How to negotiate commission

How to negotiate commission

Posted on August 3rd, 2009 Huis-Huis 1 comment

Commission negotiations can be brutal

The agent’s fee is something everybody (except for the real estate agent) loves to hate. Unless the real estate agent performs a service far beyond the norm, I doubt you could find any buyer or seller who’d wish to pay his/her real estate agent MORE commission than is absolutely necessary.

Informed buyers and sellers know that real estate agency commissions are negotiable, but few people know HOW to negotiate a better agent’s fee. In this article, I discuss how to negotiate real estate agents’ commissions. It gets a bit detailed, but the devil’s in the detail, as grandad used to say!

Sellers seldom negotiate. People tend to think, “Why would the agent cut his/her commission?“, or “He/she will take offence if I bring up the subject of the sales commission!”

And it literally pays real estate agents to have clients who think like that. The truth is that good agents are always willing to negotiate, especially BEFORE they have your signature. Unfortunately real estate agents are (or are supposed to be) experienced negotiators, so you’ll have to do some homework before you try to negotiate with your estate agent about the commission.

There are some things, other than money, that your agent values. Clients that are willing to make the real estate agent’s work easier, and/or provides the agent a measure of certainty that they will eventually get paid for the work he/she does, are more valuable to the agent than unreasonable clients.

Remember, the agent only gets paid once the property is sold and the transfer goes through. And therein lies the key arguments that will allow you to reach an agreement with your agent that will suit both parties.

Commission negotiation strategies

In this article about negotiating real estate agents’ commissions I give a lot of details and ideas you could use in your commission negotiations. You don’t have to use every suggestion. But you’ll soon see a pattern of sense in all the madness, so please read through it and keep an open mind, will you?

Some of the suggestions might seem ludicrous, but remember, you probably don’t negotiate with people on a regular basis. The tactics described here are proven negotiation strategies that might just allow you to save a bundle on your real estate agent’s commission:

The phone call

Never negotiate or even enquire about real estate commissions over the phone. Choose a good real estate agent, with experience selling property in your neighbourhood, and phone only to arrange a meeting.

The best time to negotiate your agent’s commission is (obviously) before you give a mandate. So, when you contact the agent, don’t say, “I want you to sell my house.” A statement like that gives the agent an open mandate to market the property.

Rather say: “I would like to discuss the sale of my house“, and make an appointment to meet.

Don’t get into too much detail over the phone. Keep the call short and sweet. Say, “I’m busy and can’t discuss the details now, but I look forward to our meeting,” if you need to.

Tell the agent that you would like to see information about recent sales in you area when you meet. You want the agent to put in some effort beforehand, because it will make it more difficult for him/her to simply walk away from the negotiating table.

Arrange your meeting to get the home advantage. You don’t want to negotiate commission on the agent’s turf – which means his/her office. The general idea is for you to feel comfortable and the agent to be out of his/her element (possible but not likely).

The meeting pre-negotiations

Be sure to allow 2 to 4 hours for the meeting and don’t allow yourself to be rushed by the agent.

When the agent arrives, be friendly. Ask about the agent’s family, work and interests. You want to connect with the agent on a personal level. It shouldn’t be too hard, because the agent is likely to have the same idea.

Offer the agent something to drink, like tea, coffee or juice, and keep the fluids coming, if you can. But be sure to limit your fluid intake. (A full bladder during negotiations is a liability. Especially if you subtly prevent the other party from slipping away for relief.)

If you arrange to meet the agent at your house. Make sure the property is neat and presentable. Take him/her on a tour of the house and suggest that he/she fills the details into the listing form so long. If he/she wants to take pictures, encourage it. Remember, the more effort the agent puts in beforehand, the harder it will be to walk away from your commission negotiations.

When you’re ready to sit down and talk, if you have an imposing home office or study, use it to your advantage. Or if you have a proper office at work, you might consider using that, but your dining room table will do nicely for the purpose of negotiating the realtor’s commission.

