Category: Management

How to Fix Your Broken Real Estate Company (before it’s too late)

Mr. Richard Feder from Fort Lee, New Jersey writes:

‘Dear Set Fee Blog.  I have been reading your posts for some time and am convinced that my current real estate company business model – what you call ‘Ordinary’ – is antiquated, out-of-touch with consumers, and, well . . . it sucks.  But I don’t know how to go about changing it without firing all of my agents, shutting the doors and starting over.  Help me, please.  Tell me how to go about abandoning the tired old agent-oriented model and converting to a shiny new consumer-centric,  set-fee model.’

Dear Mr. Feder.  Thanks for writing and, believe me, you are not alone.  I am considering starting a 12 step program for Ordinary Brokers and I’m sure the meetings would fill fast.

But first, let’s understand that the kind of change you’re talking about is HUGE.  It’s not just a simple matter of altering how you charge consumers or how you offer your menu of services.  Even a well-studied outsider would probably screw it up without expert coaching.

I am a good example.  I came to Help-U-Sell in 2004 as an outsider, hired to do a job:  upgrade the company’s University.  It took three months before I had all of my old paradigms out of the way and could see Help-U-Sell for what it really is:  a bold new way to deliver excellent service to consumers while making a healthy profit in real estate.  You have to question all of your assumptions, all of your beliefs about how the business works.  And you have to change from the core outward.  ‘ Sell Fast – Save Thousands’ is just the outward expression of a ton of tweaking behind the scenes. Nonetheless, here is what I suggest:

Start carefully monitoring the lead flow in your office.  Where are the leads coming from?  What (and who) is generating them?  What portion of the incoming leads are coming from company sources as opposed to agent sources?  You want to consider this to know how much business your company is likely to do in the event all of your agents pack up and leave; which is a possibility if you go through with the change.

By the way, ‘carefully monitoring the lead flow’ means to monitor it like it’s never been monitored before.  You want to get source information on every single inquiry, whether contact information is gotten or not.  You want to know why everyone, even the caller who was a nutcase or the one who simply hung up, called your office.

I don’t think you can realistically expect your current staff, and certainly not your current agents to do this.  My suggestion:  hire someone (or convert your best office admin) to handle ALL phone and Internet inquiries.  One person through whom all incoming traffic is routed.  This person collects source information, handles the inquiry, collects contact information and then turns the lead over to you for assignment to the appropriate agent.  By the way, if yours is a big office, you probably need more than one person doing this important function.

Try to maintain your sense of humor as you review the data your new call coordinators are collecting.  You’ll probably discover that many of your agents, in fact, most of them, have been living off leads YOU generated.  You’ve been paying them huge splits to generate their own leads, do their own marketing and so on . . . but it has been YOUR marketing, your investment in signs, facilities, web presence, and advertising that has been causing consumers to contact the office.  Surprise, surprise!  It’s time to wake up now.

As an aside, I once did a modified version of this exercise with an Ordinary broker who had a ‘Top Producer’ who did about 30% of the office’s production.  The broker spent most of his days living in fear that the agent would leave.  When we did the analysis we discovered that more than half of that agent’s production came from office-generated leads.  Then we put a pencil to the company dollar she generated (after the huge split she was paid), deducted a factor for what it cost to produce those company-generated leads and discovered that the broker was probably losing money every time TP closed a deal!  He was making more from some of his less productive people.  He said goodbye to TP then watched as everybody became more productive and his bottom-line improved.

Start calculating what it actually costs you to market a properly priced listing.  Don’t consider what you have to pay a listing agent.  We’re only looking at hard costs here:  how much marketing, how many days of office operation and so on.  Be aware that whatever number you get today may be different tomorrow.  Cost to market a listing varies in direct proportion to days on market.  If your marketplace slows and DOM goes up, so will your cost to market a listing . . . so take your figure and add a ‘fudge’ factor – say 25%.

