Why the Real Estate Commission Is Way More than 6%

If you think that a 6% real estate commission is a lot of money, it’s actually even worse than that! The problem with the real estate commission is that it’s charged on a leveraged asset. That is to say, there are obligations that reduce the actual amount of equity you have in the home, and that gives the real estate commission even greater importance than it seems when taken at face value.

Here’s why…

The Commission Comes Right Out of Your Equity – Not the Sale Price

The real estate commission is calculated based on your total sale price, but it’s paid out your net equity.

That distinction is important because it makes you appreciate that the commission isn’t “only 6%” – it’s really much more.

Though your home may be worth, say, $500,000, it’s likely that you actually own only a small portion of that as a true asset. For starters, if you have a mortgage – and most homeowners do – that cuts down your equity position. If you have a mortgage of $400,000, your actual net worth is now down to $100,000 ($500,000 – $400,000).

But that equity can be reduced even further by any and all of the following:

  • A second mortgage or a home equity line of credit (HELOC)
  • A lien, such as a tax lien or a mechanics lean
  • By seller paid closing costs, such as transfer taxes, attorney fees, and any closing costs you’re paying for the buyer
  • By any allowances, such as repairs or carpet replacements, you’re paying for the buyers

Even assuming that there are no second mortgages, HELOCs or liens, you can fully expect that roughly 4% of the sale price will go toward closing costs if you’re paying at least most of the buyer’s closing costs. That alone will represent a $20,000 reduction in your equity.

When you deduct that from the $100,000 equity you have (after accounting for the mortgage), your net equity is just $80,000 on a $500,000 house.

Now let’s recalculate what the real estate commission is in relation to that equity, rather than on the sale price alone.

  • Real Estate Commission Calculation: $500,000 X 6% = $30,000
  • Real Estate Commission as a Percentage of Your Equity: $30,000 divided by $80,000 = 37.5%

Now, if we deduct the real estate commission from your equity – which is already down to $80,000 based on previous deductions – you will walk away from the closing table with just $50,000 ($80,000 less the $30,000 real estate commission).

6% is suddenly looking like a lot more than 6% – because it really is.

The Percentage is Higher the Less Equity You Have

In the example above, you actually walk away from the closing table with $50,000 to use as a down payment on your next home. But that assumes a healthy equity position of $100,000 before you sold your home.

But what would happen if, instead, you also had a HELOC of $20,000? Right there, the amount of cash coming to you from the sale of the home would be cut almost in half – down to $30,000.

At that point, the whole idea of selling your home could become questionable.

But it gets even worse…

The Commission Could Even Eat Up ALL of Your Equity

If, instead of having a $20,000 HELOC, you had one for $50,000, you’d walk away from the closing table with nothing!

Here’s how:

First Mortgage payoff: $400,000
HELOC payoff: $50,000
Seller Closing Costs + Buyer Closing Costs paid by Seller: $20,000
Real Estate Commission: $30,000

Total Reductions in Equity: $500,000

If your sale price is $500,000, your total equity reductions would leave you coming out of the closing with no money at all.

That’s hardly an exceptional case in today’s housing market. Many people are still carrying maximum financing or some sort of first-second mortgage combination that leaves them with very little equity to start with. When you add closing costs and the real estate commission to the equation, walking away with nothing is hardly unthinkable.

The Real Estate Commission Could Prevent You From Being Able to Sell Your Home

If you’re counting on proceeds from the sale of your home to provide at least some of the down payment on your next house, walking away from the closing table with no cash is an obvious problem.

But what if you’re in a negative equity position? That’s when you actually have to write a check at the closing table in order to settle the sale of your home.

People are sometimes able to do this if they have a generous employer-paid relocation package that will cover the shortfall. But if you’re paying the shortfall out of your own funds, it may very well make selling your home impossible.

The 6% real estate commission is one of the main reasons you’d be in this position, precisely because it is a reduction in your net equity in the home.

Cutting the Real Estate Commission Out of The Picture

If you’re worried that you’ll have little or no cash from the sale of your property, the obvious best way to improve on the situation is to sell the house yourself so that you don’t have to pay the 6% real estate commission. And when you don’t have to pay the commission, that’s more money in your pocket from the closing. It could be the deciding factor as to whether or not you even attempt to sell your home at all.

If you’d like to sell your home yourself (FSBO), but don’t think that you can, I can help you do just that.

Check out my Selling Your Home Made Simple program, and you’ll quickly realize that you can do exactly what a real estate agent can, but without having to pay the real estate commission.

You owe it to yourself to try. It’s one of the very best ways to protect the equity you have in your home, and to be able to take that equity with you to the next home you buy.

( Photo by purpleslog )[/fusion_text]

Want a free step-by-step guide for professionally selling your home (and keeping all the profits)?

Download our free guide ‘INSERT NAME’ that’s the ultimate ‘For Sale By Owner’ handbook for homeowners who want to maximize their home’s sale price, sell faster and pay no commissions.

Related Articles

Isn’t it about time to finally say goodbye to agents and keep ALL your equity?

No more guessing.

Sign up to get a free digital copy of ‘Three Keys to Pricing Your Home Right’