Category: The Industry

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.  

Why the Current Percentage Based Commission Structure in Real Estate is Good for Consumers

Tomorrow, Help-U-Sell Broker, Dan Desmond, will be ‘debating’ the merits of the Set Fee Business Model vs. those of the traditional percentage based model with an industry veteren, Scott Einbinder. Dan will do just fine. He has dozens of comparative gems that illustrate the superiority of the Set Fee model over percentage commissions.

But I keep trying to think like the other guys. I wonder what they’ll say are the consumer benefits of a seller paying, say, 6% to sell their $300,000 home ($18,000) versus a set fee of, say, $4,950? Here’s all I could come up with:

The lofty percentage based commission is better for consumers because there is so much money in the transaction for real estate people that they will crawl all over one another to make the sale! AND it’s good for consumers because there is enough money in the transaction for the brokers to pay their salespeople ridiculously high commission splits and still have enough left over to pay the electric bill!

In fact, there is so much sales commission in real estate transactions that pay by percentage, that the industry has invented all kinds of new ways to ‘get the job done.’ How about this one:

I know of more than one company that has brought ‘Network Marketing’ (Read: MLM) to real estate. They pay bonuses to salespeople on the production of the people they bring into the company and the ones THEY bring into the company and the ones THEY bring into the company and so on. The models I’ve seen have agents earning bonuses SIX GENERATIONS down-line from the person who actually did the transaction. So the transaction agent gets paid . . . and so does the person who brought them in and, of course, the person who brought that person in, and so on and so forth until six people have shared that commission. It’s not only possible, it’s likely that the 4th, 5th and 6th generation winners won’t even know there is a transaction in the works! They may not even know the agent who actually did the deal! But they’ll still get paid because they did the one thing the traditional business holds as all important: they recruited!

What’s wrong with that? I mean, Donald Trump and Robert Kiyosaki have both endorsed Multi-Level Marketing (oops! I’m sorry, I mean: Network Marketing) as a great way to make a lot of money. What’s wrong with it is this:

If there is enough money in the transaction to pay six (or more) real estate people, most of whom had NOTHING to do with the transaction at all . . . . there’s too much money in the transaction for real estate people.

We have to remember why people get into the real estate business. Very few go to college to study real estate and prepare for a career in it. Most set out to do something else . . . that eventually goes wrong. Maybe, like me, they set out to teach but discovered several years later that teaching wouldn’t pay the bills. Maybe they were climbing someone’s corporate ladder and were suddenly laid off. Maybe they stayed home and raised the kids, who are now grown and independent. The point is this: most people come to real estate as a fall back (fall forward?) from a career shift. Why do they choose real estate? Anyone who’s bought or sold a house or two has a basic familiarity with the industry and how things work. Entry is relatively easy and cheap – you just have to pass a State test and pay a few fees. And there is potential to make big bucks. I mean, just look at the numbers! Sell a $400,000 house paying, say 5% commission . . . that’s $20,000 for just one deal! I know, I know, not all of that goes to the agent, but still, it’s a lot of money for selling one THING. You’d have to be selling industrial pumps or warehouse automation systems to make that much on a single sale anywhere else . . . and those jobs would probably require technical expertise that most don’t have!

So, when our chosen career shits and we need a plan B, we look to real estate because it’s easy to get in, it doesn’t cost a lot, and the money can be really good. In fact, it looks like ‘easy’ money. I assure you it’s not . . . but to a person looking for an income stream, real estate sales can appear relatively easy.

Unfortunately, most who get in quickly discover the truth: that it’s NOT easy, that they work more hours for less per hour than they what they left. It’s frustrating. And now here comes Help-U-Sell trying to charge sellers LESS for our service! Unthinkable!

I don’t want to give the impression that I am anti-real estate agent. I assure I am not. To me, the ones who are good are . . . heroes. I’ve worked with some who tirelessly wrangled angry dragon-like transactions into submission, day after day, deal after deal, and never stopped smiling. What I am ‘anti’ is: consumers bleeding equity to support a real estate business model that’s was out of date 20 years ago and that’s been on life-support ever since.

So, here’s to you, Dan Desmond! Put your armor on and speak the truth . . . it may just set them free.

Zip-It

Inman News has a headline story today about Zip Realty launching a new mobile-friendly website. This is really important in today’s real estate world. Increasingly, consumers are using mobile devices (cell phones and tablets) to access the Internet and therefore listing information. Clearly, if your property website is not mobile optimized, the consumer using a phone for access is going to have a very funky, scroll-heavy experience.

Here’s the rub: Help-U-Sell has had a mobile optimized website for almost two years.

Really. I can’t say we were the first . . . but (as usual) we were in the first wave. Consumers who go to helpusell.com using a mobile device are automatically redirected to a mobile optimized site. They have the same powerful helpusell.com experience, but they have it on their phones and tablets.

What I can’t understand is why, when we innovate, when we are ahead of the curve, when we point the way (as we have done and have been doing for years), the national media, Inman, RIS, NAR et.al. ignore it. They will faun all over Re/Max when it does something we did last year . . . but recognize us when we do something remarkable? Never.

It underscores the fact that, in real estate, there is the status quo (populated by nearly a million REALTORS) and those who earn a living off them (the real estate media, the National Association of REALTORS, et al) and there is Help-U-Sell. We may be the best idea since sliced bread, we may have the best program for consumers, we may be technologically WAY ahead of the status quo, but as long as THEY are supporting the media, our story will never be told.

The only thing we can do is to succeed, as we always have done. We build and grow, build and grow. Ultimately, the contest between the status quo and Help-U-Sell will be decided by consumers. The more of them we serve (and the better we serve them), the more the scales will tip in our favor. And someday . . . someday . . . someday most consumers will be having a quality set fee real estate experience, wondering why it was ever done any other way!