Now consider:  is there a way to effectively accomplish the successful marketing of a listing without paying an agent 70% or more?  This involves carefully examining what a listing agent actually does.  We could go through the whole laundry list here and then we could demonstrate how almost all of it could be done much less expensively . . . but instead, let’s just acknowledge a fact you already know to be true in you gut:  You’re paying that agent 70% NOT to sell the listing, but to GET the listing.    It’s the damndest thing!  Today, we pay listing agents at closing not for getting the listing sold – listings, properly priced and plugged into an effective marketing program pretty much sell themselves – but instead as a reward for bringing business into the company.  In other words:  for getting the listing.

Now your task is becoming clear.  You must create marketing and administrative systems for standardizing the marketing of your inventory.  You have to take marketing BACK from your agents.  You need to design it, orchestrate it, hire the admin staff to get it done.  Marketing has to transition from being idiosyncratic – created willy-nilly but a pack of individual agents who have widely different ideas about marketing – to being automatic . . . standardized, monitored, controlled and adjusted by you.  In your new universe you’ll be plugging your listings into your already operating marketing system, not designing a whole new marketing program for every listing you take.  Its a very big shift.

Then you have to take BACK the ‘getting’ of  listings from your agents.  You and your team of assistants now need to be in charge of this inventory procurement function.  I am aware that the faint of heart, having read this far, are now shutting down their computers. Oppressed by their own paradigms, they cannot envision a world in which listing inventory is secured without agents.  But I assure you it can be.  It starts with an examination of your seller offer:  what do you have to offer that is, far and away, better and different than most of your competitors.  If – like most real estate brokers – your offer is identical to every other broker’s, you have a problem.  You’re going to have to refine who you are and what you have to offer until you stand out from the crowd and are thus, easy to spot by consumers.  Then you must market that offer.

Once your offer to sellers is fine tuned and really different, you will discover that it is much easier to present.  Your listing consultation will look something like this:

  • Tell me everything I need to know about your move
  • This is who we are and how we work
  • This is what makes us special and different
  • Here is what our past clients say about us
  • This is how much we can realistically sell your house for and what you’ll likely net
  • Sign here

If you take out all of the fluff and show-biz most listing agents trot out during their presentations, this can be accomplished in, oh, 30 minutes of less.  When you have a better deal to present, you don’t need the smoke and mirrors, the fluff and show-biz to get the listing.

Up until now, most of this could be done in stealth mode.  You could do your research and preparation without telling your agents.  But now that all the ducks are in a row, everything is lined up and ready to go, it’s time to call a special meeting.

Present the state of the company – get right down to profitability.  I don’t know what yours is, but if you’re like most Ordinary brokers your company is making less than 5% profit – which is obscene considering the risk owning a real estate company involves.  Get their buy-in that that’s a pitiful bottom line for a fine real estate company like yours.

Then present your solution:  you are going to become a lead generating machine, which means taking back marketing and investing in it heavily.  They will like that.  But, you’re also going to take back the listing function.  You will no longer need agents to find consumers – you’ll be doing that with marketing.  What you will need agents for is handling the buyer leads your marketing and your listings generate.  You anticipate that a good buyers agent in this new company you are building should close in the neighborhood of 20 transactions this year – all basically fed to them by the company marketing program.   You may now invite all who are not interested in this opportunity (which will be most) to leave.  Now, interview the ones who are left.  Since you will be shouldering the financial burden for lead generation, who on your remaining staff would you trust with the important task of converting them to sales – for a much more reasonable 50% split.

At the end of the day, your office population may have dropped from, oh, 50 agents and 3 admins/assistants to 5 agents and 4 admins/assistants.  You can now begin to look for smaller, less expensive space.

By the way, all through this process, it’s a good idea to contact Ron McCoy at Help-U-Sell for advice and to begin a conversation about becoming part of the family.  The Brand will help you through the transition and position you properly for maximum impact in your marketplace.

As you start to walk down this new path, you will begin to feel as if you are waking up from a very long nap.  Real estate will look new and it will be exciting again. You will be filled, even driven by a new sense of purpose:  the mission.  You’ll work harder and have more fun than you have in years.  And, in six to nine months, your personal bottom line should be way ahead of where it is today.

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?  

Are You Ordinary?

