Real estate commissions have been in the news, ahem, a lot lately, to say the least. (There’s no such thing as bad publicity right?!) So we wanted to take a deeper dive into this opaque world and hopefully shed some light on what the heck is going on, why, and how you can be an informed consumer.
First, here's Danielle's take on the recent NAR lawsuit (and others) and what it means for you as a San Francisco home buyer or seller, and for real estate agents too.
The key takeaway? You should take it very seriously who you hire as your fiduciary!
If this settlement, which is about how buyer agents are compensated, causes San Francisco home buyers to be more careful and thoughtful about who they choose to work with, we're all for it. If it leads to a higher standard of service and expertise among agents and causes those less serious to leave the industry, that's a good thing for consumers too.
Some things about how agents are compensated may change. What won't change is that understanding real estate agent commission rates is important when buying or selling a home in San Francisco.
Let’s be real. With a median home price of ~$1.3M, real estate fees are not an insignificant amount of money! So, in this post, we'll discuss how commissions work, who pays what, and how to navigate the SF real estate market effectively.
Real estate agent commissions are always negotiable by law between the agent and the principal (you: the buyer and/or seller). Rates vary from broker to broker and agent to agent, as most of us are small business owners and independent contractors.
Traditionally, a total commission of 6% was common for full-service brokerages. Over the years, many agents decided to discount their fee in order to be competitive and win the listing, putting a downward pressure on overall fees for the average agent. There are also “low or no frills” discount brokerage models available. Think Redfin, etc. You may also choose to sell your home on your own (FSBO - For Sale By Owner).
When a home is prepared to be sold, the seller and their agent enter into a listing agreement, which outlines the total commission to be paid and the portion that will go to the buyer's agent. Upon closing, the buyer sends funds to a neutral third-party escrow company, covering the seller's proceeds, closing costs, and any additional real estate compensation owed to their agent.
Historically, the seller has paid the entire buyer agent commission from their proceeds, leading some agents to claim that their services are "free" for buyers. This was misleading and disingenuous as the cost of the fee was built into the sale price of the property. The seller pays the brokers and who pays the seller? Yup: the buyer. The agent was not “working for free”. The real estate industry has evolved a lot over the years to become less “sales-y”, more professional, ethical and transparent. There is more work to be done.
Recent lawsuits have questioned the fairness of the current system, where the buyer agent's fee comes from the seller's proceeds. As a result, the industry may see changes in how commissions are structured. Professional buyer agents now use Buyer Representation and Broker Compensation Agreements to outline their fiduciary duties and commission requirements. See our San Francisco home buyers page for more information and a sample of the agreement.
While discount brokers like Redfin and FSBO options exist, their market share in San Francisco is relatively small. When considering a lower-fee agent, it's essential to weigh the potential savings against the unintended consequences of working with a discount broker or FSBO model.
At the risk of sounding too biased (though we admittedly are), it can seem appealing to save on fees up-front, but consider if you want your home to also be seen as “discount”. Marketing, brand image and industry contacts count in the competitive and insular world of San Francisco real estate. A full-service, experienced agent will provide superior negotiation, project management, home preparation, and strategic pricing advice. A top agent will more than pay for herself. 😉
Ultimately, it seems more consequential to focus on your bottom line and net proceeds.
When searching for the right San Francisco real estate agent to represent you in buying or selling a home, it's useful to consider factors beyond just the commission rate. While some agents working for traditional brokerages may be willing to charge less for their services, it's important to understand the potential trade-offs and make an informed decision based on your specific needs and priorities.
When considering a lower-fee agent, it's worth asking why they are willing to work for less. Is it to maintain a large market share, or do they feel their abilities don't warrant a full fee? Real estate is a service-based business where skills such as negotiation, project management, and market knowledge are paramount. Agents who excel in these areas can maximize value for their clients and provide a smooth, transparent experience.
While the potential savings from a lower commission may seem appealing, it's important to run the numbers and consider the bigger picture. Is the money "saved" up-front (usually between ~ 0.5% to 2%) actually worth it?
An agent's fee can be an indication of their ability to communicate effectively, understand their value, and negotiate on your behalf. Choosing an agent solely based on a lower commission may not always result in the best outcome for your home sale or purchase.
Agents with the largest market share in a given neighborhood may often charge less than the standard commission rate to maintain their dominance. However, it's important to note that having a significant market share can sometimes lead to unintended consequences for individual clients such as overlapping listings that compete for the same home buyer pool. When an agent is managing many clients simultaneously, they may be inclined to prioritize closing sales quickly rather than ensuring each client receives the personalized attention they deserve.
Striking the right balance when choosing a real estate agent is key. While working with a top producer can be invaluable due to their extensive experience, knowledge, and industry contacts, there may be diminishing returns with agents who sell the most homes in a particular neighborhood. On the other hand, working with a part-time or less experienced agent may mean they are less skilled negotiators or less up-to-date on current market conditions and trends.
Ultimately, the right real estate agent for you will be one who combines expertise, trust, and a commitment to your individual needs and goals. By carefully evaluating an agent's track record, communication style, and understanding of your unique situation, you can make an informed decision that balances the value of their services with the level of personal attention and support they provide.
Buying or selling a home in San Francisco is a complex and personal endeavor. Working with a trusted, knowledgeable, and well-connected agent is crucial to achieving your real estate goals efficiently and effectively.
Understanding real estate agent commission rates in San Francisco is key to making informed decisions when buying or selling a home. While rates are negotiable and alternative options exist, working with an experienced, full-service agent will most often result in a better overall outcome and net profit.
As top 1% SF Realtors since 2002, our boutique collective of listing, buying, marketing and transaction specialists at Vivre Real Estate are here to help you navigate the market successfully and reach your real estate goals. To start the conversation and see if we’re a good fit, contact us here.
