“That’s the way we’ve always done it” is a costly mindset when it comes to buying homes. Going to your local bank for a mortgage versus shopping different lenders will likely cost you tens of thousands of dollars in increased fees and higher interest payments over the life of a mortgage.
Similarly, you could be leaving thousands of dollars on the table by simply picking your “friendly neighborhood realtor” who operates using a traditional commission model. Let me explain.
How Realtors Get Paid
The traditional real estate model includes a 6% commission paid to realtors by the seller of a home. Half of this goes to the seller’s agent and half to the buyers. The companies the agents work for normally take a cut for themselves, but that’s beyond the scope of today’s discussion.
The Department of Justice has noted that there has been a “stickiness” to the 6% commission for decades, leading to higher than necessary costs to consumers. In other words, realtor commissions have stayed stubbornly high despite technology decreasing the costs of information exchange, marketing, and processing a real estate transaction.
And yes, even though it doesn’t directly “cost anything” for a buyer to use a real estate agent (since the seller pays the commission), home buyers still have an opportunity to put thousands of dollars in their pocket by prudently choosing their realtor.
The Department of Justice’s Recommendation – Lower Listing Fees & Rebates
The DOJ has recommended “full-service discount brokers” as an attractive option for consumers. For sellers, these agents reduce their own listing fees without cutting their quality of services. Redfin has emerged as a popular discount broker, cutting their commission from 6% to 4% when you sell your home and buy another with a Redfin agent. Here’s a diagram from their website explaining how it works.
For buyers, the savings opportunity is opaquer, but equally helpful for consumers! Some agencies and agents will give a portion of their commission to their clients in the form of a closing cost credit. The Department of Justice recommends buyer rebates (in the majority of states where they are legal) as a way to increase home affordability, especially since closing costs bar so many from home ownership. These agents offer the same caliber of service as traditional agents which do not provide rebates.
Redfin has a rebate program, but it’s a paltry 0.20%-0.35% of a home’s sale value. Clever offers a 0.5% rebate (meh) while Simple Showing offers a whopping 50% of their commission (so between 1.25% and 1.50% of home value) of the sale price. The agent in South Florida I used also rebates half of her commission, so I’m getting a $3,600 credit towards my closing costs.
Final Thought: Be Kind
A full-service discount broker is going to do everything they can to help find you your perfect home. They will make less than a standard agent on the transaction, and I keep this in mind. To this end, if you work with a discount agent and wind up putting them through an unusual amount of labor (100 home showings!?), you might want to offer up some of your rebate. After all, while everyone loves saving money, we still want everybody to be fairly compensated.