Lew Sichelman

Which would you rather pay a real estate agent to help you sell your $450,000 house: a 6 percent sales commission or $27,000? 

They’re exactly the same amounts, of course. But 27 grand sounds like a lot more than 6 percent, doesn’t it? And that’s why an unpublished (as of this writing) report from Stephen Brobeck, senior fellow at both the Consumer Policy Center, contends realty professionals almost always quote percentages instead of hard-and-fast numbers. 

Obviously, you’ll never know what you will eventually get for your house until a contract to buy it is signed, sealed and delivered, so quoting a percentage makes sense. There’s a big difference between 6 percent of $450,000 and 6 percent of $400,00 – in this case, $3,000, 

Nevertheless, Brobeck maintains that treating broker commissions in terms of percentages rather than dollars leads many sellers and buyers to overlook the real cost of buying and selling a house. To many, he said, a percentage is perceived to be less costly – and that’s that. 

Poll Says Consumers Prefer Dollar Figures 

Forget for a moment that percentage-based commissions tend to discourage some – but certainly not all – agents on both sides of the table to negotiate prices down. After all, the higher the price, the bigger their paydays. 

Just consider the notion that, as Brobeck quotes an expert in this report, “percentages add a layer of abstraction” to the transaction. 

It’s simply more difficult for most people to translate percentages into real estate dollars, especially when the money is a large amount. And as everyone knows, real estate commissions tend to be very large, about $19,000 on the median priced house at the typical commission. 

The research bears out that supposition. In one study, investigators found that “percentages are difficult to process and understand.” Another study cited in Brobeck’s paper compared consumer perceptions of a $50 discount with a 15 percent discount. Even though the dollar savings were identical, the $50 off coupon generated much more revenue, with the researchers concluding that not only did people fail to do the math, they had no desire to. 

There are other reasons why consumers accept the cost of buying and selling as a percentage. One is that they have other priorities, mainly setting the sale prices, getting the deal done and buying another house at the same time. What they are actually paying only hits them squarely between the eyes at the closing table. 

Perhaps that’s why, Brobeck notes, when a national research firm asked 1,000 adults how they preferred their agents’ compensation to be listed – as a dollar figure or as a percentage of the sale price – 55 percent choose dollars. Only 15 percent picked percentage, while 30 percent had no preference. 

Moreover, two-thirds said they supported a requirement that commissions also be stated in dollars. Yet, most agents talk only in terms of percentages and very little else. 

Do Percentages Encourage Higher Commissions? 

Now let’s look at the idea that quoting compensation as a percentage gives those agents who won’t work for a lower price cover because it drives down their own bottom lines. 

“While many agents resist this temptation,” Brobeck said, “there is evidence that others succumb to it.” 

Here, he cites two Federal Reserve economists’ discussion a year or so ago about this “backward incentive” as it relates to agents who represent buyers.  

Noting that commissions stated as a percentage offer a “direct disincentive” for the agent to bargain on his client’s behalf, they explained it this way: “The harder and smarter the buyer’s agent negotiates on behalf of her client, the less she gets paid at closing.” 

Another research study came to a similar conclusion: “This creates an obvious conflict of interest. … Given that the agent receives a small portion of the transaction price as (a) commission, the agent’s goal of maximizing the expected commission will conflict with the buyer’s goal of minimizing the selling price.” 

Unlike Brobeck’s previous reports, this one breaks no new ground and does not contain original research. It proposes no policy changes, either. But it does discuss how parties to a real estate transaction can protect themselves from, as Brobeck sees it, paying more than they should. 

“To the extent these consumers treat the fees as dollars, not percentage of sale price, they should be able to more effectively negotiate the fees,” Brobeck concludes. “This ability, most experts agree, will not only lower commissions overall but align agent compensation more closely with the services that agents provide.” 

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.