There is one topic that every listing agent, broker and real estate coach talks and thinks about all the time: How much commission is the right commission?
My company NextHome conducted an in-house research experiment using data from the Mid-Florida MLS. We used a data entry set of more than 8,000 results including only existing home sales between the $150,000 and $800,000 price range. We pulled all of the sold single-family homes sold in Hillsborough County between January 1 and December 31, 2015. We excluded foreclosures, short-sales, auction properties, properties with missing information, homes that sold for less than $149,999 and homes that sold for more than $800,000.
As a listing agent, the primary goal is to sell your listing as quickly as possible and to get the highest closing price as possible.
There are many factors when it comes to getting a home sold that are outside the control of the real estate agent, such as current supply, interest rates and macroeconomic factors.
Of the decisions that real estate agents can control when listing a property — marketing the property and listing commissions — the most influential factor is the listing commission.
Market to other agents
According to a November 2015 study by the National Association of Realtors, 87 percent of buyers used a real estate agent when purchasing their home.
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As a listing agent, marketing your listing to other agents can be more important than marketing your listing to potential buyers. This will lead to a larger pool of potential buyers.
Because marketing your listing to other agents is more important than marketing it to potential buyers, some might assume that setting your listing commissions as high as possible and offering the highest bonus amount would lead to the highest sale price and the quickest listing period.
That’s almost true.
Win for both sides
In the analysis of the sales data from the new report, offering a commission rate higher than 3 percent does lead to a home selling for a higher price. The median home listed at more than 3 percent commission sold for nearly 1 percent more than homes listed at less than 3 percent commission.
Even after accounting for the differences in listing commissions, a homeseller who sells his or her home at $300,000 stands to net nearly $1,500 just by agreeing to a higher commission.
As a listing agent, you win by getting more commission income. Your client wins by having more money in his or her pockets after closing.
Moreover, according to the report, you are 51 percent more likely to get your listing sold for above asking price when you set the commission above 3 percent versus simply keeping the listing commission at exactly 3 percent.
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Know the drawbacks
At the opposite end of the sales price spectrum, offering a bonus to the buyer’s agent actually leads to the lowest sales price and the longest days on market of all the commission methods examined.
When offering a bonus, the median list-to-close price was nearly 3 full percentage points lower than offering a listing at just a 3 percent commission. And it took nearly double the amount of time to sell a home that offered a bonus than a home that offered no bonuses.
That same homeseller who lists her his or house at $300,000 would most likely close at $279,000 when the listing agent is offering a commission bonus — regardless of initial commission percentage — versus a closing price of $288,000 with a 3 percent commission rate with no bonuses offered.
Finally, the report shows that listings that offer less than 3 percent commission have a 31 percent chance of getting a closing price for less than 93 percent of the original asking price.
Essentially, one-third of the homesellers who choose to use an agent who discounts commission will find they will be selling their house for considerably less than if they used a real estate agent who charges 3 percent or more in commission.
If you choose to discount your commission, you are doing a disservice to you and your clients.
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Nico Hohman is a real estate agent and construction manager for NextHome Discovery. Follow him on Facebook or connect with him on LinkedIn.
Editor’s note: This story has been updated to clarify study methodology.
