David Monroe's Real Estate Blog

Where Does That Real Estate Commission Really Go? 

Many people outside the real estate industry have a perception that real estate agents take home large commission checks each time they sell a property.  Often times when I've spoken to someone who thinks that real estate agents get paid more than they should to sell a house, I've found out that they believe the agent is receiving a check for 6% of the purchase price.  However, this isn't how real estate agents get paid.

First, let's clear up one common misconception--The assumption that real estate agents are employed by the real estate brokerage they're affiliated with.  This generally is not the case.  Most real estate agents are independent contractors and pay all of their own business expenses, including phone, transportation, advertising and marketing, continuing education, insurance, association dues, office equipment, technology, accounting and tax preparation, administrative staff, etc.  As independent contractors, real estate agents affiliate themselves with a particular brand and work under the general supervision of the brokerage firm.

To illustrate where the real estate commission goes, we'll use an example of a listing agent charging a 6% fee to sell a $250,000 house.

$250,000 x 6% = $15,000 total commission paid by the seller

Out of that total commission, the listing agent will typically split their commission with the buyer's agent, offering the buyer's agent a 3% commission.
$250,000 x 3% = $7,500 paid to buyer's agent

This leaves $7,500 on the listing side.  A typical real estate brokerage will keep approximately a third of the commission (some keep significantly more and some keep less, but we'll use a third since it's fairly common).
$7,500 x 33% = $2,500 paid to the real estate brokerage (approx.)

This leaves $5,000 for the listing agent.  Out of this remaining amount, approximately half is typically spent on marketing and servicing the listing, as well contributing to other behind-the-scenes costs like administrative support staff, office expenses, dues (MLS dues, Realtor dues, etc.), continuing education, insurance, business travel, technology tools, etc.
$5,000 x 50% = $2,500 for marketing, servicing, and operational costs

This leaves approximately $2,500 pre-tax that the listing agent retains on a $250,000 sale.

To bring it all together, here's the summary of where the money goes:

So you may be asking, "How much does the buyer's agent keep in the same transaction?"  For the buyer's agent, the numbers are fairly similar except for the marketing and servicing costs.  Since the buyer's agent doesn't incur costs like signs, flyers, additional marketing, key box, etc., the buyer's agent may retain a bit more of the commission.  However, the buyer's agent will typically spend more money on transportation, and since many of the services performed by a buyer's agent cannot be delegated to other support staff, the buyer's agent will be more limited in the number of homes that can be sold each month.

So now that we have established how much a real estate agent actually makes on the sale of a home, I'll be posting a follow up blog post soon that shows the duties and activities that a real estate agent actually performs.  You may be surprised by the amount of work that goes into selling a house.

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Authored by David Monroe, Realtor®, Master Certified Negotiation Expert®
Phone:  (206) 905-8590

Copyright (c) 2013 by The David Monroe Team at Keller Williams Western Realty.

The FHA recently changed its post foreclosure and post short sale waiting period from three years to one year for eligible borrowers.  Their new "Back To Work-Extenuating Circumstances Program" reduces the waiting period for people who had a foreclosure or completed a short sale or deed in lieu of foreclosure during the recession as a result of a decrease or loss of income.

Prior to the introduction of the program, FHA had a three year waiting period after a foreclosure, short sale, or deed in lieu of foreclosure, and a two year waiting period after a Chapter 7 or Chapter 13 Bankruptcy.  However, now borrowers who experienced a qualified "adverse economic event" and have since recovered may be eligible for the new program.  A qualified economic event may include:

• Short Sale
• Pre-foreclosure Sale
• Deed in Lieu of Foreclosure
• Foreclosure
• Loan Modification
• Loan Forbearance
• Chapter 7 Bankruptcy
• Chapter 13 Bankruptcy

In addition to recovering financially, you must attend a HUD-approved home ownership counseling course.

Additional requirements include:

• You must be able to document at 20% decrease in household income
• The decrease in income must have been six months or longer and must have occurred around the same time as the economic event.
• You must demonstrate satisfactory credit history since the economic event, showing on-time payments for the period following the economic event.
• You may need to demonstrate good credit history prior to the financial hardship that led to the economic event, with credit that was damaged as a result of that financial hardship.

Other conditions may apply, but this is a huge opportunity for anyone who experienced a short sale, foreclosure, or other similar event recently but is now financially able to buy a home again.

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Authored by David Monroe, Real Estate Agent and Short Sale Specialist
Access Seattle area short sale help and find out 8 Things You Must Know Before You Attempt a Short Sale.
Phone:  (206) 905-8590

Copyright (c) 2013 by The David Monroe Team at Keller Williams Western Realty.

