Ordinary Test Explanation

It struck me that providing a rationale for each of the ten questions in the previous post would make sense.  I mean:  Ordinary brokers and agents may not even understand the significance of the questions much less why they might be an indicator of ordinariness.  So, here is the background for each question (If you haven’t read the original post, it would make sense to do so before continuing):

1.  Do you charge home sellers a percentage based commission? I’m sure you’re doing it because you’ve never questioned whether it made any sense or not. I assure you it does not.  If you need convincing, start HERE.

There is no relation between the time, money and effort it takes to sell a home and a percentage of the sale price as sales commission.  It’s a complete disconnect that nobody in the industry can explain logically. Rather than pound away at it again, if you need to learn why that approach is so off-track, just follow the link (‘HERE’) above.

2.  Do your sellers pay the full percentage based commission specified in the listing agreement even if there is no outside selling broker or agent to pay?

One of the organizing principals of the real estate business is that people need representation.  Buyers need a knowledgeable expert to look out for their interests in a transactions just as sellers do.  So the real estate sales commission – usually, but not always paid by the seller – is designed to be split between the broker representing the seller and the broker representing the buyer.  Since most brokers hire agents to represent them, those agents also have to be compensated.  So that big percentage based sales commission is actually designed to compensate four people:  the listing broker, listing agent, selling broker and selling agent.  Fine.  Let’s do an example:  

Mary has a $350,000 house and lists it with Acme Realty,* agreeing to pay a 6%* sales commission when it sells.  That’s $18,000!  For simplicity’s sake, let’s assume that all splitting of commissions in this example will be done on a 50/50 basis:  the two offices will split the commission 50/50 and they each will split their portion 50/50 with their respective agents . . . which is rather laughable, because it happens so rarely today.  In today’s real estate universe, most agents are getting 65% -70% of their office’s portion of the commission, sometimes even more.  But back to the example.  We break down Mary’s $18,000 commission as follows:

$4,500 for the Listing Office

$4,500 for the Listing Agent

$4,500 for the Selling Office

$4,500 for the Selling Agent

Now, what happens if the Listing Agent finds the buyer?  We’re not having to pay a Selling Office or Selling Agent, right?  Does Mary get to keep the $9,000 that was designated for them?  

Ok, ok, I know:  the Listing Agent is doing two jobs here, that of the Listing Agent and that of the Selling Agent, so they should get paid twice, right?  And what about the Listing Office?  They had marketing expenses on the Listing Side and have to pay for all kinds of systems to enable agents in the office to find and work with buyers, so they should be compensated twice, too, right?  I won’t split that hair. Having been in the Ordinary business for years I will admit that there is a little more effort for a listing agent who finds his or her own buyer and a little more strain on office resources . . . . but it’s a little more, not $9,000 more.  The in-house sale is a windfall for agents and brokers at the expense of home sellers, so much so that in the biz we call it ‘Double-Dipping.’  

3.  Do you allow your sellers to actively seek their own buyer if they choose?  And if they are successful, do they pay less?

We are connected people.  You have friends, family, neighbors, co-workers, acquaintances.   And there is a chance that any one of those people – or someone they know – may be the best buyer for your house.   But when you list with Acme, are you encouraged to spread the word to your personal network?  And if you do and are successful in finding your own buyer – not only eliminating the Selling Broker and Selling Agent, but also eliminating the marketing function from Listing Brokers list of duties –  is there a corresponding reduction in the sales commission you pay?  Wouldn’t it make sense if there was?  I’m just sayin’ . . . 

4.  Does your office management team spend the bulk of its time recruiting new agents and training unsuccessful agents?

This is symptomatic of a real estate office and broker with the accent on the wrong syllable.  They are in the recruiting business, not the real estate business.   This is a broker who believes hiring agents is the key to profitability . . . and almost any agent will do.

Listen:  most people who get a real estate license and join an office don’t make it.  Most are gone in a couple of years.  But everyone who gets a license has friends, family and neighbors who might do business with them before they crash and burn and leave the business.  The Ordinary broker builds his or her business on this principal, using the personal relationships of recruited agents to expand the office’s reach to consumers.  

The extraordinary broker, on the other hand, uses carefully orchestrated marketing and finely tuned office systems to expand his or her business and enhance profitability.  Agents are very important, but they are there to help the broker take care of the business the broker has created, not to create business for the broker (although, that naturally happens).  

Can you see the difference?  The Ordinary broker, running a body shop, really doesn’t care whether the new recruit becomes an outstanding agent or not.  Oh, they’d like everyone to be successful and make them a ton of money, but they know that’s not going to happen.  What’s really important is that they get 5 or 6 deals out of those failing recruits before they move on.  

On the other hand, the extraordinary broker’s business lives and dies based on how well his agents take care of the buyers and sellers the he has worked so hard to secure.  There is no room for non-producers, for those who lose leads and fumble repeatedly.  Bumping along at 6 deals a year is unacceptable. 