Always negotiate accross a table. Seat the agent on the other side of your table. Consider moving chairs away, to limit his/her options to position him/herself. The agent will usually prefer to sit next to you while delivering his/her sales pitch. The idea behind the agent’s strategy is literally to make you feel that the he/she is “on your side“.

If possible, give the agent a chair that is a little lower than yours, so that you can look down on him/her. This will unsettle the agent ever so slightly. It might have something to do with feeling like a child at a table with grownups, I don’t know. But it makes it hard for the agent to adopt a hard line during the negotiations.

You might also consider “ganging up” on the agent. Call in some reinforcements, and bring them up to speed on the plan. Position your “team” on your side of the table. They just have to sit there and seem interested. This has an intimidating effect on the agent, even if your team has a couple of kids in it, who’ll feel outnumbered.

When the agent starts his/her sales pitch, get the agent’s promotional material on your side of the table, if you can. Page through it, looking at the agent at intervals (especially when he/she uhmmms and ahhhs). The agent probaly knows the pitch by heart, but taking the visual clues away makes their job just that little harder.

Struggling is a funny thing. When you work hard for something, you tend to love that thing more than if it came easily to you. The harder your agent works towards getting your property listed, the harder it will be to walk away once you bring up the commission thing – and the harder he/she will work to get your property sold, eventually! So, don’t be shy to make the agent sweat a little. You’re just helping!

It’s not a train smash if the agent ends up on your side of the table for a while. Simply find an excuse for the two of you to leave the table for a moment, once the pitch is over, and position the agent on the opposite side side of the table again, when you return.

Let the agent know that you’re impressed with what you’ve seen and heard thus far and that you’re interested (obviously only if you are) in a written mandate, but that you need some clarification on a few points. Yes, I said a WRITTEN mandate. You want everything in black and white.

Discuss the marketing plan for your property in detail and get the agent to put everything in writing. Make sure that the agent gives specifics and time frames and commits to regular progress reports.

Ask to see the recent sales information you requested. When you talk prices, insist on talking prices that include the commission. The agent’s commission gets included in the sales price when the sale gets registered in the deeds office. And your buyer will have to pay transfer duties or taxes on that amount, so it is actually unfair to talk about the net purchase price, isn’t it?

Now ask your agent’s opinion about the highest price you can expect to realize for your property. If you disagree, discuss the price and motivate your argument. You want the agent to agree with you – not just cave in because he/she wants the listing.

Try to add the commission to the highest possible price you discussed, and have that filled into the mandate form as the sales price. This is a sneaky tactic you might be able to use to give you some extra leverage, especially if the agent’s bladder is about to burst and he/she isn’t concentrating too well. The commission was already included in the price, remember?

If you don’t like being sneaky, or if you try and don’t get away with it, no problem! You just want to load the sales price for negotiations anyway. You have a realistic sales price in mind, this was just an exercise in stockpiling ammunition…

Reduce the mandate period to be as short as possible. Your agent might go for a mandate period as short as one week. This can be extended later, if you want. But for now, cut that mandate period to the bone.

Read through the mandate agreement, ask questions and suggest amendments, if needed, without discussing the commission. Attach the marketing plan to the mandate and reference the addendum in the printed mandate form, so that the marketing plan forms part of the mandate agreement.

Make sure that there are “easy outs” built into the mandate. If the agent objects, ask him/her if they plan on not fulfilling their responsibilities, and then pause expectantly… Best to let them know now that you actually expect them to perform to the agreement, right?

Specifically check if the agent has the right to sign the mandate agreement on behalf of the agency. You want to negotiate with someone that can actually make a decision. If the agent cannot sign the agreement, you’ll have to arrange to meet with a principal real estate agent from the agency, because any commission negotiations would be a waste of time. Check this as soon as possible.

The commission negotiation

At this point, the agent will be confident that the mandate is in the bag. All that is needed is your signature… And this is the time to bring up the commission.