In pursuing good business practices in a Seattle foreclosure process one needs the opportunity to stop foreclosure at any time, deal with lender, and learn of the advantages of a distressed sale.  A distressed seller should also check on the ways a foreclosure may be stalled.  A truly experienced distress sales realtor can help eliminate and explain all possible contingent deficiencies.  They can direct you to people who can answer any legal questions that may pop up at any juncture of sale.   Finding a realtor experienced and qualified in distress sales is the key ingredient  to take as much pain and heart-aches out of the process.   An experienced distress sale professional can identify all discounts possible from any local lender.  

With an experienced distress or short sale professional a distressed seller has the best opportunity to eliminate high mortgage payments,  

expand monthly cash flow, and relieve hundreds, even thousands of dollars of debt.  The right realtor could help a distressed seller to enjoy an elimination of debt (getting rid of collectors phone calls and visits--forever).  Most Seattle short sales are full settlements (note that if you have a second mortgage, a distressed real-estate pro is needed even more, for many times a foreclosure is needed to relieve additional debt (i.e. the second mortgage  or taxes on unreleased settlements.  An experienced distress pro will;l refer seller to accountant or attorney for total relief.  

Have you stopped making your mortgage payments?  Are you considering it?  If you’re just considering it and haven’t already stopped, read the post, Should You Stop Making Your Mortgage Payments?

If you have stopped making your mortgage payments, either because you can no longer afford to pay or for some other reason, here’s what you can expect:

First Mortgage
First mortgage lenders are typically much easier to deal with if you fall behind on your payments.  They typically won’t harass you by phone, but they’re likely to fill up your mailbox with letters reminding you that have haven’t made your payment. 

If you speak to your first mortgage lender on the phone, they usually won’t use high-pressure collection tactics.  That doesn’t mean they won’t ask for a payment, but the collection effort over the phone is not likely to go past that level.  They will make a lot of effort to determine if there’s a way to bring the loan out of default status by offering a loan modification, payment moratorium, or some other workout solution.  However, these workout solutions are rarely successful, since most borrowers just get lost in the system.

This low-pressure collection strategy may not apply if your loan was sold off to someone that specializes in purchasing loans that are in default for pennies on the dollar.

Second Mortgage
If you stop making payments on your second mortgage, this can create a bit more of a challenge.  Not only will the second mortgage lender fill up your mailbox with threatening letters, your phone is likely to ring off the hook as well. 

I put second mortgage lenders in the same collection category as credit card collectors.  Second mortgage lenders have a lot more to lose, especially if the first mortgage lender forecloses.  Therefore, they tend to use high-pressure, threatening, and sometimes unethical collection practices.  They may try to contact you at work or they may try to contact your relatives, although you can request in writing that they not do this. 

They may lie to you.  They may tell you that they won’t approve a short sale or loan modification if you’re behind on your payments.  This is not true.  If you challenge something that they tell you and they offer to have you talk to their supervisor to confirm, don’t take the bait.  Their “supervisor” is most likely just the collector in the cubicle next to them.

Letters In The Mail
During the first 90 days or so, your mailbox is going to fill up with letters from your lender.  They may start out friendly, offering lots of options and telling you how much they want to help you, then they will start getting more threatening.  Usually around the 60 day mark, they’ll send letters by certified mail as well.  They’ll use terms like “Acceleration Warning”, “Notice of Intent to Foreclose”, “accelerate the maturity of the loan”, “declare all sums immediately due and payable”, “commence foreclosure proceedings”, “take legal action”, etc.  They're trying to get your attention.  Just remember that no matter what they say, there are specific procedures and timelines that they must follow (see Foreclosure Process and Timelines in Washington State).

Two Notices To Take Seriously
If you’re receiving so much correspondence from your lender that you’ve given up even opening your mail, there are two letters (or notices) that you should pay particular attention to.  The first one is the “Notice of Default”.  This will usually be sent by regular mail, certified mail, as well as a hand-delivered copy (usually taped to your front door if you’re not home).  This notice warns you that the bank may start the foreclosure process if you don’t cure the default within 30 days.

The second notice is the “Notice of Trustee's Sale”, which is sent 30 days or more after the Notice of Default.  Like the Notice of Default, this notice is also sent by regular mail, certified mail, and hand-delivered.  This notice means the bank has scheduled the foreclosure auction for your property.  The foreclosure auction will be at least 90 days from the date of the notice.  The bank has the ability to postpone the auction at their discretion if you’re in the process of a short sale, loan modification, or some other workout option.