Well, the nasty-gramms have already started to roll in. If you are Help-U-Sell you know this comes with the territory: we scare the be-jabbers out of ordinary REALTORS so they tend to hurl Molotovs when we make ourselves heard.

My last post – the one about building a landing page for Sellers – contained some blunt but honest words about ordinary REALTORS. I named a handful of national brands, lumped them all together and said they were ordinary and that there was not one whit of difference in their consumer-side operating systems. There may be some behind the scenes areas of differentiation, most frequently in the way agents are paid and how they are encouraged to help the broker recruit, but the consumer doesn’t see that and doesn’t care about it. The consumer experience is identical whether you are Keller-Williams, Coldwell Banker or Exit. And trust me: that is not a good thing.

So I had a couple of people tell me I don’t know what I’m talking about because their brand is anything but ordinary! I had an old friend from my Century 21 days tell me I’d probably never work in the legitimate real estate business again. Now that’s a hoot, isn’t it? Because in that pronouncement he labelled the Brand I love, which is the one viable alternative to the tired agent-oriented real estate business model (Help-U-Sell), ‘Illegitimate.’ I think I’d rather be illegitimate than extinct, wouldn’t you?

I think it’s time you put your own real estate career to the test. All of you. It’s a simple set of 10 yes/no questions. If you answer ‘yes’ to more than 3 of them, then, no doubt about it, you are ORDINARY – and therefore headed for extinction sometime in the next decade. Ready? Let’s Go!

  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.
  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?
  3. Do you allow your sellers to actively seek their own buyers if they choose?  And if they are successful, do they pay less?
  4. Does your office management team spend the bulk of its time recruiting new agents and training unsuccessful agents?
  5. Does your office incentivize agents to help in recruiting?
  6. Are agents in your office responsible for doing their own marketing and generating their own leads?
  7. Are  the mediocre agents in your office – ones doing, say, 8 deals a year or fewer – on  commission splits greater than 50%?
  8. Have you changed offices in the last 2 years?
  9. Do you put all of your listings in the MLS?
  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?

Seriously:  3 yeses and your REALTOR DNA is probably so twisted you may never recover.  The only hope would be if Don Taylor – the founder of Help-U-Sell – were to open up a Betty Ford type clinic for recovering 6%ers . . . and I’m sorry, but he has his eye on other prizes.

So, what do you do if you do get more than 3 yeses and have to admit that you are, in fact, ordinary?  Here’s an idea:

  1. Take your gross income from last year.  Go ahead, take it right off the 1099
  2. Divide that by 52.  It’s ok to use a calculator for this and subsequent steps
  3. Now estimate how many hours you put into your real estate career in a typical week
  4. Divide the Dollars (the answer you got when you did the division in step 2) by the hours (step 3)
  5. That’s how much you made per hour last year in real estate . . . Gross, before taxes, insurance, business expenses, and so on
  6. Now compare that with minimum wage, or with starting pay in any salaried job for which you might qualify
  7. There’s no easy way to say this . . .  if the hourly wage is higher than what you grossed per hour last year, get out of the real estate business

Finally, I also got taken to task for ‘hating real estate agents.’  I’m sorry:  that’s just WRONG.  I love good real estate agents.  I think they are more than essential.  I think they are heroes.  What I can’t stand are mediocre real estate agents who continue to bump along, almost failing year after year.  They deliver inferior service, drag the image of the entire industry down, and sap business from good agents who could serve those buyers and sellers so much better.

What is a Sales Commission?

Sales commissions are so common in business that I sometimes wonder if we haven’t forgotten what they are all about.

While there are several ways to compute a sales commission – paid as a percentage of gross or of profit, paid on revenue over an agreed level, paid as a set fee per unit and so on – most are calculated on a percentage basis. The historical background on this goes back to the time when the maker of a thing wanted to focus on the making and get someone else to take the burden of developing a customer base and selling the thing.

