Did you know that there’s a simple provision you can add to your real estate listing agreement, that will not only serve to better align your agent’s interests with your own – but could also save you thousands of dollars on your selling commission?
Well, there is such a provision – and while most agents will agree to it if requested – very few will suggest it to you on their own. This little-known contract provision is called a Variable Rate Commission Clause, and, no matter what your home is priced at, using this provision could save you thousands of dollars in commission fees.
In this article, I will explain exactly what a Variable Rate Commission Clause is and how you can use it to potentially save thousands on your home sale – but first, it’s necessary to understand exactly how real estate commissions are paid out in the typical real estate transaction.
How Are Buyer’s and Seller’s Agents Paid?
Most sales transactions in theTwin Cities market involve two agents: the listing agent, who represents the seller in listing and marketing the home for sale, and the buyer’s agent, who represents the buyer in the offer and purchase of the home.
In a normal transaction, a portion of the total commission collected by the listing agent is paid out to a buyer’s agent who represents the buyer in the transaction. This offer of payment is known as the cooperating broker compensation, and in our market, it’s typically 2.5% to 2.7% of the home’s selling price.
As an example: If the total commission charged by the listing agent is 6% – the buyer’s agent will be paid 2.7% of the sales price, and the listing agent will keep 3.3%. On a $250,000 home, this calculates into $6,750.00 paid out to the buyer’s agent and $8,250.00 retained by the listing agent.
What Happens if the Buyer Isn’t Working with an Agent?
But, what happens if the buyer is not working with an agent? In this situation, it seems reasonable that the seller would be able to save some money on the commission since that extra 2.7% isn’t being paid out to a second agent, right? Well, unfortunately for home sellers, this is typically not what happens.
Not surprisingly, the standard contract terms used by the vast majority of real estate agents make no mention of the variable rate commission option. When it comes to fees, the language in the standard listing agreement obligates the seller to pay the full commission, even in cases where the listing agent does not have to pay anything out to a buyer’s agent.
The industry has some colorful names to describe the act of collecting both seller and buyer sides of the sales commission. These situations are referred to by agents as, “hoggers,” or, “double-ending the deal,” because of the windfall of commission money that is earned.
Going back to our $250,000 example above – instead of collecting [just] $8,250.00, the listing agent will now be keeping the entire $15,000.00 commission for himself, all for doing essentially the same amount of work! Something doesn’t seem quite fair to the home seller who’s stuck paying compensation for two agents when only one is involved in the sale.
So, how can you, as a home seller, capture some of these commission savings for yourself? The answer is easy – just make sure to ask that a Variable Rate Commission Clause is added into your listing agreement.
The Variable Rate Commission Clause
A Variable Rate Commission Clause is a simple sentence added into your listing contract which states that in the event that no buyer’s agent commission is paid out, the total commission charged to the seller will be reduced by a certain percentage – for example, 2%. Therefore, if the original commission is 6%, your variable rate commission would be reduced to 4%. In the event that your home sold to a buyer who was not working with a separate agent, you would save 2% in commission fees, which could be a lot of money. For instance, in our $250,000 example above, this Variable Rate Commission Clause would save our seller $5,000.00 in commissions, (2% of $250,000), while the listing agent would still earn an additional 0.7% of $250,000, which adds up to $1,750!
Note, that by discounting the commission by only 2%, rather than the full buyer’s agent payout of 2.7%, the listing agent earns more money than he would have in a typical two-agent transaction, thus providing a fair and reasonable incentive to work with unrepresented buyers. As you can see, the wise use of a Variable Rate Commission Clause can result in a win-win situation for both home seller and agent.
A Variable Rate Commission Clause Aligns Your Agent’s Interests with Your Own
An additional benefit of using a Variable Rate Commission Clause is that it reduces the incentive for your listing agent to push for your acceptance of one offer over another because of your agent’s own financial interest in earning more in fees. This factor is especially important in the current market, with so many homes selling in multiple offers. For instance…
Imagine a selling situation in which you receive multiple purchase agreements, all with similar offering prices. If your agent stands to earn thousands of dollars more from an unrepresented buyer, (or worse – a dual agency buyer), he may end up advocating for your acceptance of one offer over another, even if the other terms of that offer are less desirable for you, the seller.
By using a Variable Rate Commission Clause, the seller and the listing agent both stand to come out ahead in situations where no buyer’s agent is involved. In this way, your agent’s interests and your own remain aligned, which is the way it should be!
Your Listing Agent Will Probably Not Suggest This Option Voluntarily
Not surprisingly, most agents will not voluntarily bring up the option of a Variable Rate Commission Clause, so you need to make sure that you ask for it specifically. Don’t be surprised if the agents you speak with don’t understand the concept at first – it’s likely that their brokerages are not training them to offer their sellers the benefit of lower commission rates.
So, What Is the Exact Language of a Variable Rate Commission Clause?
The language of a Variable Rate Commission Clause can be very basic. It just needs to state that the total commission charged to the seller will be reduced by a certain amount if no cooperating broker compensation is paid out.
Here is the exact language that I include in all of my listing agreements with sellers, “In the event that no cooperating broker compensation is paid out, then the total listing commission charged to seller shall be reduced by 2%.” This language can easily be added in on any blank line of the standard listing contract.
Where to Find an Agent Who Focuses on Client-Centered Representation
A request for a Variable Rate Commission Clause is totally reasonable and more than fair. If, after explaining the concept to your potential listing agent, he refuses to agree – just find a different agent who will. If you’re looking for an agent who’s more than happy to offer this seller to protection to his clients, you’ve come to the right place.
The Variable Rate Commission Clause is just one of the many client protections and benefits enjoyed by sellers who list their homes with me and my company, Metro Home Connection Realty. There are many other client-focused benefits, which most agents don’t dare offer. To learn more, just click here to see a list of Ten Special Client Protections and Benefits that My Competitors Can’t Touch.
Written by: Kevin Huntington, Attorney and Managing Broker of Metro Home Connection Realty