Archive for the ‘The biggest myths about real estate commission’ Category

The Biggest Myths About Real Estate Commission

Thursday, May 3rd, 2012

Sean Hessby Sean Hess (Sean@StAugTeam.com), Broker and Manager for St. Augustine Team Realty (www.StAugustineTeamRealty.com). Join us on Facebook.

A higher commission will get you better marketing, true or false?

False.  A higher commission will not get you better marketing.

Commission is the engine that makes real estate sales go.  It’s what gives real estate agents the motivation to front all the money, effort and time to market a house on their own dime while the seller sits back and waits to get paid.  Commission is what gives real estate agents the motivation to wade through countless emails and phone calls from looky loos, and to sit there on a Saturday at an Open House with a pasted-on smile while some jerk buyer rips into how ugly the house is.

To paraphrase Han Solo in Star Wars, “Look, they ain’t in this for your revolution, and they’re not in it for you, Princess. They expect to be well paid.  They’re in it for the money.”

Commission is the engine that makes real estate go.

4%? No reward is worth this... Photo Lucasfilm LTD, 2oth Century Fox.

That’s why lousy agents and lousy marketers can charge the same thing as the good agents and the good marketers. Because commission and marketing are two different animals.

FYI, if you want a real estate agent who is also a good marketer or has a good marketing plan do your research by punching an agent’s name or an address on one of their listings into Google and see what comes up.

There is no set commission in a market, true or false?

False.  Possibly the biggest lie in real estate sales.

Okay, I take that back, it’s not so much a set commission as a set range.

Back in the far-off year of 2009 when we opened our doors we offered a 4% commission as a loss-leader way to generate some early listings.  Let’s say for the St. Augustine market the regular commission is either 5% or 6%.

When it got out that we were offering a 4% rate…certain Realtors told us in no uncertain terms that it would be bad for our business if we continued to offer it.  These weren’t buyer’s agents who were dressing us down…we were still offering a regular 2.5% split to the buyers side (comparable to a full 5% listing)…these were seller’s agents who were afraid our commission structure would undermine their ability to charge 6% for listings.

Our rationale for offering 4% was that if enough people signed their listings up we’d end up taking less for each sale, but the company would make up for it in overall sales volume.

In the end we dropped the 4% for several reasons.  The first was that it didn’t generate enough volume to make up for the lower rate.

The second was that it actually had an unintended (and negative) affect on the sellers.  In the same way a higher commission will force a seller to be more responsive to repairs and feedback in order to maximize the sales price, the lower commission put the sellers in a position to where they were de-incentivized to work harder.

It worked like this: with the lower commission the seller felt they were playing with house money.  So instead of doing everything possible to make sure their house sold, they did everything they could not to spend another penny.  In other words, they were already saving 2% off the standard rate and it became a game to see how much more money and effort they could save by not doing repairs or anything else.   With a few notable exceptions, those we listed at 4% failed to sell because the seller had no skin in the game.

So we dropped the 4% because it failed to generate volume, de-incentivized the seller, and yes, because we were bowing to pressure from other real estate agents.

I want to make this absolutely clear: no group of agents or broker’s cabal came up to me and told me to stop offering 4%.  But individual agents did.  I’ve been in the business long enough to know that these agents were NOT directed to do this by their brokers.  But some brokerages are so…how shall I say, cultish(?)…about the rate they charge, that it would be unusual if their agents didn’t go out into the wide world and try to turn us into disciples to their own personal Cult of Commission.

I will also add this.  Some companies really pay their agents poorly.  This is because certain companies can’t control expenses at the top (I have a problem with that), or because they love a fat, healthy profit margin (as a capitalist I have no problem with that), or high franchise fees, or any combination of those.  And the reality is that certain real estate agents at certain companies can’t afford to sell a home with a 4% commission because they won’t break even on the sale.

So I say, “Thank You,” to them, for raising the commission, and enforcing it, for all of us.

