Savings

Performance Based Commission Rates for Top Real Estate Agents

As the real estate industry finally lowers commission rates after August 17, 2024, the battle continues between brokerages and agents to win business. For example, Sotheby's decided to charge 2% to the seller and 2% to the buyer—or less—to stay competitive. Other brokerages will likely follow suit.

For real estate agents, there is now an additional ceiling on how much they can charge a seller. However, top agents may still command incentive-based commission rates that may exceed 2% per side.

To do so, these agents will have to believe in profit-based compensation. The better a real estate agent serves his client, the more he should be paid, and vice versa.

This goal is consistent with the essence of capitalism and America, which is why there has been controversy over Diversity, Equity, and Inclusion (DEI) programs. If a person is hired for diversity but does not have the skills to do the job, they are being set up for failure. Everyone loses in such a situation.

Performance Based Commission Pricing: How Big Real Estate Agencies Earn More Money

The most common complaint from real estate agents and buyers is that commission rates are too high. With the rise of the internet and technology, it's surprising that real estate commissions stay at 5%–6% for so long, hence the NAR's case for price fixing. After all, commission rates in some industries have decreased, some reaching 0%, such as buying and selling shares.

At the very least, real estate commission rates should decrease as home prices increase. It doesn't take twice as much effort to sell a $400,000 home as it does an $800,000 home. Charging a low commission is fine but it can reduce the profitability of the industry.

With performance-based commission rates, a real estate agent can consistently prove their worth. The agent charges a higher commission for exceeding certain price ranges, while sellers keep commissions if the home sells for a lower price.

Example of Performance-Based Commission Pricing Prior to August 17, 2024

Below is the performance-based commission price I received from a real estate agent in July 2024, before the regulatory changes in the real estate industry came into effect:

  1. For contract value of $2,900,000 and above: 5% commission.
  2. For contract value between $2,750,000 and $2,899,000: 4.75% commission
  3. For contract value between $2,650,000 and $2,749,000: 4.5% commission
  4. For contract value of $2,649,000 and under: 4.25% commission

This structure ensures that the commission percentage decreases as the contract value decreases, providing a tiered approach based on the value of the structure.

I only got this offer after I told the agent that I was thinking of renting the property instead. This offer was better than the other three offers I had, all of which attached their 5% fee.

Example of Performance-Based Commission Pricing After August 17, 2024

Now that the August 17, 2024 deadline has passed, I am willing to accept the following performance-based commission structure:

  1. For contract value of $2,900,000 and above: 4.25% commission
  2. For contract value between $2,750,000 and $2,899,000: 3.75% commission
  3. For contract value between $2,650,000 and $2,749,000: 3.5% commission
  4. For contract value of $2,649,000 and under: 3.25% commission

Given that Sotheby's and other brokerages are willing to charge a full 4% commission to sell, at the very least, this competing brokerage should match these rates. If the job goes through, I'll save between $26,490+ in commissions, since the rate is 1% lower for each tier of contract value.

Meanwhile, if the real estate agent performs well and secures a sale price of $2,900,000 or more, they will earn 0.25% on top of the standard 4% rate.

Real Estate Agent Considerations

If you are going to pay a real estate commission, you might as well choose the best agent possible. This means choosing an agent with a strong track record, a large network, the best preparation team, and superior negotiation skills.

However, relationships are important. You might choose an agent with a small network who is willing to hustle a lot by showing every open house and reaching out to every lead. Whichever agent you choose, trust them to do the best job possible for a fair price.

If you choose an agent that charges a performance-based commission structure, you should develop realistic expectations of how much your property will sell for. If you think the property will sell for less than the agent believes, you will save more.

Calculating Opportunities for Selling Property at Various Prices

  1. For contract value of $2,900,000 and above: 4.25% commission. I give a 10% chance of this happening.
  2. For contract value between $2,750,000 and $2,899,000: 3.75% commission. I give a 30% chance of this happening.
  3. For contract value between $2,650,000 and $2,749,000: 3.5% commission. I give a 70% chance of this happening.
  4. For contract value of $2,649,000 and under: 3.25% commission. I give a 50% chance of this happening, but more than $2.6 million.

My prospective real estate agent believes there is an 80% chance that my rental property will sell for more than $2.8 million. Because of this, they initially expected to make 4.75%, the commission rate they had offered before August 17, 2024. They saw 4.75% as reasonable, as it was 0.25% below the industry rate before the rules were changed.

