3 Reasons Percentage Commissions Are Nuts

Percentage based commissions make no sense (and everybody knows it).  Really. 

Reason one:  Um . . . ‘Scuse me?

The Green’s house sells in 94 days  for $255,000.  They pay a 6% commission to ABC Realty:  $15,300. (Mrs. Green turns to her husband in the car on the way home from closing and says, ‘Remind me again, honey – what did we get for our $15,000?’)

The Browns house, 3 blocks away, is also sold by ABC in 85 days at a 6% commission.  But it’s a bigger house and brings $315,000.  They pay $18,900.  Bill Green and Bob Brown are golfing buddies and compare notes.  Bill Brown tees up wondering, ‘I wonder what I got for the extra $2,600 I paid?  Did I get $2,600 more advertising?  I don’t think so.  Did my agent work $2,600 harder for me?  No.  Hmmm. . . what’s up with that?’ 

Reason two:  One size does not fit all. 

As it turns out Green’s house was listed by ABC but sold by XYZ.  He paid 6% but it was shared among two brokers and two agents.   Brown on the other hand heard about a co-worker transferring in from out of town and put his agent in touch with the new arrival, who bought the house.  He found his own buyer and only needed to pay one broker and one agent.  But he paid the same 6%.  If you don’t think this bugs him (big time), you’re wrong.

Reason three:  But Captain, it is not logical.

Bill Green owns a hardware store.   Hammers are among the many items he sells.  He buys his basic hammer from a distributor who gets them in Korea.  He pays $2,25 for each one and has learned that they will last about six days on his shelves before being sold.  He prices these hammers at $4.98, which is enough to pay each hammer’s share of his cost of operation during their time on the shelf, and deliver a nice profit to the bottom line:  $.50.  Bill belongs to the local business association and he knows almost every other member has some similar pricing formula . . . except ABC.

The broker’s pricing seems arbitrary, plucked from air, as if selling real estate is a big mysterious process nobody can really understand.  He doesn’t buy it.  He knows a properly priced home in his area will take about 90 days to sell, give or take a little.  He learned from his agent that the office usually carries about 40 listings at a time.  He knows his broker has a marketing budget (or thinkshe does) and it should not vary much month to month.  With this information the broker at ABC ought to know what it will cost him to sell a typical house in his market.  Why doesn’t he just take that figure, even inflate it a bit, and then add a reasonable profit on top?  That’s what any other business person would do.  Hmmmm. . .

I could keep going.  There’s the seller who, through some stroke of good fortune gets a sale in 5 days instead of 95:  why does ABC still charge him  6% ?  There’s the former FSBO who is ready, willing and able to do much  the leg work in the sale:  open houses, showing the property, keeping the flyer box full.  What he needs help with is marketing,  negotiating and processing the sale.  But he still pays 6% if he lists with ABC.  And there’s the seller in the gated community who won’t allow a lock box, doesn’t want a sign and insists the listing agent be present every time the home is shown.  Seems like ABC ought to charge that guy more.

The point is, commission based pricing makes no sense at all.  The consumer knows this.  He thinks about it.  It burns inside him every time he  lists and sells.  He’s desperate to find a better way next time . . . but most never discover an acceptable alternative.  Oh, they could go FSBO, and get nothin’ fer nothin‘ .  Or they could use a discount broker and get, well, less for less.   But some sellers — the lucky ones, I’d say — are going to hear about Help-U-Sell and they’re going to get on the phone and say, ‘I hear you guys are different.  Tell me what you do . . . ‘

And that leads to a whole new conversation.

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