5.  Does your office incentivize agents to help in recruiting?

All this means is that the number one priority in the office is to add more agents.  See the explanation in #2 above – it is the same. 

6.  Are agents in your office responsible for doing their own marketing and generating their own leads?

In the ’70s and ’80s, when brokers took the accent off marketing and lead generation and put it on recruiting they found the only real tool they had to attract agents was commission split.  This made sense then as it does now:  when everyone has the same operating system and the same tools, all that’s left to distinguish one company from another is commission split and personality.  From that time forward, agent commission splits have risen and risen to ridiculous levels.  Even non-productive agents are often paid stratospheric splits.  With more of each commission dollar going to the agents, brokers had less to spend on marketing.  Most simply quit marketing homes – that became the responsibility of the agents.  Instead, many brokers shifted their own marketing efforts to recruiting and retention programs.  They were marketing to attract new agents and to cause the ones they already had to stick around.

The reason this question is on the list is that the situation is symptomatic of an office that’s gotten out of the real estate business and into the recruiting business.

7.  Are  the mediocre agents in your office – ones doing, say, 8 deals a year or fewer – on  commission splits greater than 50%?

According to NAR, the average REALTOR in 2012 grossed $34,900.  That’s a little less than $17 an hour before taxes, insurance, business expenses and so on (assuming a 40 hour work week).  That will most likely be less than 10 closed transaction sides . . . and will often result in the agent getting some kind of plaque.  In fact, ‘Million Dollar Club’ agents – those who sell $1Million worth of real estate will gross something less than $20,000.  This is not only acceptable to most ordinary brokers, it is often celebrated, rewarded, fussed over.  If the non-producers in your office are being paid more than 50% all it says is that your broker is begging people to come to work for the company, even non-productive people.

Here’s a great truth from nature:  eagles don’t flock with turkeys.  If you are not one of  the living dead occupying space in your Ordinary office, get out!  Now!  And then do something extraordinary:  take a look at becoming a Help-U-Sell set fee broker or a buyer’s agent in a Help-U-Sell office.  

8.  Have you changed offices in the last 2 years?

Many years ago, I spent some time as Director of Recruiting at Century 21’s International Headquarters  (Can you imagine that?? Me???!  That was before I saw the light!).  We tracked all kinds of things related to agents and offices.  One of those things was turnover.  Generally speaking, every office turned completely over every three years.  I know:  the visual of that office turning over is funny.  But the stat isn’t.  It means if you take a photo of your office staff during sales meeting today, and put it away for three years and then look at it . . . .most of the people in the picture will no long be with the office.  Yes there are exceptions, but the fact is, agents in general have become obsessed with commission split, and office jumping to attain a higher number is regular as rain.  And what does this behavior say about the function of the office and the broker?  It says those things are irrelevant.  Unimportant.  A necessary evil.  If you are caught in this office-jumping cycle, consider the notion that a capable broker can greatly enhance your career.  If the broker’s business is to generate leads that you convert to sales, you’ll do more, make more and have more fun.  Of course, your split will be lower, because your broker will be spending serious money on marketing, but your career will be so much better you’ll finally stay put!  

9.  Do you put all of your listings in the MLS?

The MLS is great!  It’s a wonderful marketing tool!  Trouble is:  it’s expensive.  A seller going into the MLS has to be prepared to compensate not just the listing office and agent, but also the outside office and agent representing the buyer.  In many situations it’s worth the expense, but not in all situations.  

In fact, in most normal markets (not depressed or under-performing) , a properly priced listing will sell in a reasonable time with or without the MLS.  So why add the additional expense to the seller’s HUD-1 if you don’t have to?  If you could get the job done without costly outside help and thus save the seller serious money, why wouldn’t you?  I know:  your MLS probably has a rule that says you have to put all listings in, but that just means your seller has to sign a waiver if they’re not going into the MLS.  

Of course, if you hold your best, most marketable listings out of the MLS, passing the savings on to your sellers, your fellow agents are going to hate you.  You will be taking a little of their cheese away and giving it to your sellers.  But who are you supposed to be taking care of in your real estate career?  Your listed seller or the agent who works in the office down the street who secretly wishes you’d move to Tierra Del Fuego?

10.  Does your office own or have an interest in ancillary services (termite, title, escrow, mortgage, etc), and does your management team pressure you to pressure your clients to use those services?

I remember working with Ordinary brokers in the ’90s.  The big issue – other than recruiting, of course – was profitability.  You see, there was none.  By then, agents were demanding such high splits that even good, productive offices were making no money.  I remember going to a meeting of brokers in California.  Their discussion of profit was honest.  The consensus was that it was impossible to make a real profit in real estate, that the smart thing to do was to use the real estate office to drive business to your ancillary services.  Make your money on title, escrow, insurance, and so on.  Sad.

Really:  don’t you think that, if your business can’t make a real profit that maybe there’s a problem with your business model?  I mean, if you were selling hammers that cost you $2.00 for $3.00 and paying the salesperson 50% commission, you’d know what to do.  Why is that so hard in real estate?  

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