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How Real Commissions Impact Home Equity

by | Jan 24, 2022 | Finance, Selling

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In 2021, 92% of people selling a home used a real estate agent. Real estate agents can make the process of selling a home more transparent and less overwhelming. But at what cost? Licensed agents earn a real estate commission for selling your home. The traditional commission is 6% in total: 3% to the buyer’s agent and 3% to the seller’s agent. 

What many sellers don’t realize is that 6% is based on the gross sales price of their home, but when that same dollar amount is represented as a percentage of net proceeds the net commission amount (or real commission) is often as high as 25-35% of their equity!

Buying or selling a home can be a stressful process for many. After all, for most Americans their single largest source of wealth is the equity they’ve built up in their primary residence. However, by taking the time to understand gross commission versus net commission home sellers can more accurately gauge whether or not they can afford to pay a 6% gross commission.

We’re shining a light on the topic no real estate agent wants to talk about, so you can ensure you’re in control of your transaction and most importantly, your equity. 

How Real Estate Agents Get Paid

Real estate agents are unique in that they are not paid an hourly wage. Instead they are paid a commission, but only when the transaction is complete and a home is sold. The sale involves two agents: the aforementioned buyer’s agent and the seller’s agent who are paid from the proceeds of the sale. The seller does have the ability to negotiate their real estate agent’s commission before they choose to list the home. These commission rates are recorded in the seller’s listing agreement, which also outlines the terms of your agreement with your real estate agent. 

Ultimately, a real estate agent brings a buyer and seller together to consummate a real estate transaction at an agreed upon price. When ownership of the home is transferred from the seller to the buyer, the real estate agents receive their commission. Then, the agents are responsible for splitting that commission with their respective brokerages. 

The Impact of Real Commissions

Traditionally, the sellers pay all real estate agent commissions. This is because the fees come out of the sale price of the home. Now it’s important to note real estate agents add value in a variety of ways, from understanding the local market, to providing comparable sales data and navigating the complexity of the transaction overall and the paperwork that comes with it. The question is – does the value your real estate agent provides warrant them earning six percent of your home’s total value while you’re only entitled to the home’s net proceeds? 

Net Proceeds and Real Estate Commission

There is more to understanding how much money you will actually earn from the sale of your home. This is where the importance of net proceeds comes into play. Net proceeds are what you actually receive from the sale of your home. To calculate this amount you’ll need to consider your current mortgage and the costs of selling a house which includes real estate commissions. What isn’t widely known is that the six percent traditional real estate commission comes out of the total sales price of the home, rather than the net proceeds from the sale. 

There are a variety of net proceeds calculators available online, but home sellers really just need a simple formula including the following costs. 

  • Home sale price: The price the buyer has agreed to pay the seller for the home. 
  • Real estate agent commissions: The seller pays the commission for both the buyer’s agent and the seller’s agent. The total commission is typically 6% of the home sale split between the two agents.
  • Costs of repairs: Does your home need any major repairs or updates prior to selling? Remember to factor in these costs when selling. 
  • Closing costs: These typically include costs of transfer tax, title insurance, and escrow funds. 
  • Mortgage payoff amount: This is the amount you still owe on your current mortgage.

Calculating Real Commissions and Net Proceeds

Let’s look at what you are actually earning from the sale of your home using this example. 

Home sale price: $325,000

Real estate commissions paid: $19,500

Cost spent on repairs/improvements: $2,000 

Closing costs: $9,000

Mortgage payoff amount: $135,000

Here it is with the numbers plugged in:

$325,000 − ($19,500 + $2,000 + $9,000 + $135,000) = $94,500

So, in this example, your home sale proceeds equals $94,500. Now, the $19,500 you paid in commission is actually 20.6% of your net proceeds, rather than the 6% you were told. Not to mention, this doesn’t include the cost of staging a home if the seller chooses to do so, seller concessions or the cost of a home ownership overlap. An ownership overlap occurs when the seller has purchased a new home, but still owns their original home. Thus, the seller incurs the cost of two mortgages until their original home sells. 

True Real Estate Commissions Have Cost Americans Millions

In 2020, Americans spent an estimated $86 billion on real estate commissions. It’s easy to see why sellers see the potential value in working with a real estate agent. Studies have shown that homes sell for 20% more when working with a real estate agent. However, it’s still essential to understand how much real estate agent commissions actually are when compared to your net proceeds. 

In Denver, the average home value is $580,678 which equates to total commissions of $34,850 and a $17,420 commission for the seller’s agent alone upon sale.

In Seattle, the average home value is $888,202 which equates to total commissions of $53,292 and a $26,646 commission for the seller’s agent alone upon sale.

The above figures represent 2021 values based on a 6% gross commission with half (or 3% of the total sale price) going to the seller’s agent. 

Find an Affordable Agent!

New real estate services companies like Trelora drastically reduce commissions while at the same time delivering the same great service and success rates. Frankly, with home values up by 48% over the past 10 years, according to RenoFi, the traditional real estate commissions of 6% are too high. 

Let’s look at the average home value in Denver for example. In December 2012, the average Denver home value was $256,000, meaning 3% commission for the seller’s agent would total $7,680. This market has seen exponential growth over the last 10 years. In December 2021 the average Denver home value was $580,678, this is an increase of 126%. As a result, the seller of the same Denver home 10 years later now pays $17,400 for the same 3% sellers agent commission. A seller’s agent does the exact same work today that they did in 2012, but homeowners are paying thousands more. 

6% Can Be Too High

Most buyers and sellers work with a real estate agent. Traditional commission is 6%, with half going to the buyer’s agent and half to the seller’s agent. But, when you take the time to calculate your net proceeds, this 6% is actually closer to 20% or more in most cases. Despite what a listing agent may tell you, real estate commission is negotiable, and moreover there are other options available. Not every real estate agent charges 3% on each side to sell your home and there are ways to increase your net proceeds with a little research. 

1% Sellers Agent Commission with Trelora

The average real estate agent typically spends 37 hours with a client in order to sell their home. At Trelora, our agents offer better service for a better price. By trusting our team of experts with your home sale, you earn $12,000 more on average in net proceeds with our low, fair 1% listing fee. 

Trelora pairs modern technology with a team of experts to sell your home quickly and for top dollar without compromising on quality or customer service. Our team has helped over 7,300 homeowners since 2011, providing over $70 million in real estate commission savings for our clients. 

Traditional real estate agents charge 50% more to sell the same home, which comes entirely out of the seller’s equity, which is why more and more smart sellers choose Trelora.

Old School Broker Trelora Real Estate
Listing Agent:$17,420.34$5,806.78
Buyer’s Agent:$17,420.34$17,420.34
Total Cost: $34,840.68$23,227.12
Savings: $0$11,613.56

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The information contained in this blog is for general information purposes only, and while believed to be accurate, Trelora assumes no legal responsibility for accuracy. Information provided within should not relied upon as legal advice. Please consult with your local advisors for independent information regarding availability and applicability in your market.