On Thursday I explained how cooperating commissions work, who pays them, and what impact it has on real estate transactions. What I put off until today was the various options that home buyers and sellers have in lowering the cost of these commissions – although I did mention how home sellers could take advantage of variable rate commissions and how home buyers could benefit from commission rebates. Those two recommendations still stand.
However, the home seller still needs to decide on how much of a cooperating commission to offer and this is where it gets sticky. Within different areas there are indeed patterns of typical cooperating commissions. For instance, throughout much of the country 3% is typical while 2.5% is typical in Chicago but even in Chicago some neighborhoods routinely go as low as 2% and lower cooperating commissions are more typical on higher priced homes. And, sometimes, you’ll see higher cooperating commissions offered as an incentive for the buyer’s agent to push the listing (more on that later). In addition, it’s also very common in Chicago for the listing agent to subtract anywhere from $200 – 400 from the cooperating commission (mostly because they can but allegedly it was originally to help cover marketing expenses).
Just to give you an idea of the distribution of cooperating commissions in Chicago I looked at the 7030 active residential listings above $200,000. A little more than 90.2% were at 2.5%, a little more than 4.2% were 2%, a bit more than 2.7% were at 2.25%, and a little more than 1.3% were at 3%. The rest were all over the map or not formatted in a way that made them easy to group. Almost all of the offers had a few hundred dollars subtracted from the percentage to boost the listing brokerage’s take-home pay. So there is some variability in these numbers but not a lot.
Nevertheless, despite typical patterns there is no standard cooperating commission and any realtor that suggests otherwise is actually breaking anti-trust laws. Consequently, this commission should be jointly set by the realtor and the home seller based upon several considerations. That discussion might/ should include the following topics which I usually bring up to prospective home sellers.
Can A Low Cooperating Commission Hurt The Sale?
I believe that the reason 2.5% is so common in Chicago (and 3% elsewhere) is that sellers and their agents suffer from FOSO (Fear Of Standing Out). They understandably worry that a low cooperating commission will somehow hurt the sale because buyer’s agents might blackball the listing. Of course, any buyer agent that engaged in such a practice would be violating their fiduciary duty. In addition, in today’s world it’s not like a real estate agent can exactly bury a listing that they don’t like because they won’t make “enough” money on it. In fact, for the most part buyers are driving the bus, telling their agents what they want to see.
Then again we don’t know how a low cooperating commission might consciously or unconsciously bias the buyer’s agent’s opinion of the property. The weird thing is that we’ve gone below 2.5% on a $1.2 MM property before and received complaints from buyer’s agents and then we cut it on a $425K listing and received no complaints. Who knows? It could be a function of the attitude of agents that work the higher price points.
Also, if the buyer is smart enough to get a commission rebate from their agent a low cooperating commission could affect the rebate that the buyer gets. We definitely cut our rebates – possibly even eliminate them entirely – when the cooperating commission is below 2.5%. Usually our buyers don’t care but if they did they would be within their rights to impute their loss as an added cost of purchasing such a home and factor that into their offer. That cost ends up getting transferred back to the home seller in the form of a lower offer anyway.
Can A High Cooperating Commission Help The Sale?
Offering a higher than average cooperating commission is just the mirror image of offering a lower than average one. Do we really believe that a buyer’s agent is going to push a particular property just so they can make more money? I guess it’s possible but that would be pretty sleazy and they would lose serious credibility if the home buyer saw through their act. That’s why I personally don’t approve of that strategy but we do see it shamelessly promoted from time to time.
What Would Happen If The Cooperating Commission Was Really Small?
As I’ve written before our friends at REX have built an entire business model around not paying cooperating commissions but they’ve opted to do that outside the MLS system, which drastically reduces the exposure of the listing. That restriction is really unnecessary since you can basically replicate that strategy inside the MLS. As I’ve pointed out before our MLS system allows us to offer cooperating commissions as low as $1.
However, the problem with offering a really low cooperating commission is that the buyer’s agent really doesn’t get paid enough. Therefore, the buyer’s agent turns to the buyer to make up the difference. In fact, quite often a buyer-broker agreement is in place that explicitly states what percentage the realtor expects to make and how the buyer will be responsible for making up any shortfall. And, even if such an agreement is not in place, a smart realtor would put one in place prior to showing a property with a super low cooperating commission. The buyer would then factor that added cost into their offer, thus transferring the cost back to the seller.
In reality the cooperating commission is essentially a home buyer incentive that usually transfers to the buyer’s realtor – in whole or in part. Although, the home seller has some flexibility in setting this commission, with varying degrees of attendant risks, any extreme positions may circle back around and bite them in the ass.
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.