Real estate agents have to disclose the commission cost. To win your business, real estate agents need to be transparent with what types of property they’ve sold, when they were sold, how they were able to get the best price and process for their clients, and how much their services cost.
A listing agent also needs to disclose how much it will be paying the buyer's agent in commissions. Usually, when a listing agent charges 4.5% – 6% to the seller, half of the commission is split with the buyer's agent. However, after the NAR settlement on March 15, 2024, listing agents no longer need to pay the buyer's agent's commission. It is now up to the buyer to negotiate how much the buyer's agent will earn.
It unfortunately still costs a fortune to sell a home today with the average commission of between 4.5% – 6%. However, know that EVERYTHING is negotiable, especially after the landmark ruling against the National Association of Realtors, Keller Wiliams, and Homeservices of America for participating in price fixing and collusion to keep commissions high.
Many real estate agents won’t budge at anything under 4.5% because they have to give half or more to the buyer’s agent, which makes NO sense. Think about it as a seller. What the heck are you paying the buyer’s agent 2% – 3% while having the try to knock down your asking price? It’s nuts!
Real Estate Agents Have to Disclose Commission Cost
Here is a page in a powerpoint presentation a couple real estate agents used to pitch me on selling one property for theoretically $1.85M. Notice how it’s not just the 5% commission that I have to pay, but the transfer / excise tax, inspections, 3R reports, staging (optional), water compliance and notary and more.
Once you sell the property, you will get a detailed cost of selling report from your Title / Escrow company to input for your taxes. You will also get a 1099-S report. Make sure you keep all the records possible for home improvement costs over the years to increase your cost basis and decrease your taxable income.
If the real estate agent is not upfront with you on the costs, walk away. As the landmark real estate collusion case against the National Association Of Realtors proved, some industry practices are quite detrimental to sellers and buyers.
I love real estate as an asset class, but the selling costs are outrageous in this internet day and age. I would use new real estate companies with lower commissions first.
Here's a fascinating conversation I had with Mike Ketchmark, the attorney responsible for winning a $1.8 billion lawsuit against the NAR, Keller Williams, and HomeServices Of America.
Another Real Estate Commission Cost Example
Here's another example of how much it costs to sell a $2,600,000 home here in expensive San Francisco. The commission cost is 5%, which used to regularly be 6% before 2010.
Bottom line. Selling costs are high in real estate. Therefore, do your best to minimize real estate turnover if you want to build wealth. Let the power of compounding work in your favor for as long as possible.
The irony is, if it cost less to sell a home, there would be a lot more inventory and a lot more business for real estate agents. As such, if you are a homeowner who doesn't plan to sell, this self-throttling by the real estate industry is good for home prices. I strongly believe real estate will perform well this decade for so many positive fundamental reasons.
Explore Real Estate Crowdsourcing Opportunities
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Fundrise manages over $3.3 billion for over 500,000 investors looking to diversify into Sunbelt residential and industrial property, where valuations are lower and yields are higher.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.
Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside. Crowdstreet is a solution where you can build your own select real estate portfolio.
Personally, I've invested $954000 in real estate crowdfunding to diversify and earn income 100% passively. Both are sponsor of FS and FS is an investor in Fundrise at the moment.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $270,000 a year in passive income. He spends time playing tennis, hanging out with family, and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, and Bloomberg.