What the estate agent didn’t realise when you first called, is that you’re not like most of the people he/she gets to deal with. Most people know nothing about selling homes – you do. And those uninformed sellers usually figure the real estate agent knows best. He/she is a professional after all, isn’t it? But you know that there is no such thing as a “standard” mandate, a “standard” commission, or a “standard” sale. And it is time that the real estate finds this out as well.

Say something like, “Okay. This looks great. The last thing we need to discuss is the commission, I guess!” Note that it is not “your” commission yet. There’s no need to make this personal now.

The real estate agent’s first defensive strategy to avoid lowering his/her commission will usually be to point blank refuse to discuss the commission. This is an aggressive bully tactic that I absolutely despise. The agent that tries to pull this one is hoping to discourage any discussion of commission before it starts. Don’t fall for it.

The best response to such arrogance is to let the agent know you won’t stand for being bullied into any contract. Tell the agent in no uncertain terms that you are not interested in doing business with someone who is unreasonable.

“Flashing” is a little trick that might come in handy here. This technique is aimed at attacking the opponent’s confidence. Here’s how to do it: Look the agent in the eye and then “flash” a look down, to where his/her crotch would be, and back to eye level – don’t worry, the agent is sitting on the opposite side of the table, remember, so you’re in no danger of getting an eyeful. But the gesture might just shake the agent’s arrogant confidence a little. It works on male and female agents, so it doesn’t have anything to do with inadeqacies of the agent’s reproductive system, I think. Just try it, and let us know if it works!

If he/she still doesn’t make the noises you’re looking for, get up as if to walk away, or if the agent is in your home (as would normally be the case), as if to walk him/her out. You don’t have to mention all the other agents that will be interested in your business, but it couldn’t hurt.

If the agent still insists on being unwilling to negotiate, let him/her leave. They’ve wasted your time, but you’ve wasted more of theirs, so that’s fine. It will usually not come to this, though, if you got the agent to truly invest time and effort in your property before starting the negotiations.

Be fair

If the agent wanted 7% commission initially, don’t go crazy and offer to pay only 1%, to start off with! Remember that you don’t want to starve your poor realtor, nor do you want to make the agent resent you, your property, or your mandate. Be fair and reasonable.

You want the agent to accept a commission reduction – any reduction – for now. Once you get the agent to agree to the reduction, update the mandate agreement immediately. You don’t want the commission to slip back down the slippery slope, after getting an agreement, now do you?

It is better to talk about real money amounts than percentages, when you negotiate commission with your agent. A 7% commission doesn’t sound as bad as R70 000, on a R1 000 000 property – that’s why agents like to quote a percentage to start with! Calculating and talking about the commission amount in rand and cents gives a clearer picture of the commission you’ll be paying. More fair, if you ask me.

Structure the commission

If your agent cannot understand why the two of you should negotiate the commission, you’ll have to be able to convince him/her with valid arguments. Here are a few ideas:

The commission is what motivates the agent to sell your property. And if you feel that the motivational value of the commission does not suit your needs, the two of you should be able to come up with a structure that makes sense for both parties, shouldn’t you?

For instance, if you are looking to sell quickly, a commission structure that includes a bonus, for obtaining an acceptable offer to purchase before a certain deadline, would be a more suitable motivator than a flat rate or fee.

Or, if you absolutely need a minimum purchase price, a commission structure that includes a bonus, for an acceptable offer to purchase that exceeds that amount, would motivate the agent to get potential buyers to make their best offers from the start.

You will obviously need a generally lower commission rate to be able to offer the bonus payment in a structured commission agreement. Try to make the bonus payment as big as possible and the general commission rate as small as possible. You don’t mind paying well for a job well done, do you? But if the agent does not perform, he/she should be punished. So get yourself big sugar lump and a looong, thin stick… FIGURATIVELY of course!

Real estate agents in South Africa are not used to structured commissions. But they bloody well know what a BONUS is! Make the most of this information.

Incentives for commission reductions

To properly negotiate the best commission agreement, you’ll need something to offer in exchange for commission reductions. Negotiations are give and take, after all. So, next we’ll discuss some incentives that can help motivate an agent to drop his/her commission.