Identity Crisis

(April, 2013 is turning out to be the biggest month we’ve ever had at The Set Fee Blog. With 7 full days left in the month, we have already had more visitors than in any month since our inception – which was September 2010. I think it’s mostly people getting ready for the BIG DEBATE coming up in a couple of days. Along that line, Good Luck, Dan! I know you’ll be great.)

I’ve been chatting with Michael Del Rosario, a real estate broker in Cerritos, CA, about a new agent directory website he is building, Agents For Less. He’s allowing agents and brokers who offer some kind of financial incentive to buyers and sellers – whether commission discounts, flat fee, fee-for-service, limited service, etc. – to be listed in a searchable, consumer friendly database. We were talking about categories today and it was a little un-nerving. I realized we have a bit of an identity crisis in real estate, and it all revolves around ‘Full Service.’

Consumers intuitively know what ‘Full Service’ in real estate means:

  • Expertise/Consultation (preparation for sale, pricing, planning, staging)
  • Marketing (which might include MLS, Internet, Open Houses, advertising, signs, flyers, etc)
  • Representation/Negotiation (weighing offers, avoiding mistakes, anticipating next steps)
  • Transaction Processing/Problem Resolution (making sure everything is done properly, handling problems as they arise)

The problem is that almost everyone in the business – traditional percentage-based brokers, discount brokers, flat fee brokers, fee for service brokers and so on – claims to do all of those things!  The only brokers who might admit to NOT doing some of it would be self-described ‘Limited Service’ brokers or ‘MLS Only’ brokers.  With so many different kinds of brokers laying claim to  ‘Full Service,’ the term becomes meaningless . . . except that consumers don’t realize this.  In the muddled mess of real estate company marketing, they have come to believe that  ‘Full Service’ must also mean ‘Full Commission.’  >>> (and therefore, less than full commission means less than full service)<<<

Let that sink in for a moment.

Of course, nothing could be further from the truth.  If your less-than-full-commission offering is based on a better, more efficient business model that enables you to be profitable while charging people LESS . . . then the debate is not about the level of service, it’s about how much the consumer wants to pay to sell a house.   And here’s a news flash:  s/he wants to pay as little as possible to get the job done quickly, efficiently and effectively.

If you aren’t charging a full percentage-based commission, you have to go the extra mile to make consumers understand that you actually ARE Full Service.  It’s a nagging bit of marketing that has to be undertaken if you are going to do anything different with your fee structure than what your ordinary competitors are doing.

At the same time, ‘Full Service’ will become the imaginary club your competitors will wield to beat you in the marketplace.  They will insist that you don’t provide ‘Full Service’ because you charge less . . . which taps into the consumers’ sub-conscious belief that ‘Full Service’ and ‘Full Commission’ are somehow intrinsically tied to one another.   When Suzy Sixpence from Acme Realty says, ‘Help-U-Sell?  Oh, they’re not Full Service . . . I know they’ll say they are, but they really don’t do anything for their sellers except put the sign in the yard.  Sometimes they won’t even put you in the MLS – and of course, without that, you’re not even on the market!  We all know you get what you pay for, and that’s really true when it comes to Help-U-Sell and the other discounters,’ . . . when she says that, she sometimes gets a head nodding Amen from her audience. But they are not nodding because what she’s saying about Help-U-Sell is true. They are nodding because they know there is a difference between Nordstrom and Wallmart . . . and she successfully uses that knowledge to twist perception in the real estate arena.

John Powell created the Help-U-Sell Service Comparison chart for use in Listing Consultations:Help-U-Sell Service Comparison Chart(Note: this is a generic version of the chart used only as an example in Help-U-Sell training. Don’t try to draw any conclusions from this example – it’s totally fictitious) John has used it effectively for years – in fact, it is the centerpiece of his Listing Consultation.  It graphically illustrates what his office does for sellers and compares it with what his four biggest competitors do.  And, of course, it shows that he does everything they do plus a lot more.  It neutralizes the ‘less than Full Service’ bomb quite effectively.  Trouble is:  you have to get face to face with a seller before you can use it – and if Suzy Sixpence has gotten to them first . . . .well, you may not get the opportunity.

Getting the opportunity is a function of marketing.  We spend major marketing resources getting information about what we do for sellers for a set fee out into the marketplace.  It usually takes a lot of mailbox marketing to install the message and, increasingly, a lot of SEO and Internet marketing.  Your marketing is successful when a consumer, sitting across from Suzy and hearing her spout her nonsense, experiences the natural discomfort that occurs when the crap-meter goes off!  When that happens, Suzy just looks . . . slimy.

Consumers:  when you talk to real estate brokers about level of service and fee structure, use the four bullets above to evaluate what they say.  If they don’t do something, ask why.  (There may be a good reason, i.e. newspaper advertising.  In many markets it does not produce results – defined as leads – and therefore is wasteful and ineffective.)  If the fee seems lower than what others are charging, ask how they are able to do that and still be profitable.  And ask what, if anything, you are giving up for the lower fee.

OR:  just put this all aside.  Remember that the shortest distance between point A and point B is a straight line . . . and call Help-U-Sell.  You’ll get ‘Full Service.’  You really will.  And you’ll pay much less because Help-U-Sell is a different, more efficient business model.  We can charge less and still make more because we don’t run our offices like . . . well, like Suzy runs hers.

**PS: Help-U-Sell Brokers, why not get listed on www.agentsforless.com?  It’s free and is just one more way consumers may be able to find you . . . and getting found is half the battle.

 

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