Monday, August 21, 2006

Why 6%??

Here is a question I get from clients who are considering listing their property with me, why 6%??

I'm also seeing this issue discussed on RE blogs all over the place lately as well. This is my answer, it doesn't have to be 6%. The fee you agree to pay the listing broker can be any amount you wish to negotiate for. The 6% figure has been sort of a main stay in this biz for many years. (For clarification, this 6% fee is a typical fee for the sale of a single family home -- fees are different for modular homes, raw land, and commercial property -- I'm only speaking in general terms for the sale of a single family home on this post)

Prices of homes has shot up all over the country, Kingman is not on a price level with most other places that I follow and read about. There really aren't that many opportunities to sell $600,000 homes in my local area. That is more the exception and not the rule. But people use the $600,000 figure all the time and 6% of that is $36,000. That seems like quite a fee, and you know what I agree!!

A couple of posts back I spoke of the MLS advertising fee that sellers agree to pay for their listing to appear in the MLS. So if I were listing a $600k home for a 6% fee, typically it would mean that the buyers broker would collect $18k from the successful transaction. Again, WOW!! That seems like a lot of money, and it is. However, like I said before that figure is negotiable. You have to check what the going rate in the MLS is for what others are offering on MLS through a broker/agent. Maybe it is 2% or 2.5%, or even some sort of flat fee.

What I'm going to do here is look at my side of the fee if I was the listing agent in this case and an agreement was entered into by a buyer (that was represented by another broker) and a seller (that I was representing).

Would I like to make $18k on a sale?? You better believe it. Would I make that amount though?? No I would not. Not in reality. The MLS advertising fee is one component of the total fee a seller agrees to pay a broker/agent. The other components are more traditional advertising costs and expertise costs. I'll explain both.

I'll start with the expertise costs. This basically regards compensating me for my skills in handling all the necessary documents and negotiations in a transaction. Think documentation fees. We first start doing a comparative marketing analysis of a property, this could include time spent with me driving by other listings currently on the market or recently sold homes for better perspective on what we are comparing. Then I help facilitate filling out the sellers disclosure forms, researching basic title information, verifying pertinent facts about the property, filling out data sheets for the MLS (optional) and submitting all of the information where it is applicable. There is other information that I obtain as well, the point is that the clock is ticking because I am working for the client to provide all of this on their behalf and I get compensated for my time and efforts.

Honestly, to this point, this does not take a lot of time, but it does take expertise. Why?? Because I have been doing it now for some years and I have it down to a system that works for both my clients and me.

I'm skipping over the advertising costs here for a bit (and probably will offer a whole different post on that later as this post continues to get longer). So next comes an offer from another broker to purchase the listed property. In Arizona the real estate purchase contract is quite long and there are many possible addendums that could be included. It is my duty to thoroughly review all the documents to have a clear understanding of the offer. Then it is time to convey that information to the seller. Most sellers want the bottom line dollar figure so I produce an estimated net sheet for them to review that estimates the bottom line.

We are now in the process of negotiation. Because the current market is one where the buyers have the upper hand, this probably means a counter offer or a series of counter offers could be in the works. This is my favorite aspect of this business, it is where I really shine. I love the black and white of a printed document, just something about it that feels so right. This is where deals and made and broken, this is where I'm my clients guard dog and I have no problem showing teeth once in awhile.

Okay, now we have an agreement. Now it's on to playing quarterback for me. This is where I stay in touch on a timely basis with the buyers lender (if there is one), the buyers agent/broker, the title and escrow company, and the multitude of inspectors and appraisers (if needed) to insure all of the documents are in accord to the agreement. On most occasions there are situations that arise that could threaten the agreement, this is what I'm on the constant lookout for. I practice this business this way, if the deal fails it's on me... no matter who could be at fault for unhooking a deal. If a lender is slow getting doc's in, or the title company mixes up some of the documents, or the buyer starts to get second thought, or whatever... it's on me at this stage to keep things on track. If you are selling a property how much is this expertise worth to you??

How much?? Let's negotiate it, because it is worth a different amount to different people.

I won't speak for other agents or for brokers. But I'm willing to charge a fee from a negotiated flat fee to just having it included in the 6% more typical fee that most people are familiar with. I will say this though, the work I just described above is the same kind of work I do whether or not the property is worth $600,000 or $50,000. To me it does not matter. The flat fee I offer for the work above is $3,500.

Tune in later for the advertising component, I'll also do a summary for a clearer understanding on how anyone can negotiate his or her listing fee agreement.

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