As always, if you’re concerned about your legal rights or legal implications, you should consult with an attorney. 

This is just a brief overview of what to expect, and it may differ slightly from lender to lender.  Feel free to share your experiences.

1. If your mortgage is FHA insured, you’ll typically need to be at least 31 days behind on your mortgage before they’ll consider a short sale.
   
   
2. For other types of loans, some lenders will approve a short sale if your payments are current, and some will not.  It depends on the underlying investor, and some banks service loans for many different investors.
   
   
3. The short sale process may take longer if you’re current on your mortgage payments.  The bank usually won’t feel that there’s a risk of getting the house back if you’re current on your payments, so they may not be as motivated to work on a reasonable timeline.  A good real estate agent with short sale experience may be able to assist you with the wording in a hardship letter so the bank understands that even though your mortgage is current now, default is imminent.
   
   
4. If you stop making your mortgage payments, it will have a negative effect on your credit.  Therefore, you should make sure you handle anything that would be impacted by negative credit before you stop making payments--And that doesn't mean going out and buying a new car or furniture on credit then not make your mortgage payment.  Securing a place to rent could be impacted by negative credit, but this is usually done much later, and you may be able to explain the circumstances to a prospective landlord.
   
   
5. If you have significant liquid assets (cash in the bank, CDs, whole life insurance policies, or other investments), the bank may require you to put up some cash at closing or sign a promissory note as a condition of approving a short sale, regardless of your mortgage payment status.  IRAs and other retirement plans are typically exempt, but that won’t necessarily stop the bank from trying to ask for these funds.  I’ve heard of situations where sellers were tricked into borrowing from their IRAs to pay back mortgage payments or cover deficiencies on a short sale.
   
   
6. If you stop making your mortgage payments, the bank will attempt to collect the back payments.  If you have two mortgages, the second mortgage lender will probably harass you much more than the first mortgage lender will.  The second mortgage lender is also much more likely to use unscrupulous and unethical collection tactics.  Be prepared.  It’s a lot easier to deal with if you know what to expect.
   
   
7. If you have a second mortgage and stop making your mortgage payments, the second mortgage lender may tell you that they won’t approve a short sale if the second mortgage is delinquent.  This is a collection tactic and is not true.  In fact, the exact opposite is often the case.
   
   
8. Borrowing from a credit card to make your mortgage payment is not recommended.  I have yet to come across a situation where this actually ended with a positive outcome.
   
   
9. If you stop making your mortgage payments, it could eventually lead to foreclosure if you are not able work out something with the bank or have a short sale approved.
   
   
10. If the bank determines that you have enough income to make the mortgage payments, they may not approve a loan modification or a short sale.  However, the bank may make an exception in special circumstances like divorce or an out of area job transfer, where staying in the house may not be an option.

If you also have credit card debt, here are some things to keep in mind:

• If you’re unable to continue making your mortgage payments and intend to do a short sale, staying current on other debt outside your mortgage (car payments, credit cards, etc.) will typically make it easier to secure a place to rent after the short sale is complete.  It will show a prospective landlord that although you had stopped making your mortgage payments because the payments were more than you could afford, you are able to make lower rent payments, and the mortgage situation was an isolated incident.  Many people in short sale situations would have sold their house before they fell behind on their mortgage payments if they would have been able to sell their house for enough to pay off their mortgage.
  
  
• Some banks may check your credit before approving a short sale.  If they find out that you stopped making your mortgage payments but have stayed current on your credit card payments, they may reject the short sale offer.  I’ve only heard of this happening once, and it was with Bank of America.  It’s unclear whether it was just a threat or if the underlying investor actually required that.  However, consider this a warning—It could happen.
  

I’ve received many calls from prospective buyers interested in my short sale listings asking if the listing price has been approved by the bank.

1. The seller’s loan is an FHA loan, and HUD has sent the seller a letter stating the minimum net payoff proceeds that they would accept.  This can be fairly reliable as long as all of the conditions set by HUD are satisfied.  In this situation, you also need to know the following:
   
   
   1. When is the deadline for obtaining a signed Purchase and Sale contract from a buyer?  The HUD pre-approval is only valid for a specific period of time, usually around 90 days.
      
      
   2. What is the appraised value of the property?  The pre-approved price set by HUD is based on a percentage of the appraised value, usually 88%.  Since this is the net amount after all selling expenses (including commissions and closing costs), that translates to a purchase price of approximately 97% of appraised value.  However, HUD will often times accept less than the pre-approved amount depending on how long the property has been on the market—A buyer’s agent that specializes in short sales will know when you can make a lower offer that will net HUD less than their pre-approved amount and still have it approved by HUD.   If your agent doesn’t know this, you could be paying more than you should for the house.
      