A lower commission will kill the sale of your home, true or false?

False.  But you better be careful.

Now I’ve got you really confused.  I just went into why we no longer offer a 4% commission and now I’m telling you a lower commission won’t hurt a sale.

Here’s how it works.

No agent cares if I or any other agent offers a lower commission (considered 5% in this market) from time to time.

One time last year I went into a listing appointment and it was obvious from where the seller wanted to price the home that it would be under contract in under 30 days and sold in 60.  I said, “Look, I don’t have to charge you 6%, it’s only going to be on the market 30 days.”  This was the type of home in good enough of condition, in a price range that had a huge enough pool of buyers that I knew 5% wouldn’t be a problem.

Another time we did a 4% listing special for local educators, back when the state legislature was really trying to hammer them (we wanted to show our local school teachers some love).  I did a listing appointment for some teachers who were retiring and selling their house.  The other agents they were interviewing were just beating us up over the 4%, saying their house would never sell.  So I did some research, looking at every house that sold in the same community over two years–and the homes that didn’t sell–to see if the 4% (with a 2.5% split to the buyer mind you…hiding the fact that it was really 4%) would handicap a home.  The result was that commission didn’t matter in that neighborhood, and a home was just as likely to fail to sell at a higher commission as at a lower commission.

The thing was, this was a pretty exclusive type of house in a neighborhood where homes didn’t come on the market very often.  It was also a price range with a strong pool of buyers, and the home was priced correctly.  So I made it a compelling case to charge less, with the asterisk that if it didn’t sell we would raise the commission (and as it turned out the home was under contract in 2 weeks).

So two very important things to consider on a lower commission: the home must be priced correctly, and there must be a strong pool of buyers.  And that I didn’t do this all the time, because…

If the company or agent you hire has a reputation among other real estate agents for “cutting” commissions, in other words, typically offering a commission that is lower than the market rate, then it will hurt your sale, because other agents will avoid your agent’s listings.  Sometimes this is done because the agents are making a business decision in that they can’t afford to show a home with a lower commission, and sometimes it’s to send a message to the agent that their commission structure just isn’t acceptable.  Yes, that really does happen.

Also, the reality is that when I offered a lower commission on the two homes above, I limited the buyer pool a bit because some agents would drop the house from showings for the reasons above.  I got away with it because the price on each of the homes and their locations were so compelling that the buyers would beat a path to my door with or without their RealtorSuch is the power of MY marketing (I’m tooting my own horn here).

A higher commission will get the seller a better sales price, true or false?

True.

I did a whole blog post on why a higher commission will get a better price, but here it is in a nutshell:

Every real estate agent who has a buyer with even a passing interest in the house will show the house.  In other words, anytime anyone is showing that type of property, no matter how many others are on the market or how much competition you have, your home WILL be on the list to get shown every single time because it pays the best.

A higher commission keeps the deal together because it’s just not a deal a real estate agent can afford to let go.  In other words, real estate agents will go out of their way to make sure the buyer and seller come together, and stay together, on a deal.

And, lastly, a higher commission incentivizes the seller.  In other words, the seller has skin in the game.  He or she is paying a higher rate, so they need to get the maximum price out of the house.  In order to make sure this happens they will make the repairs that need to be made, and if buyer feedback is negative they will address it.  The result is a home that shows extremely well, gets shown a lot, and thus gets a quicker offer in less market time.  And because the home is not on the market very long, and because there is strong interest from other buyers, the buyers making the offer can’t beat the seller up on price.

Just understand, commission–high or low– has no effect if the house isn’t priced correctly.  Because the buyers will have no interest.  And if the buyers have no interest, no amount of coaxing from an agent will get them into the home.   

If you are a real estate agent and have ever had another real estate agent threaten you about a commission on one of your homes, I’d love to hear about it.  Please email me at Sean@StAugTeam.com. Put “Commission Threat” in the subject line.  Thanks for reading!