When negotiating commission rates with a real estate agent, be very careful about incentive schemes, particularly in rising markets. On the surface, incentive schemes seem sensible enough – identify fundamental market price and offer the agent an incentive above that.
Agents call incentive schemes ‘kickers’. It’s common for kickers to be 10% to 20% above the perceived market value. The owner pays the agreed base commission rate PLUS the kicker!
As an example, if you have a property that you feel is worth $1 million, an agent may agree to a lower commission rate at $1 million but a higher percentage of everything ‘over $1 million’.
The agent may ask for a commission of 2.2% on $1 million. You suggest 2.2% is on the high side compared to other agent’s quotes. The agent floats the suggestion about a lower commission rate up to $1 million of say 1.5%, and 10 to 20% of everything over $1 million, payable to the agent. This seems fair on the surface, everyone wins together.
The trap for home sellers is the agent knows from the beginning of the campaign that the price is highly likely to exceed market value – assuring them of an excessive commission.
The owner takes false comfort in a kicker fee arrangement protecting their commercial interests when it simply exposes them to a large commission.
Every Sunday morning, you read newspaper articles about homes selling for $100,000 or $200,000 and even $500,000 above the seller’s reserve price. The kicker, for example, on $200,000 means that you pay the agent a commission premium of $20,000 to $40,000 for simply doing their job – selling your house.
Admittedly, the best agents can have a positive influence or impact on the final sales result, but not by $200,000?
At a public auction, the success is largely determined by what the under bidder bids to, as opposed to any negotiation efforts of the agent. The only reason that so many houses sell excessively above the reserve price is the reserve price is set too low, to begin with.
The reserve price should be set relative to the market feedback and offers, not relative to the sale down the street last month. In a rising market, the worst way to set a reserve price is based on past sales. If you do, you are likely to set it too low. A low reserve price with a kicker in place means you will unknowingly overpay the agent on the commission and thank them for it in the process.
If the sales price of your home exceeds the market price, that’s your good fortune.
Most agents ‘value offering’ is that they can achieve a high price for your home. Paying an agent a kicker is simply giving your premium price to the agent as a commission premium.
Commission incentives work best in slow markets where there is downward pressure on price, this ensures the agent is not just focused on a quick sale to maintain turnover. In a rising market, the price is high and the days on the market are minimal – therefore the market is doing the hard work on the agent’s behalf.