      
   3. How long has the property been on the market?  This relates to Point (b) above—HUD may accept a lower payoff than their pre-approved amount depending on how long the property has been on the market.
      
      
2. The bank has verbally approved a listing price or has verbally disclosed the minimum payoff that they’ll accept.  This is possible, but rare.  Banks want the property sold at the highest price possible and don’t want to leave money on the table.  If they approve a listing price of $300,000 and the property could have been sold for $320,000, then they haven’t done their job of mitigating the loss.  Most banks prefer to receive an offer, then determine if the price offered is acceptable.  Also, if the price approval was not in writing, there’s no guarantee that they’ll follow through with their verbal commitment (banks are notorious for “forgetting” verbal commitments that they’ve made).
   
   
3. The bank has given written approval of the listing price.  As in Point #2, banks rarely approve a price prior to procuring a bona-fide buyer for the property.  If the listing agent claims to have written approval of the listing price, ask them to send a copy to you in writing.  If they say they can’t because it contains confidential information, ask them to black out the confidential information with a marker and send a copy to you (make sure they don’t black out the borrower’s name or property address).  If the letter states an approved price, make sure it also states the net payoff proceeds that the bank will accept.  The bank is less concerned about the sale price—They’re concerned about the amount of money they’ll end up with after the deal is done.  You’ll want to avoid potential situations where the bank approved a listing price but comes back in the eleventh hour and says something like, “That price was based on 4% in real estate commissions, not 6%,” or “That price didn’t account for prorated real estate taxes, homeowner association dues, etc.”
   
   
4. A previous buyer’s short sale offer was approved by the bank, but the buyer backed out or could not complete the transaction.  This situation would seem like a slam-dunk since the bank had already approved another buyer’s offer.  But beware—Just because the bank approved another buyer’s offer at the same price doesn’t guarantee that they’ll approve your offer.  The previous buyer may have had different financial qualifications and the terms of the previous offer may have been different than the terms that you’ll offer.  Maybe the previous offer didn’t include an inspection contingency, and that made it desirable to the bank.  Also, short sale approvals are usually good for up to 30 days, or sometimes 45 days.  If the bank finds out that a different buyer was substituted, they could reject the short sale.
   
   I had a recent transaction where we had a short sale approval (approved specifically for the original buyer), we sent in a new offer to the bank for approval at the same price, and the bank changed their mind and decided they wanted a higher price.  We had to fight with the bank for the next month to get them to come back down to the original price that they approved the first time around.
   
   My point here is that just because the bank approved an offer from another buyer doesn’t necessarily mean that you can just substitute a new buyer and expect the deal to go through.  The only way to assure that the bank will go through with the deal after the approved buyer backed out is to submit the new offer and get a new approval.  Depending on the bank, this could take anywhere from several days to several weeks.
   
   If you find yourself in this situation, ask the listing agent to send you a copy of the short sale approval letter.  Make note of the deadline.  Many banks will issue an updated approval letter for the new buyer but won’t change the date that the approval expires (the deadline for closing).

Is there such a thing as an unsellable house?  There’s a wealth of information available on preparing and staging a house to sell, but what about situations where the house can’t be properly prepared or fixed up to sell?  I work a lot with short sales and pre-foreclosures, and in many of these situations the houses aren’t in great condition.  Often times the seller has no motivation to fix up or clean up the house.

One house I recently sold was no exception.  It was in foreclosure and we had to sell it quickly.  The house was only 13 years old and needed new flooring, interior paint, and some landscaping work, but it looked much worse.  The owner had multiple large dogs that were allowed to go in and out as they pleased and the house smelled like a wet dog.  Nearly every room in the house had boxes, clothing, and other personal belongings stacked floor to ceiling, and some of these rooms were so cluttered that it wasn’t even possible to get inside the room.

In the listing, I requested that agents contact me prior to showing so I could warn them of what they were walking into and help set the proper expectations.  I could see the potential of this house, but most buyers and their agents could not.  Some buyers turned around and walked out as soon as they opened the front door.

Critical Feedback

I always request feedback from agents that show my listings.  I received several scathing comments about this house from other agents:  “Get it off the market!”, “You should be embarrassed for listing this house”, “It stinks!”, not to mention some of the direct insults to the seller even though the agents had never even met the seller.