Net Sale Proceeds and the Real Estate Commission

It is not higher math to multiply the real estate commission rate by the expected sale price to come up with the commission cost. It is a significant number, to be sure, and it attracts considerable attention early on in the home selling process, often focused on reducing the commission rate. But commission is not the only item that affects how much a home seller walks away with from a closing.

Home selling is a lengthy process, even in an active market, with many aspects layered upon one another; serial in nature yet highly interactive. Here’s a list of ten major elements of that process:

  • Agent/Brokerage Selection
  • Pricing
  • Preparation/Staging
  • Marketing
  • Showings
  • Offer Negotiation
  • Contingency Management
  • Third Party Vendor Selection
  • Financing Contingency
  • Closing Coordination

Unless they have sold many homes, most sellers rely on their real estate agent to manage this process efficiently.

Unfortunately, the financial impact of not managing these steps correctly is often not apparent to a home seller until closing time when all of the home selling costs, including commission are known. Many of these costs are shown in the closing statement, but not all.

As part of a listing consultation, many real estate agents will prepare a “net sheet.” This is a document that takes the list price of a property and reduces it by certain fixed costs associated with the sale. Costs like recording fees, transfer taxes, attorney fees and commission. The variable is the conversion of the list price into an actual sale price. The other costs, with the exception of attorney fees, are a percentage of the sale price. This a reliable representation of what the seller can expect to walk away with from the closing table. But there is also a list of variable costs that can have a major impact on the “net.”

Even in active markets, the expected time between receiving an offer and the resulting closing is likely to be 45 to 60 days, owing to satisfying various contingencies including buyer financing. However, additional time can easily be added to these days, and with added time comes greater opportunities for costs to mount. Home sellers are wise to consider the experience and track record of the real estate agent and brokerage they hire to sell their property.

The graphic below shows the cost implications associated with a poorly managed home selling process. Each of the items listed in the left-hand column below the final sale price will reduce the funds a seller will receive from the sale of their home. This is an expansion of the standard “net sheet” and includes items like inaccurate pricing, poor offer negotiating, un-needed home preparation costs and badly defended items from the home inspection. All of these items are directly or indirectly affected by the performance of the agent hired to manage the sale of the home.

In order to demonstrate how a lowered commission rate should not be the only consideration to affect the “net,” the column of expenses under the 30-day heading include a reduced commission of ½%.

In this example, adding 30 extra days to closing along with less then perfect management of the selling process, results in $3,784 less to the seller even with the lowered commission rate.

Experience, training and administrative support matter. When making the decision on who to hire, you should consider who is more likely to:

  • Sell your property and return the highest net price,
  • In the shortest amount of time to closing and
  • With the least amount of hassle.

While hassle is not easily monetized, it is worth a great deal to be avoided.

 

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