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Realtor Fee Structures Explained

Updated: 3 days ago

There has been a lot of noise about realtor fee structures.

It all sounds very exciting. The price of all homes is going to drop by 6%. Buyers and sellers will save money! You don’t have to use a realtor! 



But did anything really change at all?

There was never a requirement to use a realtor; you could always buy and sell without representation.  Fees were always negotiable. One of my clients is a prominent Austin commercial developer who uses a realtor when his family shops. He appreciates having someone manage the project, and as much as he knows about commercial, he wants the residential expertise when he is in that space.


So what is changing, and why does it matter?

What is changing is that we can no longer enter data into a field in the MLS that says how much the seller is paying for the buyer's agent fee. Some people think that was a dumb system to begin with.


Let me explain how this likely happened and why most sellers focused on making as much as possible from the sale of their property will likely continue to pay a buyer's agent fee.


Sellers care about their “net.” How much money will they walk away with when it is all said and done? Sellers typically own their homes for an industry average of 7 years. With a modest 3% appreciation, an average seller would have 21% + appreciation on their property. In addition to the downpayment of 10-20%, they now have an additional 21%.


Buyers, on the other hand, come to the table with downpayment money, and they are more sensitive to cash up front, while the seller is more sensitive to the cash they walk away with. For buyers struggling to raise 5% downpayment an additional 2.5% to 4% to pay for representation could be the difference between purchasing and not purchasing a home. For these same buyers, having a professional who can negotiate better terms and repairs is crucial as they don’t necessarily have the extra funds for large repairs in the first few years.


If buyers are now in the position of paying for their agents and the seller isn’t offering any closing costs to assist with this compensation, many buyers will pass on seeing a home that doesn’t offer closing costs to assist with this fee.


Does it make sense for sellers to limit the number of buyers able to purchase their home?

If a seller is trying to get the highest price possible, how can they do that? 

Marketing, preparing the property well, and ensuring the largest number of buyers can see the home are important. When the largest number of buyers can see the home, it is also important to make sure that every single buyer is able to make an offer. If there are buyers with only 5% for a downpayment who have asked their agent to skip any homes, they may choose not to make an offer on a home that is not offering this compensation to their agent.


Let's talk about this market we are in now in Austin, Texas.

In our current market environment, considered a balanced market, buyers and sellers are evenly matched. It doesn’t feel like that to us, but that’s a conversation for another time. 


Sellers have only a 5% chance of selling their home every week. Only 5% of the inventory goes under contract weekly, so they have a 5% chance of selling. 


In this environment with only a 5% chance of selling, what happens to the other 95% of properties every week?

They remain on the market at the same price, or they decrease their price. 


Let's discuss the homes that sit on the market. 

Taxes: Our property taxes hover around 2%. Or 200 Bps. Each month a property sits on the market it incurs the carrying cost of 16 Bps of property taxes.


Mortgage: 80% of homes are purchased with a mortgage, and of those, the average hold time is 7 years. So, most properties sitting on the market have a mortgage in addition to the tax cost above. There isn’t a great way to ascertain what percentage of the home cost is paid monthly, but we can assume it is at least as much as the property taxes. When interest rates were low, property taxes were about 30% of the average home payment. Now, with interest rates higher, it is a lower portion of the monthly payment, but to be conservative, let's say that it is the same as property taxes. 16 Bps


Price decreases: Our recommended price decrease for our sellers is 3-5% every 3-4 weeks, depending on the home and the inventory available for that area and that type of home.


Therefore, with only 5% of homes selling, a seller would cost themselves 3.32% to 5.32% monthly if they don’t sell their home. (price reductions + taxes + mortgage)


This is a monthly cost, not a one-time cost.


So if a seller sits on the market for two months, they would cost themselves 3.64, (2x mortgage + 2x tax + 1 price decrease) and if they sit on the market for three months, they would incur a cost of 5.96%. (3x mortgage + 3x tax + 2 price decrease)


If you are a seller and you want to capture the highest net from your sale, why would you exclude buyers who don’t have adequate cash for closing costs? Isn’t it in your best interest to invest 3% to try to avoid spending 5.96% 


Ok, fine this market stinks, what about a hot market?

Fair enough. Our current market is brutal for sellers. What about the markets we experienced in 2020 and 2021? Does a seller care about saving this money in those markets?


The math is always the same: Buyers are always more cash-sensitive than sellers, as sellers have the equity from the sale. Buyers tend to be less price-sensitive because the increased amount of the sale only increases their total mortgage and doesn’t impact their payment by a large percentage. Sellers want to see a higher price because that is money in their pocket in 30 days.


So, with this in mind, why would a seller want to limit the number of buyers that can make an offer on their property, even in a hot market? They might not incur the cost of property taxes, mortgages, or price decreases in a hot market, but they are still limiting buyers. In 2021 people were paying 5-10% over asking on a regular basis. In that environment why wouldn’t you want the additional pressure of even one more buyer to maximize your profits?


The savvy seller will invest 1-2% of the asset in staging because they understand that while this is a lot of money in their everyday lives, it is a small percentage of the asset, and having one more buyer come and look at the home can pay them a 200% return on that investment.


Likewise, the seller who understands the market mechanics will also offer to compensate a buyer closing costs to help assist with all their closing fees, including the cost of having professional representation.


There have always been low-cost and no-cost models with different levels of service. 


This makes sense; some people shop for clothes at Walmart, others at Target, and still others at Nordstrom. There are different service models for Tax assistance as well. Some people opt for Turbo Tax, and still others prefer to have a CPA for a higher level of service and planning.


But the sophisticated seller who understands the relative costs of selling a home is likely to choose to assist a buyer with their expenses to get one more buyer in the door and increase their probability of getting a return on their expense of professional advice. They want to be sure they are part of that 5% that gets an offer this week.


We are delighted to be your guides to real estate and always happy to nerd out of the details with you.


Cheers,

Jen & the team









 © 2024 Berbas Group. All rights reserved.

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