Since the NAR settlement, real estate agents have found themselves under a microscope, often facing skepticism about their commissions. It’s crucial to take a step back to explain how agents earn their income and the immense value they provide throughout the buying and selling process.
One of the reasons that so many agents struggle to talk about real estate commission is that they don’t fully have a grasp on it themselves, operating as if they’re employees with a paycheck instead of business operators. Keep in mind, it’s your job to clarify the intricacies of real estate commissions, not just to help clients understand the hard work and dedication that goes into every transaction but also to manage your finances responsibly.
Let’s start by looking at the most common misunderstanding that consumers might have.
A typical real estate agent makes around $50,000 to $70,000 per year, but these numbers don’t really mean much when you consider all the factors involved. Here’s some data gathered from the first 7 months of the year:
80% of agents sell fewer than 10 homes for the entire year, and many people are unaware of the substantial expenses that agents incur to even try attracting business.
For instance, agents often allocate around 30% to 50% of their income towards taxes, marketing, and operational costs. Real estate marketing expenses can include everything from professional photography and staging to online advertising and print materials.
Additionally, agents must cover licensing fees, association dues, and other operational costs that are essential for running a successful business. Just because an agent earns a certain amount doesn’t mean they get to keep it all – only the bad ones do that. The reality is that real estate is harder than it appears and real estate lead generation can get particularly expensive.
Typically, the total commission for a real estate transaction hovers around 5% to 6%, which is split between the listing agent and the buyer's agent. For example, if a home sells for $300,000, the total commission might be $18,000, with each agent receiving about $9,000.
This is where price point comes into play. Agents working in luxury real estate make substantially more per transaction and must offer an even higher level of service for it. But here’s the kicker: agents don’t just pocket that money.
They justify their commission by providing extensive services that can save clients thousands of dollars.
A skilled agent knows how to negotiate effectively, ensuring that clients get the best possible deal. They also provide valuable market insights, helping clients price their homes competitively and avoid costly mistakes. In many cases, the money saved or earned through an agent's expertise far outweighs the commission paid, making it a worthwhile investment for clients.
When discussing real estate commissions, transparency is key. Clearly outline your commission structure and the services included. This openness builds trust and helps clients understand what they are paying for, making them more comfortable with the commission.
Take the time to educate your clients about the real estate commission rates in your area. Explain how these rates are determined and the value they receive in return. Providing context can help clients see the bigger picture and appreciate the work that goes into each transaction.
Here’s an exercise… write down everything you do for your clients. Get creative in ways you can go above and beyond for them – for our coaching members, the Top Agent Playbooks show some remarkable additional services our clients use to rev up business. Do you offer a free moving van, provide free home equipment rentals, or provide discounts on partnered services? Once you have all these written down, work them into the unique value proposition.
With the new NAR rules now in effect across all MLSs nationally, you now need a contract to work with buyers or sellers. Don’t look at this as a bad thing. A contract is something you can hold on to, a form that helps you establish a bond.
One of the best times to talk about agent commission is when you bring up the contract. Philadelphia legend Tom Toole has a great script for buyers that helps to break the ice on the buyer-broker agreement. He offers them a “30-Day Test Drive” contract on his services and mentions that even if he wanted to show a house to his mother, he could not do it without a written contract. This eases the tension and sense of responsibility.
After that, he can more naturally go into what the contract mentions, including how he gets paid and what he offers in return for that payment. “I do charge a fee just like any professional would for their services, but I have a track record of making you far more above average than I’ll be walking away with.”
Lead conversion is one of the most important skills to focus on in today’s market, so practice, practice, practice.
Use past successes to illustrate the value of your services. Share examples of how your expertise led to higher sale prices or quicker sales. These stories can help clients understand the impact of a skilled agent on their bottom line, reinforcing the justification for real estate commissions.
Before attempting to justify your commission, ensure you fully understand both the client's perspective and where your money is actually going. Listen to their concerns and address them thoughtfully. By acknowledging their feelings and providing clear explanations, you can foster a positive dialogue about real estate commissions and reinforce the value of your services.
Knowing this still and consistently developing your real estate skills will enhance your reputation and build stronger relationships with clients. Remember, it’s not just about the numbers; it’s about the value you bring to the table.
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