Today, if an agent prepares a new fact, he can expect to earn a base commission rate of 3.75%. However, if they manage to get more than $2,900,000 in real estate, they will get an additional 0.5% performance bonus commission.

My Commission Savings Based on My Real Estate Price Forecast

I only believe that there is a 30% chance of my property selling for more than $2,800,000, and only a 10% chance of my property selling for more than $2,900,000. As a result, I am more aligned with the $2,650,000–$2,749,000 price range. This means that my expected commission payment is only 3.5%, or 0.25% less than what the agent expects on his basis. Basically, I saved myself another 0.25% in commission if my prediction is true.

Additionally, since I offer a 50% chance of selling my property for $2,649,000 or less, I won't be too disappointed if it happens. I'll also be happy knowing I saved an extra 0.5% on the tip, which translates into savings of up to $13,245.

What I need to notice is if the property is selling for exactly $2,900,000. Ideally, the property should not be sold for exactly $2,900,000, as that would mean I would pay 0.5% more in commission on every sale while earning only $1 over the $2,899,000 limit. My break point is to pay an additional 0.5% commission if the property sells for $2,914,500 or more. Therefore, it is worth considering adjusting the threshold values ​​accordingly.

Goal As A Realtor: Find The Most Prospective Real Estate Agent

As you can see from my performance based commission structure, the bigger the difference between what the realtor expects your property to sell for and what you expect, the more you'll save.

Therefore, your goal as a seller is to find the best selling real estate agent possible. A highly optimistic agent will offer above-market sales price estimates in their commission structure. When they reach a pie-in-the-sky sales price, you're happy! If the sale price falls well below the agent's expectations but meets your expectations, you will pay a much lower commission and be happy.

Real estate agents must look to clients to grow their future book of business. Another way top agents sell themselves is to present a pitch book of past sales, customer testimonials, and data to convince you to sell with them. Getting a listing is more preferable than having a buyer as a client.

At the time of listing, the agent may tempted to give you the highest possible sales price to protect your business. It's the same as a general contractor who promises to charge you the lowest price to win your business, then adjusts after the contract is signed.

When you decide to work with a real estate agent, that's when you negotiate a performance-based commission structure. If an agent disagrees after running their numbers, you know they're blowing smoke and trying to close your business.

A performance-based pricing agreement essentially puts the agent's money where their mouth is. A smart agent who wants to maximize his profits will develop realistic sales price estimates.

The Danger of Hiring a Fraudulent Real Estate Agent

Of course, as a seller, you don't want to hire an agent who is too deceptive to save on commissions. That would be counterintuitive, as the agent's deception may indicate incompetence. They may not understand the local market well enough to market the property properly. In turn, this may result in the seller not getting top dollar.

This lack of understanding of the local market is why you should not hire an out-of-town agent. Instead, you want someone who has lived in your area for decades, knows everything about the area, and knows things that will improve the local economy. As a buyer, you choose to negotiate with out-of-town agents who may charge too high and cause their listings to expire.

As a seller, the best approach is to hire the most knowledgeable, market-savvy, and optimistic agent you can find, and get them to agree on a price based on performance. after do your own market research. Anyone who believes in achieving success and in their own power will agree. And frankly, that's exactly what you want in a real estate agent!

If you're having trouble convincing an agent you want to work with to agree to a performance-based commission structure, ask them this simple question: Do you believe in your real estate abilities? I agree. Let's see what we can do!

Student Questions and Proposals for Architecture

Do you think top real estate agents will agree to performance-based commission structures if they truly believe in their abilities? What kind of real estate agents will not agree to receive merit-based compensation? Does everyone want to be paid what they deserve?

If you want to invest in real estate without dealing with agents, think about it Fundrise. Fundrise manages more than $3.3 billion and allows you to invest in residential and industrial nonprofits across the country. As you get older and wealthier, you may want to avoid investing in real estate. Additionally, as real estate commissions and mortgage rates decrease, demand for real estate should increase.

To accelerate your journey to financial freedom, join over 60,000 others and sign up Financial Samurai's free newsletter. You can also receive my posts in your inbox as soon as they are published by subscribing here. Financial Samurai is among the largest private equity websites, founded in 2009.


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