General Question

crazyguy's avatar

Why are some real estate costs based on the price?

Asked by crazyguy (3197points) November 25th, 2020

Examples are real estate commissions and escrow costs. Other than liability insurance, which is a very small part of the expenses, costs are independent of the value of the transaction. Yet it is not unusual to find escrow companies demanding $4 per thousand of the transaction amount (for buyer and seller) and real estate agents demanding 2.5–3% of the sales price.

Just those two costs form a big part of a seller’s closing costs.

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17 Answers

ragingloli's avatar

The more something costs, the higher the risk, and the harder it is to find a buyer, because there are fewer of them.
And people love money.

elbanditoroso's avatar

Quick answer: the real estate industry is a scam and has been for decades.

Longer answer:
Realtors have had a stranglehold on who can sell houses. They have built the multiple listing services, they have credentialed people, in such a way that they control the industry.

They have also trademarked the word Realtor – which is heinous thing to do.

As a result, they also control fees – particularly commissions. It’s hard to find a realtor who gives discounts or will negotiate.

There was a low-fee relator a couple years ago – Zip Realty, I think – that did have lower commissions or maybe flat fees. But other realtors didn’t want to work with them because it was hurting their income.

One of the best things that happened in the last ten years was the creation of web sites like Zillow, where sellers and buyers can get independent information. Free market and all that.

As for – why do escrow companies and such charge a percentage? Because they can. Tradition. And the scam circle doesn’t call them out on it because they’re part of the scam themselves.

crazyguy's avatar

@ragingloli I am thinking in terms of a buyer who is knowledgeable and has done the difficult work of selecting the property s/he wants to buy. (Through open houses and/or online research). S/he just wants an agent to write an offer. I know you can negotiate a kickback on the commission (say one-half). If the property costs $1 million versus $250K, what is the difference in the agent’s workload and time spent to justify a fourfold increase in compensation? Even more galling is the escrow company charge!

JLeslie's avatar

Tradition. You can negotiate and shop around with realtors and closing agents who will break the traditions.

crazyguy's avatar

@JLeslie I am trying to do it, as my wife and I contemplate a move. It is like pulling teeth…

JLeslie's avatar

@crazyguy If you really can’t find a realtor who will negotiate you can list it on Zillow yourself and write in the first sentence will cooperate with buyer’s realtor.

There are some companies that will do a flat fee listing on the MLS, there might be one in your area.

If you do either you’ll have to field all the calls and showings.

Darth_Algar's avatar

Because the market will bear it.

JLeslie's avatar

@crazyguy You wrote 2.5–3%. Is that total? Or, on each side, meaning you pay 5–6%?

crazyguy's avatar

@JLeslie As I said in my response to @ragingloli, I am thinking in terms of a purchase. So 2.5–3% is just the buyer’s broker’s commission.

JLeslie's avatar

You don’t pay any commission on a purchase. Unless, it is atypical where you are.

crazyguy's avatar

That is true.

However, in actual fact, all the money in a transaction is furnished by the buyer. So not only is the buyer paying his/her broker, s/he is paying the seller’s brokers and everybody else. Without the buyer there is no transaction and therefore NO FUNDS.

JLeslie's avatar

You can ask the realtors to reduce their commission or cut you some back. I’ve done it. It usually goes like this…the seller wants $290,000 and won’t budge after coming down already from his original list price of $325,000. The buyer wants to pay $270,000. The buyer says, “I’ll come up to $285,000, but the realtors are going to have to kick in the difference to pull it together.” In a slow market realtors will usually do it. In a hot market they might not. It is really up to the broker not the sales agent. You really pay the broker and the broker pays the realtors working the deal.

crazyguy's avatar

@JLeslie What you are saying makes sense. You are asking the brokers to chip in $5K out of their total commission of about $16K. Which means the buyer’s broker will still receive over $6 grand.

Now move to California. That same house in California probably goes for about a million. If the same split were applied here on a percentage basis, the buyer’s broker would walk way with over $20 grand for doing essentially the same amount of work. In the case I am describing, the buyer’s broker does just one thing: write the offer! These days the broker writes the offer and emails it to the listing broker. The haggling may require a couple of additional hours.

JLeslie's avatar

@crazyguy Usually, both realtors chip in.

Keep in mind the salesperson is splitting with their broker, unless your salesperson is the broker of the company.

I’ve done it for $5k on a $700k house. You might be able to get $10k, but probably not more. Helps to pay the closing.

I used to do listings for 5%, I take 2%, and give the buyer‘a agent 3%. For family I do a 4% listing or even a flat fee on my side.

I used to be a realtor. I’m still licensed.

It’s better to get the lower commission negotiated in the beginning if you’re the seller.

crazyguy's avatar

@JLeslie If a person is maintaining a license, s/he is incurring some annual costs. If the person is not active, s/he probably does not have the added expenses of MLS, and insurance. So, I would guess the costs of just keeping a license are relatively minor. Unless such a person is a real estate broker, s/he cannot write an offer. In order to do that, a person with just a salesperson license would have to hook up with a broker.

The situation I have in mind is where a buyer finds the property s/he wishes to purchase without help from any buyer’s agent (these days online searches are easy and in-person visits are not that hard to arrange). Is it reasonable top expect that somebody would be willing to put in 5–10 hours for a fixed fee?

crazyguy's avatar

@JLeslie The reason I know a lot about the business is that I was a salesperson for about 5 years, and a broker for about 10.

JLeslie's avatar

@crazyguy I only mentioned I’m licensed so you know I have a little more experience than just being the seller or buyer. I just paid $70 I think this past September to keep my license alive another 2 years. $25 for continuing ed and $45 to the state. Something like that, I don’t remember the exact amount.

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