Because the salesperson did not have a vested interest in the product or the company – he or she was just ‘the help’ – sales commissions were used as a motivational tool: the more you sell, the more you make. Some organizations took this idea to the max, graduating their commission scale upwards as a salesperson’s production increased. Others, fearing that good salespeople might make more than CEOs, put a cap on commissions (and usually drove their best salespeople away in the process).

The situation in real estate is a little squirrely. Technically, you pay your real estate BROKER (not agent) a commission when your home sells. Usually it is a percent of the sales price (which, of course, makes no sense at all), and it is intended to motivate your broker to work hard securing you the best possible offer on your property. But, in reality, most sellers never meet their broker. The person they deal with is an agent who works for the broker. The broker pays the agent a ‘split’ of the commission the seller pays the broker, and uses the ‘split’ as a means of motivating the agent.

That’s the way it’s been for decades.

But this is 2013. Home selling has changed:

  • It no longer takes an arm and a leg to sell a properly priced listing. The Internet has made powerful marketing affordable, even cheap.
  • The mystery of getting a house sold has evaporated as consumers have gained access to information previously held from them and systems have replaced personalities in the selling process.
  • As a result, the real estate superhero salesperson has lost his/her battle with Kryptonite. There really is no magic in the home selling process anymore. It’s pretty much: price it right, plug it into a marketing system that produces results and negotiate a good deal.
  • The value of an agent today has more to do with negotiating that good deal, looking out for his or her client’s interests (representation), transaction processing and problem resolution as the sale progresses to closing. It’s not so much about ‘selling.’

What I question is why we are paying our brokers a commission?  A commission is something you use to MOTIVATE a salesperson.  The broker today is NOT a salesperson.  In most ordinary real estate offices s/he is a glorified admin – supporting the efforts of his or her salespeople and keeping the office infrastructure working.  The ordinary broker today is someone we should be paying a FEE to, not a commission.  A FEE is something you pay a professional for handling a specialized task:  you pay an attorney a FEE, you pay an accountant a FEE, why not your real estate broker?

If there is a true salesperson in this equation it is the real estate salesperson, who works for the broker . . . but s/he is not a salesperson in the way you are probably thinking.  You’re probably thinking, ‘Yes!  It’s that salesperson who is going to sell my house, not the broker!’  But we’ve already established that you don’t really ‘sell’ homes; homes sell when they are priced properly and plugged into an effective marketing program.  The salesperson in an ordinary real estate company sells something other than homes.  What they sell is the services of the broker to consumers.  The broker hires salespeople not because s/he needs someone who knows how to sell a house, but because s/he needs someone to convince new sellers and buyers to do business with the company.

Seem like a muddled mess?  It is.  We have an antiquated business model at the heart of every ordinary real estate company.  They keep trying to dress it up as ‘new!’ but, as we used to say down South, ‘you can put lipstick on that pig, but it’ll still just be a pig.’

There is another, newer way to do business that makes sense, is completely effective and costs less.  It is Help-U-Sell, where you pay a broker a Set FEE to sell your home.  Because selling a properly priced home is not rocket science, the broker and his or her support staff and office systems ‘sell’ your home.  You’re not paying a bloated percentage based commission so that the broker can then turn around and compensate a salesperson NOT for selling the house but for bringing in new business to the company.  That merry-go-round you’ve been riding all these years is in a gazebo lined with fun-house mirrors:  the distortion and dizziness are numbing.  Get off now, regain your footing and return to logic.  Call Help-U-Sell and ask, ‘How do you guys work?’  You’ll probably be delighted with the answer.

NOTE: I keep talking about ORDINARY brokers and ORDINARY real estate companies. I realize it would be easy for almost any broker or agent with any company to imply that I couldn’t possibly be talking about THEM because they really are different. So let me clarify: probably more than 90% of the real estate offices operating in The United States today are ORDINARY. They are offices where the broker’s number one job is NOT selling real estate, but rather recruiting agents. They are offices that put the agent at the center, developing endless programs to aid salespeople, not consumers. They are offices that charge consumers a lofty percentage based commission not because there is a relationship between the commission and getting the home sold, but rather because they need all of that cash to pay the salespeople the huge ‘splits’ required to keep them. It’s all about accents. Ordinary Office = accent on the agent. Extraordinary Office = accent on the consumer (And there is no better way to put the accent on the consumer than to charge a logical low set fee for the service involved in selling a home).

