I recently read an article which indicated that transaction costs for US property average between 9 and 10%. This seems staggeringly high to someone like me who is more used to costs around 2%.
The seller has to pay the majority of the US transaction costs and the largest part by far is the Real Estate Broker fee which is typically 6%.
Similar costs in Northern Europe are between 1.5 and 3%. Other overall costs are pretty comparable and consist mostly of taxes and legal fees.
So why is there such a difference between Real Estate fees in the US and in Europe?
I have done some research on this and no one seems to have a definite answer. One interesting article I read on www.homeinvestors.com suggested the reason might simply be consumer naivety. People just don’t know any better and presume the Real Estate agent is somehow earning their enormous fee.
The article mentions that paying the fee may give the consumer the assurances that all is taking place decently and in the correct manner.
Another article I looked at (www.economist.com) took a different stance and suggested the reason may be collusion and the agents operate like some kind of cartel whereby a handful of brokers handle all the sales for a particular area and thereby control the price for all consumers.
Another difference in the US is that different agents represent both the buyer and the seller. The agents need to come together in order to close the deal and thereby are naturally ‘well-acquainted’.
Whatever the reason the enormous difference in overall transaction costs (mainly fuelled it appears by Estate Agents fees) make the continuous ‘flipping’ of properties more costly in the US than it is in Europe. This is perhaps part of the reason many investors appear to be favoring European markets in recent times.