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The Truth About Real Estate Commissions

First, a little background on how real estate commissions work. Generally, the home seller pays a commission that is agreed to in their listing agreement. That commission is split four ways between the four real estate professionals involved in the transaction - a broker on each side of the transaction and their respective agents. The listing agent determines the cooperating commission for the buy side and the brokers' contract with their agents determines what percentage the agents get of their side of the transaction. While it may be useful to think of the commission as being split into four equal pieces that is most certainly not necessary or typical.

The cooperating commission has to be set high enough to provide a proper incentive for buyers' agents to show the property. In theory this shouldn't be a concern because the agent has a responsibility to always act in the buyer's best interest, not their own. However, given human nature, you can't rely upon this so the cooperating commissions tend to be set competitively (high enough to keep the buyers' agents interested). Unfortunately for sellers this tends to limit the ability of the listing agent to discount the commission. For example, if all listings are offering cooperating commissions of 2.25% and higher and if you assume that the listing agent wants to make something on the deal then the listing commission is certainly not going to be lower than 2.25%.

The party line in the real estate industry is that "there is no standard commission", which is true. If it wasn't true the FTC would be all over the industry for anti-competitive behavior so agents and brokers are really sensitive to this. In fact, during our training they drill the above line into our heads. We've heard of Chicago agents getting as much as a 12% commission in special circumstances and then there are discount brokers, providing limited services, for much less. However, brokers push their agents to get the highest commission possible and many won't approve listings that don't meet a certain threshold, which can be lower for more expensive homes or in special circumstances. Nevertheless, we can talk about average commissions, which are a statistical fact. According to REAL Trends the average commission nationwide in 2005 was 5.02% and we have no reason to believe that Chicago is any different.

But the use of a fixed percentage is quite odd for two reasons. First, although commission rates have declined over time they have not declined as rapidly as home prices have appreciated. For instance, according to REAL Trends the average commission in 2000 was 5.44%. This means that the rate has declined by less than 8% during a period when home prices have increased by a much greater percentage. So the average commission dollar has actually risen during this period. Second, it certainly doesn't require twice as much effort to sell a one million dollar home as it does to sell a half million dollar home. Granted, agents will often provide alittle discount on a more expensive home, but the dollars spent still end up being disproportionate to the work done and Chicago has a lot of expensive homes.

Lucid Realty's Approach To Commissions

So what is our solution? We have been in your shoes before so we have constructed programs for both home buyers and home sellers with the intent of earning ourselves only what we consider a reasonable commission on each transaction - and it's a lot less than what the traditional real estate companies are making. Whether you are buying or selling real estate, anything above and beyond our target commission is yours to keep. Buyers receive a rebate on a portion of our cooperating commission, while sellers pay a discounted listing commission. And because we don't believe that twice the home takes twice as much of our time we use a sliding scale. You save a higher percent on your real estate transaction the more expensive the home you are buying or selling - up to 50% - and you still get the full attention of a truly professional agent.

If you would like to learn more please feel free to:

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