Real estate commissions rise
With the collapse of the sellers' market, real estate agents are finding themselves in the driver's seat when it comes to charging fees.
NEW YORK (CNNMoney.com) -- During the housing boom, home sellers were in the driver's seat with real estate agents courting them - often at bargain commission rates. But now that the bubble has burst, the tables have turned.
In 1991, the average commission rate was 6.1 percent, according Steve Murray, of Real Trends, which tracks the brokerage industry. The rate inched down to 5.4 percent by 2001 and by the end of 2005, it stood at 5.02 percent.
Industry insiders expected further declines with the competition of discount and Web-based brokerages. In early 2006, the chairman of Re/Max, Dave Linder, told Real Trends that he expected a drop into the 4 percent range within five years.
But when home sellers found themselves with houses sitting on the market, they became increasingly amenable to paying higher commissions. Real Trends reports the average commission reversed its course and climbed to 5.18 percent in 2006, and it looks like it's going to end 2007 with another rise.
"The thing that changed," said Murray," is that the market flipped. There was a flood of listings on the market and suddenly they weren't as valuable. Agents were saying, 'I'm not going to drop my commission rate as readily."
Many sellers believe they can sell their homes quicker by hiring the best salespeople, which comes with a premium. Some may have returned to full-commission brokers after trying unsuccessfully to sell their homes themselves.
"A year ago people were asking, 'If things are selling in two days, why should I deal with a full commission broker?'" said Jim Long, an owner of Coldwell Banker Prime Properties in upstate New York.
Now sellers want a professional to hold their hand, according to Long, and some even think that it won't wind up costing them anything.
"The significant factor is net to the seller," he said. "Our list-to-price ratio is 98.2 percent," meaning the difference between the listing price and the final sale price is less than two percent - considerably better, he claimed, than most of his competitors.
Where the commission money goes
Modern real estate brokerages have a long list of expenses, including the latest technology, according to Lennox Scott, of John L. Scott Real Estate, one of the largest brokers in the Northwest.
"This is a continuing investment because tech keeps advancing," he said. Scott said his interactive department spends $3 million each year, while their information technology department spends another $2 million.
The agents themselves, who act as independent contractors, maintain their own personal Web sites and purchase their own tech devices like cell phones and lap-tops equipped with wireless Internet connections.
Brokers also bear the expenses of brick-and-mortar offices, as well as brand-recognition radio and television advertising. Individual agents buy newspaper ads to launch new-to-market properties. They also have their car expenses, lunches to pay for, membership fees and the expenses of professional development - classes in everything from web development to negotiating skills.
Then there are support teams, transaction coordinators who specialize in herding deals through to closing, relocation experts and administrative assistants.
When all the expenses are added up, there may be little left. Murray said that the average profit margin for brokers in 2006 fell to just 4.3 percent, down from 7.6 percent in 2005. Out of that, brokers still have to pay taxes - and themselves.