This article was published on 28 July 2009. Some information may be out of date.

A fairer deal for all on real estate agent commissions

Now — with real estate agents hungry for listings — might be a good time for home sellers to negotiate a new way of paying agents.

This is not about kicking a man when he’s down. What I’m proposing shouldn’t leave an honest agent worse off. In fact, if she or he is good at their job, it will leave them much better off.

The idea stems from the fact that there’s little incentive for an agent to get you a high price for your home. Their commission doesn’t vary much with price, so they often pressure you into accepting a low price so they can take their share and move on to the next property.

Under my proposal, if the house goes for a reasonable price, the agent gets the same as now. But if it sells for less, they get a lot less commission. You’re disappointed, but at least you’re not forking out many thousands of dollars to the agent.

On the other hand, if the house sells for more than expected, the agent is richly rewarded — and that should be fine with you. They have done their job well.

When Consumer last looked at real estate agents’ fees, it found that a typical deal might be $500 plus 3.8 per cent of the first $300,000 and 2 per cent of the rest.

If you are selling a house worth $300,000, this translates into $11,900. If the house sells for only $250,000, the agent still gets $10,000 — only $1900 less. If it sells for $350,000, the agent gets $12,900 — a mere $1000 more.

Here’s how I suggest you change that, assuming you and the agent have agreed that $300,000 is a fair price. Start with the usual $11,900 commission on $300,000. Then propose that for every $1000 under $300,000 the house finally sells for, the commission will fall by $100. And for every $1000 above $300,000, the commission will rise by $100.

This means that if the house sells for only $250,000, the commission will be a $5000 lower. But if it sells for $350,000, the commission will be $5000 higher. The agent has a strong incentive to bring in a high price.

You might want to encourage them by raising the baseline a little. Offer, say, $12,500 instead of $11,900 if they sell for $300,000, and adjust from there.

On a higher priced house, the differences are even starker. If the expected price is $1 million, the usual commission would be $25,900. If the house sold for just $900,000, the usual commission would be $23,900, but under my proposal it would be $15,900 — which, by the way, is still not bad.

And if the house sold for $1.1 million, the commission would rise from the usual $27,900 to $35,900.

A bonus of this system is that it will discourage agents from trying to get your listing by exaggerating how much they think you will sell for. They will be highly motivated to give you an honest listing price, and to get at least that price.

I have to admit that I’ve proposed something like this twice when selling houses, and only once did the agent agree. The other time all the local agents I spoke to flatly refused — making me wonder if there was a slight whiff of collusion in the air.

These days, though, real estate agents are hungrier for listings. It could be a way of sorting out who is likely to deliver. An agent confident they can get you at least your expected price should jump at the chance of making heaps if they do even better.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.