An Explanation on Home Broker Commission
A debate has been going on for years about what the future holds for home broker’s compensation. A study of trends in the real estate market showed that broker’s commission rates are contingent on whether the area is having a seller’s or buyers market.
According to the book “Waging War on Real Estate’s Discounters,” when a home broker compete on commission/price, he is treating his service as a commodity. It added that because 15 percent of real estate clients are choosing their home broker based on prices, a cost-cutting model is an ideal market niche.
On the other hand, about 5 percent of real estate clients chose their home broker based on premium price and service. The remaining 80 percent of real estate clients are undecided about their choice of a home broker. This group makes its decision on value, such as combination of services and price provided.
When a home broker competes on the market value he provides, it means he is helping the seller get the highest price in a short period of time with less trouble. He also attracts sellers who are more than willing to give or pay full commission.
The price-only rate approach has proven to be a failure since most real estate brokers who practice this are no longer in the market. In 1980-1990, commission rates declined because cost-cutting models grew during the seller’s market.
Meanwhile, commission rates increased when the market changed to a buyer’s market. The change also resulted to the failure of cost-cutting models.
This happen because when competing homes and prices are decreasing, it in the best interest of the seller to sell immediately before property prices started to decline. The result is a rise in buyer commissions and incentives.
Under the buyer’s market, a home broker’s value increased when he successfully closed a difficult deal. In 2008, commission rates increased just like previous buyer’s market despite the rise in foreclosure properties and short sales where commissions are pegged at five percent or below.
According to a study of about 74,175 real estate agents, the trend on commission rate is starting to manifest today. And as market improvement continues, average commission rates declined to as much as .03 in 2007 followed by an increase of 4.8 percent last year.
Trends showed that commission rates decline and agents’ income increase when markets improve.
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