Real estate agents want something from you, other than the sales commission on your property. And that something can be summed up in one word – cooperation. The agent wants you to cooperate in making their job as easy as possible. The funny thing is that they are used to getting this much needed cooperation for “free”. I mean, who in their right minds would not cooperate with the person selling their property, eh? Well, no-one. And that includes you.

But the reality for realtors all over the world is that uninformed sellers have all kinds of strange ideas. This means that the agent usually has to try and convince their clients to cooperate – not a simple feat. In your case, all the agent has to do to gain your cooperation is to give you a bit of a discount on the commission! Seems fair enough to me, donnit?

So, the only incentive you’ll actually be offering the agent in return for a more attractive commission rate is really your cooperation to get the property sold as soon and as smoothly as possible. Obviously, expanding on the topic a bit will yield better results than just mentioning the one word!

• Agents want sole and exclusive mandates. Insist on a lower commission rate for signing a sole and/or exclusive mandate. The written mandate agreement definitely has value to the agent. Make sure you capitalize.
  If the agent won’t budge, insist that the words “sole and exclusive” be replaced with “open and conditional”, wherever the mandate form makes reference to sole and/or exclusive mandates. This will allow you to appoint as many other agents as you choose and/or sell the property yourself.
  If the agent budges, but doesn’t budge enough, insist that the words “and exclusive” be crossed out, wherever the mandate form makes reference to “sole and exclusive” mandates. This will allow you to sell the property privately, to anyone that was not introduced to the property by the agent, leaving the agent with NONE of the commission.
• A reduction in the marketing price will make it easier for the agent to get buyers interested. A house that goes to market at the right price typically sells quicker than an overpriced house, so the agent gets paid quicker. Remember, you’ve built some leeway into the sales price earlier? “Exchange” a price reduction for a commission drop.
• A longer mandate period gives the agent more time to find a willing buyer without having to compete with a hoard of other agents. It gives the agent an assurance that he/she will actually get paid, as long as they do their job. Exchange a longer mandate period for a reduction in the agent’s fee.
• Neat, pretty properties attract more potential buyers, making the agent’s job a whole lot easier. Offer to make repairs or changes the agent feels nessessary, for a bit of commission, of course. Chances are your house has a bit of clutter anyway, so offer to re-organize and clear unnecessary stuff out of the house to get it in shape for marketing.
• The agent will want to put a for sale sign outside the house. You actually want that board out on the sidewalk too, but you might be able to get a concession in return for it, if you work things right.
• Make your property available as a show house for extended periods and at regular intervals. Exchange show house cooperation for commission. You’ll want to show the place anyway.
• Newspaper advertising costs quite a bit and is usually one of the real estate agency’s main expenses. Offer to contribute a fixed amount towards advertising your house in the newspaper as a show house (price, address and all), as a non-refundable advance on the sales commission, in exchange for a lower commission rate. This way you can ensure your property gets newspaper exposure AND pay less commission. Be prepared to write a cheque on the spot. Inquire about advertising costs from your local newspaper beforehand.
• The real estate agent can get a few thousand rand extra, for originating the mortgage bond for your purchasers. Ask about that, and offer to “share” the mortgage bond commission with the agent. This is another thing agents rarely want to talk about with clients and I doubt you’ll be able to get away with using this. I think that’s a bit unfair though, don’t you? So, if dealing with an unreasonable agent, be more unreasonable.

Negotiate, negotiate, negotiate

As you can see, all it takes is a bit of creative reasoning and an agent that is actually willing and able to negotiate an acceptable commission rate and mandate terms.

If you want to pay less real estate agency commission, negotiate it. It’s as simple as that. But if you can successfully negotiate a low commission rate, you might actually consider selling privately, anyway. It does take some guts to even breach the subject of the agent’s commission, and a fair bit of skill to execute the negotiations sucessfully, after all – just what you need when selling your own property!