Real estate companies, like any other company, have expenses that they must pay to stay in business. For example, rent, utilities, insurance, and salaries to office staff (but not to real estate agents who get paid on a commission basis when they make a sale). One of the problems with how fees are structured is that the total gross amount is the one that is given visibility without much explanation of all of the component parts. In many respects this is no different than buying a commodity in a store. You are shown the retail price (the price you pay) and there is no visibility on the wholesale price (the price the store paid).
Consider, for example, your salary (assuming that you get a salary and that you are not paid by commission). There is a gross figure (what you are deemed to have been paid before taxes, etc.) and there is a net figure (what you actually see deposited in your bank account). Sometimes there is a significant difference between the two numbers. If someone asked you how much you make which figure is the one that is most meaningful?
With luxury waterfront real estate listings, sellers of homes typically pay a commission based on the eventual sale price of the home that they are selling. These figures are established by individual companies but they are driven by a number of things, not the least of which are the expenses incurred by the company to run the company and stay in business in order to provide the real estate services related to the buying and selling of homes. Yes, I did say buying and selling and not just selling. It costs money to the individual real estate agent and to the company when buyers use an agent to buy a home just as it does when a home is marketed and sold.
The figure below is representative of how commissions are broken down. Generally, the commission is split between the listing and selling brokerages (not the real estate agents). Of the respective half, the brokerage takes a piece to pay for their expenses, the government takes a piece for income taxes and of the remaining amount the real estate agent must pay their expenses (which can be substantial). The amount they are left with is their net pay.
Here are a few more points to consider:
• Real estate agents have ongoing monthly fixed and variable expenses related to their business and to the services that they are providing to buyers and sellers. The longer it takes for a buyer to buy a home or a home to sell, the higher the expenses. There is a point at which a real estate agent could lose money on a sale if the time is excessive.
• A real estate agent’s expenses can include marketing, advertising, insurance, professional dues, office expenses, supply expenses, legal, accounting and professional fees, management fees, professional development courses, utility expenses and motor vehicle expenses just to name a few of them. Fixed expenses could easily go into thousands of dollars a month with variable expenses added to them.
• A fairly common occurrence is one where a buyer who is not serious about buying uses the services of a real estate agent to look at homes in a specific area. It costs the agent time and money to provide these services with no way of recouping the expenses when the person does not eventually buy a home. When people use the services of a real estate agent and the home does not sell or the buyer does not buy, it costs the agent time and money. They end up taking a loss when they provide services under these circumstances.
• Not all real estate agents are equal in terms of experience, knowledge or capability. Just like any other business, there are great ones and there are bad ones. When you encounter a great one please do not use of their services if you are not serious about buying or selling a home. If you do you may contribute to that agent going out of business and the industry could lose a great agent from which many other people will rely on in the future (including you) to receive great service.
Speaking of service, not all agencies or agents provide the same level or type of services. Full service, part time, and so called “discount” brokerages often vary in the type and number of services provided as well as when those services are provided. There is a really good reason why the expression “you get what you pay for” exists. It is often very true in business just as it is in life.
Are you planning to buy or sell a luxury home in the Comox Valley region of Vancouver Island? Contact Brett Cairns of REMAX Ocean Pacific Realty to help you with this very important transaction.