for his own agent, the very existence of a standard commission has been hotly disputed. Again, some notes from the fray: Realtors from Canada to Florida insist that a standard commission doesn’t exist, while professors from Berkeley and the Hudson Institute insist that it does.

Of course, Redfin’s business model demonstrates that it’s possible to charge different commissions. But Redfin has always been careful when listing a home to encourage our clients to offer the buyer’s agent 3%, even while accepting a lower fee for ourselves. In this at least, we’re like everybody else. We analyzed commissions paid to buyers’ agents for all broker-listed residential homes sold in King County in 2007, and found that 79% paid commissions of exactly 3% to buyers’ agents. Whether 79% adoption constitutes standard behavior or not, it is certainly common behavior.

The average commission, factoring in the lower and higher commissions as well, was 2.88%. The chart below (source: NWMLS) shows the average commission grouped by list price of the house. Most agents will tell you that the commission as a percent of the list price is lower for more expensive homes. We found this to be true: for list prices above $2 million, the average commission started getting closer to 2.5% than 3%.

Real Estate Commissions by List Price of Home

Because of the difference in commission rate for more expensive homes, we broke our data set into two parts: homes listed above $2 million and homes listed below $2 million. We focus here on the homes listed below $2 million because it’s a more interesting set– it’s much larger and the effects are a lot greater as well. This data set included 22,673 home sales.

Table: Home Sales, King County Residential Homes, 2007

  Commission lower than 3.0% Commisison equal to 3.0% Commission greater than 3.0%
Sale-to-List Price 99.9% 99.3% 98.5%
Days on Market 89 68 129

Rick West in our real estate group and Chris Wilkins in engineering ran the numbers, and the results were not as expected. That’s exactly why we created The Real Estate Scientist: to ferret out the data behind the myths and assumptions.

Homes offering a commission higher than 3% actually had a lower sale-to-list price than homes offering a 3% commission, by about 0.82%, or the equivalent of $4,095 on a $500,000 home. We had hypothesized that a higher commission would correlate to a better result for the seller. In contrast, homes offering a commission below 3% did get a better result for the seller: they had a higher sale-to-list price, by 0.54% or the equivalent of $2,719 on a $500,000 home.

The real difference between these groups was in days on market: homes that offered a 3% commission took 68 days to sell, while homes that offered a lower commission took about 30% longer, and homes that offered a higher commission took almost twice as long.

According to our data, setting a higher commission to get better results doesn’t work. It’s best to be typical, with respect to commissions.

How should we interpret this data? Is it the doing of the seller’s agent, who offers a lower commission on a property he knows will sell, and a higher commission on a property he thinks will be difficult to move? Or was the high commission itself a signal of desperation that encouraged negotiating? We tend to think that unusually high commissions are a symptom rather than the cause of a distressed listing. Whatever the case may be, the Seattle data suggest that offering buyer’s agents an unusually high commission isn’t worth it. If you have a different take on our results, just leave a comment.

Discussion

  • http://www.flexmls.com/blog/ Michael Wurzer

    Did you evaluate whether the commission changed at all during the life-cycle of the listing? In other words, was the higher commission in existence for the entire term or increased after the property didn’t sell?

  • http://htt Lane Bailey

    Again, all you guys had to do was ask…

    Higher buyer’s agent commissions usually mean overpriced listing that needs help. The sellers are hoping to find a greedy agent that will push a buyer into the property for the extra money they can earn.

    Lower buyer’s agent commission is often a property that doesn’t have much margin, so it can’t get negotiated down.

    If you want a little better idea of what is going on, you need to look at the expiration rates. Days on Market only covers properties that sell… and if only 10% of the properties in one group are selling, while 30% in another group and 40% in the third group are selling, your findings may not hold true.

  • http://blog.redfin.com/blog/author/ellie.wilkinson ellie.wilkinson

    Lane, good point that there is a selection bias here- we’re only looking at sales that closed. And Michael, no, we only looked at the commission paid at closing, as a percent of the list price at closing- so changes in commissions aren’t factored in.

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  • http://www.kaakeproperties.com Philip Kaake

    Everyone loves to run statistical data and try and decipher some meaning from it. I can tell you as an agent that I might be intrigued by a higher commission but if the home is not right for the people in style, price or any other factor I am not going to try and talk them into it. That data also does not account for unknowable information like if the selling price was too high to begin with. My answer to the question from a professional point of view is NO. Higher commissions do not necessarily lead to a quicker sale. However a really low commission like 1% to the buyers agent will probably hurt.

  • John Doe

    In my market the majority of properties that offer higher commission rates are in an upper price bracket. Was average sale price considered in this analysis? We all know that more expensive houses take longer on average to sell.

  • http://n/a BayAreaConsumer

    Of course like any chicken or egg problem it’s impossible to know whether the higher rebates were a symptom or cause of properties that don’t sell well.

    Another factor that I would think would come into play is that the higher fees could scare away some buyers because it makes it look like the real estate pros (on both sides) are taking them for a ride. After all, as redfin reminds us, all the fees are paid out of funds provided by the buyer.

    But maybe we’re just not being direct enough. What I’d like to see is some way for the seller to channel money directly to the buyer’s agent, bypassing the cut their brokerage usually takes. If I could offer 3% to the buyer’s brokerage, and an additional 1% directly to the agent, I betcha that would get the agent motivated, as it would probably more than double the agent’s takehome.

    • Stacy

      My experiance is that your data and results are miss leading for two basic reasons:
      1) Usually higher commissions are placed on undesirable and hard to sell properties causing sales to take longer. In general, these are the problem properties. Any experienced agent will tell you a higher commission is necessary for such properties. Typically, the location, condition, clouded title, no permits, lack of proper easements, other onsite or offsite, create problems that will cause double or triple the time to work out to a successful close. Basically problem properties require more effort and a prudent agent and seller will acknowledge this by offering higher compensation to the party willing to help solve the problem. In this scenario, had the commissions been lower, you can bet the average sale time of those specific properties would have been higher, say 180 to 270 days.
      2) You can bet that if the listings did not match scenario #1 above, they were just plain overpriced with an unrealistic agent or seller. A few percent typically will not keep a house from selling, however if it is overpriced, say 10%+ it will not sell. A lower or higher commission at that point really will not make a difference.

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