Tuesday, November 5, 2013

Navigating the Murky Waters of Real Estate Fees

Traditional real estate fees can dramatically impact the amount of home equity that a homeowner will net after the sale of their home. Since real estate commissions are averaging between 5-6% and many Real estate brokers are under increasing pressure by homeowners to reduce this percentage even further.

A home seller can either retain the services of a real estate broker to sell their home or they can elect to sell it themselves commonly known by the acronym (FSBO or For Sale By Owner).

If the homeowner decides to employ the services of a broker, the broker will traditionally negotiate a percentage based fee of the net amount that the home ultimately sells for. An example would be when a homeowner sells his home for $200,000 and negotiates a 6% commission with the broker. The Listing Agent will typically receive 3% or $6000 and the Selling Agent will receive the other half of the commission or $6000 upon the successful closing of the transaction. Note, the Broker will pay for his/her marketing expenses out of the commission they receive.

This model is based upon the cold reality that the home may not sell at all. Therefore, there is a greater risk to the broker that all of his/her efforts may be wasted. Conversely, there is also a greater reward to the broker for their success since the broker bears the most risk.

Another model, which represents a viable alternative, is based upon a consultative framework. This framework is a more transparent model in the respect that the consumer knows exactly what services they are receiving and what the specific cost for that service is. Thus, a consumer can make a more informed decision about the specific service needed.

Utilizing the consultative approach, a consumer pays the consultant for the service in much the same way that attorneys and accountants are paid for their professional services.

Real estate consultants will often times bundle individual services into a flat fee arrangement thereby giving the consumer even greater value for a lower cost. For example, a broker acting as a consultant, agrees to sell Mr. & Mrs.Smith's home for a flat fee which includes a list of specific services that they selected from broker's menu of services bundled for a total fee of $2995. The agreement provides that they will pay a certain amount up front and the remainder upon the closing/or termination of the agreement (without a successful sale). If the Smith's selected the individual services individually they would cost more than if they were cost effectively bundled. This arrangement becomes a win-win for the consumer and the consultant.

I have adopted this model since I believe that most consumers want choices. In addition, and most importantly, it gives the consumer the ultimate control over their bottom line by minimizing their real estate fees!

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