The unspoken word: Real estate commission vs. mortgage broker commission
I’ve actually thought about this topic for a long time… but just didn’t really know how to 
phrase my opinion. I’m friends with many real estate brokers and can understand their side… On the other hand, I was once in the lending industry and know it first hand from that side of the coin as well. But… after thinking about it, my opinion on the topic really leans one way.
Here it goes…
Just like with anything, history has shaped where we are today.
So, where are we today with these commissions?
The industry standard for real estate commissions is 3% for one side of the transaction and 6% for both sides. So… if the realtor lists the home and finds the buyer they make a handsome profit… the tune of $12,000 on a $200,000 home. Not bad for a few hours work.
Mortgage brokers nowadays usually make between .75 and 2 points on the front end of a transaction and often find a bit of profit on the rate spread as well. So… total profit on a $200,000 purchase is around $3,000-$5,000 on average. I know some of you are thinking that a mortgage broker has an opportunity to get both sides of the transaction as well (i.e.- do the loan for the buyer and for the sellers new home) and double his profit closer to that of a realtor’s. However, I know from experience that rarely (I mean very rarely) does this ever happen. Usually when a seller is selling, they have already locked up some type of financing by the time the lender gets to them.
So… a realtors standard commission for one side of the transaction is 3% and a mortgage brokers is between 1 and 2 points (at least 33% less).
Why is there such a big difference?
Hisorically real estate commissions have been right around where they are today. They really haven’t changed much at all in the last 25 years. People just go into a real estate transaction already figuring to fork over the 6% for commissions. In the last couple years however, some companies have begun to offer flat rate commissions and/or cut rate commissions in hopes of grabbing more market share. So… it looks like standard commissions may have a bit of pressure to go downward (but don’t count on it anytime soon to see the standard 3 – 6% commission go away).
On the other hand, mortgage broker commissions used to be a bit higher in the past. Back 15 to 20 years ago it wasn’t uncommon to pay 3 or more points or 1 – 2 points with a nice little rate spread. People just expected to have to pay a cost to borrow the money. They appreciated the service mortgage brokers offered and didn’t mind paying a bit. Fast forward to today… the “service” of a mortgage broker has turned into a commodity. The internet lead sites like Lending Tree and Bankrate have turned the lending industry into a dog fight and driven broker commissions down. Excellent for consumers – bad for the average mortgage broker. On top of that… it is common for consumers to think they are getting gouged if they are paying more than 1 point… let alone having any rate spread built in.
How many people walk into a mortgage brokers office do not try to widdle down the brokers profit? My guess is less than 5%. How many people walk into a realtors office and do try to widdle down the brokers profit? My guess is once again… less than 5%. Even though the realtor more often than not makes more money on the transaction… they rarely ever have to squabble about commissions. Another bit of my observations the first impression of a flat fee realtor is that they are no good and charging a low fee because they aren’t as good as the one charging 6%. But… the first impression of a mortgage broker charging 2 points is that they are overpriced and just out to take advantage of the consumer. That is what happens when something becomes a commodity. No longer does a higher price mean higher value to a consumer… it means that they are getting ripped off!
Is this fair?
Well, yes it is. This is America and I strongly believe competition is good. The mortgage brokers who find a way to break the commodity trap and offer more value get paid more… and do quite well. Good for them… I like to see people who work smarter rise to the top. I can guarantee you that the average mortgage broker makes a pretty good coin.
On the other hand… I would like to see real estate commissions be a little more competitive. To me, and this is just me, I personally value my lender more than my realtor. Ya, my realtor does help me quite a bit… but frankly, I truly could still get things done without their help. My mortgage broker is more critical for me. Having a good broker who knows how to pull strings and get me the money I need when I need it is a huge value. Without the money, the deal doesn’t happen. Without a realtor, the deal can still happen. Plus… I just cringe when I see how much a realtor makes on a sale… I just hate throwing money like that out the window.
So… here it is. And once again, as a disclaimer… I was once in the lending industry so I may have a bit of bias built in 
I think mortgage brokers earn every penny they get and have to put up with a lot of crap when it comes to what clients put them through and all of the dishonest marketing they have to compete against. I am glad that the industry is competitive… that’s what America is about and it makes the economy healthy. I also think that realtors earn most every penny (not every penny:) ), but I also want to see commissions slide down a bit. It just seems crazy that I have to pay someone $10 or $20k for probably less than 10 hours of work.
I think in the near future, with all of the innovations of the internet and the flattening of the world, we will see flat and cut rate real estate commissions gain popularity. It all really depends on the consumer. If they begin demanding lower commissions… commissions are sure to lower. More and more people leave their loyalty at the door and go for the best deal. The real estate industry is sure to follow this growing trend in society.
What I really want to see is more real estate brokers get a bit more creative and freshen up the industry a bit. The real estate industry can use a nice facelift after the recent year and can start with the brokers.
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Hey, my name is Trevor and I'm the founder of The REI Brain and a real estate investor since the age of 21. Right now, my focus in real estate investing is multi-family income properties and I have plans on moving more into the commercial real estate investment world in 2008 and beyond. 
I’ve been waiting for someone to say something like this, lol. I’m a lender in Miami and hate looking at the snooty realtors driving their porsche’s and benzes by thinking that they are the $hit.
Do they earn their money? part of it… but definetely not worth what they make.
Realtors get a bad rap. There are a small minority who make the kind of money you are complaining about. Most of us have to fight hard for our listings. There is a lot more that goes into listing a home than “a few hours”. We put money into advertising, showing, open houses, signs. Also, the broker at the company gets a cut also.
Part of the issue on both sides is that loan officers and real estate professionals spend a lot of time on clients they where they will never see a penny in income. On the loan officer side, it’s researching and quoting rates, checking credit, only to be outbid by the next person who quotes a lower deal whether or not it’s truly competitive. On the real estate side, there are tire kickers, unsure sellers, heavy advertising costs, etc.
Sites like Zillow and ours (FreeRateSearch.com) and trying to take that time out of the equation and help the consumer get pre-qualified/self-qualified and do some of the work. It’s how things have gone in other areas of financial services and fees will adjust accordingly. Consumers who want the discount model will have it, and those who want to pay handsomely for the best agent (or financial planner, or whomever) will. When consumers get more information, it changes the industry. And it’s changing.