Real Estate Sales Commissions Revisited

Most traditional real estate brokers – what I like to call ‘ordinary’ brokers – charge a percentage of a property’s sale price as commission.  It’s been that way for  . . . well, for as long as anyone can remember.  It’s what we do because . . . it’s just what we do.  To question it would be like questioning why we eat three meals a day or why we go to bed at night.  So, while percentage based commissions irritate real estate consumers to no end, they are rarely challenged.   Here at the Set Fee Blog, we challenge them every day.  We believe the future of real estate will be better for consumers who will pay a logical (lower) set fee to market their property.

Let’s take a breath here in the Spring of 2013 to, once again, chip away at that tired old percentage based paradigm.  Let’s take a look at why percentage based real estate commissions make no sense.*

REASON ONE:  Percentage based commissions are arbitrary

In my examples I am using 5%.  But why?  What does 5% of the sale price have to do with what it takes to get the property sold?  What does it have to do with effective representation of the seller’s interest and the effectiveness of processing the sale?  Nothing.  It’s just a number I pulled out of the air, remember?  And that’s how ordinary brokers set their commission rates:  they usually just pull them out of air.  There is no connection between the fee charged and the level of effort and resources it will take to sell the property.  

From an ordinary broker’s perspective, the arbitrary percentage based commission is full of possibilities!  Because it is a percent of the sale price, the amount of dollars collected in commission goes up as more and more expensive property sells!  A typical strategy for an ordinary broker who wants to improve his/her bottom line is to target ever more expensive property . . . because 5% of $500,000 is a heck of a lot more than 5% of $300,000 . . . and, honestly?  It usually takes no more time, effort, energy or money to market a $500,000 home than a $300,000 home. Yea!  Let’s hear it for arbitrary commission rates!

REASON TWO:  Percentage based commissions are inequitable

Let’s assume you want to sell your $300,000 house.  It’s a nice big 4 bedroom with 2,200 square feet of living space.  You decide to list with a fictitious company, Hypothetical Realty, and agree to pay their 5% commission when the property sells.  That’s $15,000 (Gulp!).

 (Wait a minute . . . I’m having trouble catching my breath . . . I’m thinking about YOU in your $300,000 house.  If you are a typical $300,000 house homeowner, you might earn in the neighborhood of $80,000 a year.  That means YOU, the owner of this house has to work about 2 1/2 months to pay your real estate commission!  Really:  take your paychecks for January, February and half of March and give them to your real estate broker because that’s what it’s going to cost to sell your house! )

Now, when your neighbor sees the For Sale sign in your yard, he starts to thinking . . . ‘maybe this is a good time for ME to sell.’  So he calls up Hypothetical Realty, has them over for a chat and agrees to pay their 5% commission, too.  But his house is smaller: it’s just 3 bedrooms and 1,800 square feet.  Price: $240,000.  If it sells for full price, the commission will be $12,000.

Wait a minute!  You’re paying $15,000 for the same service delivered by the same company that your neighbor is paying just $12,000 for!?! WHY?? Where is the logic in that?? Are you paying $3,000 more because it will take that much more advertising to get the job done? (Hardly)  Are you paying $3,000 more for a better For Sale sign??  Oh, I know: you’re paying $3,000 more because your agent is going to work $3,000 harder, right?  WRONG!  There is absolutely no reason why you’re paying $3,000 more than your neighbor other than this:  you’ve been conditioned from the moment you had your first real estate transaction to accept without question the notion that real estate commissions should be a percentage of the sale price.

Usually it takes no more time, energy effort or money to sell a $300,000 house than a $250,000 house in the same neighborhood.  So why aren’t they paying the same thing?  I really have no explanation.  I think, next time you talk with Hypothetical Realty, you might want to ask them.

REASON THREE:  Percentage based commissions are inflexible

Ok.  You listed with Hypothetical, remember?  They are selling your $300,000 house and charging 5%.  The reason the fee is so high is that in all likelihood there will be TWO real estate companies involved in the transaction – yours (the listing company), and a different company who comes in with the buyer. Both companies will need to be paid.  And, of course, each of those companies will be represented by an agent who needs to be paid, too.   So that 5% you agreed to pay is not just one commission, it’s four:  one for the listing company, one for the listing agent, one for the selling company and one for the selling agent.  Ok, maybe there is some logic in this lofty commission stuff after all! There are a lot of people who have to get paid!

But wait:  what if your listing company finds the buyer?  What if there is no outside broker involved?  Do you still have to pay all four commissions?  Yep.  That’s what you agreed to when you signed the listing agreement.  So what does the listing broker do with the extra cash he got to keep?  Well in other industries it’s called overage or breakage . . . and it’s one of the keys to pocketability . . oops, I mean profitability.

Or, how about this sad tale: you list your home with Hypothetical on Friday and on Monday you meet the new person transferring into your company from out of state.  They hear about your house, fall in love with it and want to buy it.  You call up your agent to write it up.  Now YOU found the buyer, right?  Are you still going to have to pay all four commissions?  Yep.  That’s what you agreed to when you signed the listing agreement.

You see, there is no connection between what it takes to make the sale and what you’ll pay.  It is a completely inflexible, one-size-fits-all system that, I’m sure you agree, makes no sense.

I could go on, but I think three reasons why percentage real estate commissions make no sense is enough.  It’s important that you know that it doesn’t have to be this way.  There are alternatives out there, though they can be hard to find.  One I know and believe in is Help-U-Sell.  They charge a logical Set Fee to sell your house.  It’s just a wild guess on my part, but that $300,000 house?  The one Hypothetical was going to charge 5% or $15,000 to sell?  Help-U-Sell Theoretical Realty (a fictitious company operating in the same fictitious neighborhood) might charge something like $3,950 to sell it.  Oh, and they’d charge your neighbor with the $250,000 house the same $3,950.

Now I want to be completely clear about this.  That $3,950 is this particular Help-U-Sell office’s Set Fee.  It covers the consultation and advice you’ll be getting, the marketing of the home, the negotiation, representation and transaction processing you’d expect from any Full Service real estate broker.  

What it does not include is any commission for an outside broker or agent.  You don’t have to offer it for sale through outside agents, and in some hot markets, that might be advisable.  I mean if you can sell without paying extra people, why do it, right?  However, most sellers opt to go into the local MLS which means agreeing to pay outside brokers and agents a fee if they bring in the buyer.  So you’ll be adding their fee to your Help-U-Sell $3,950 in the event that’s how the sale is made.  How much would it be?  For your $300,000 house, you might offer between $6,000 and $9,000 to compete for an outside broker or agent’s attention, but the amount you offer is entirely up to you.  

And here’s the best part:  suppose you do want to offer your home for sale through outside brokers as well, you go into the MLS and you offer to pay an additional, say, $7,500 to an outside broker should they find the buyer . . . but then, you go to your office and, as in the example above, you find your own buyer.  What do you pay?  Just the Help-U-Sell Set Fee, $3,950.  You see, with Help-U-Sell, you pay a fee based on how your home actually sells – with or without outside broker help – not based on an arbitrary percentage based commission that was intended to compensate four different entities.

*In this Blog post, I will be using examples of percentage based commissions.  For convenience sake, I’m going to use 5% as the commission rate.  It is a number I plucked from air and is in fact a rather unusual number in today’s real estate universe:  most charge more.  It is important to remember that real estate commissions, whether percentage based or set fee, are fully negotiable between the broker and the consumer.  There is no ‘going rate,’ and each situation is (theoretically) handled differently.  Brokers set commission rates for their individual offices and if rates are negotiated, they are done so only with the broker’s approval.  Price fixing occurs when two or more brokers get together and agree to charge the same thing.  That is a highly illegal activity.  At Help-U-Sell, different offices charge different set fees for a very logical reason:  the cost of carrying a listing varies from location to location as does the number of days it takes to get a listing sold.  

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