Tag: real estate commissions

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.  

Tapped Out!

A little quote from NAR’s Chief Economist, Lawrence Yun:

Housing equity – housing asset value minus mortgage liability – has greatly shrunk in the painful aftermath of the housing market crash. The aggregate homeowners’ real estate equity stood at $6.1 trillion today versus $13 trillion in 2006 according to Flow of Funds data from the Federal Reserve. According to Census, there are 74 million homeowners. So on average, the average equity per homeowner in 2011 is $82,000, which is down from $170,000 in 2006. A separate Federal Reserve data from Survey of Consumer Finances showed that the median homeowner net worth to be $190,000. This larger net worth figure is due to homeowners having other assets in addition to housing equity. The median renter’s net worth was $4,000. The only good news at the moment is that the further declines appear largely over. Price measurements from NAR, Case-Shiller, Core Logic, and Federal Housing Finance Agency have all noted a slight uptick in home price in recent months.

We just don’t have the clout of equity we did five years ago; and it was clout.  I’ve seen it in franchise sales.  Five years ago an eager prospective franchisee could easily pull a second mortgage to finance a start-up business.  The equity was there and banks were falling all over themselves to lend the money.  Today that door is pretty much shut.  Most times, the equity is not there and when it is, the lenders are so difficult (and guidelines so strict) that the old equity cash-out bonanza is almost impossible.

The good news is (and there’s always good news):  It’s not that expensive to get started today.  Five years ago, retail space was very pricey and Marketing – which in Help-U-Sell was largely direct mail based – was huge.  HUS offices routinely spent $7,000 -$10,000 a month on marketing and it was mostly postcards and mailbox delivered flyers (ETMs).  Today, postcards are still an important part of the mix, but Marketing is mostly about the Internet.  While it’s not free, it’s cheap compared to mailbox stuffing.

But the drop in equity has had big implications elsewhere, too.  Small business expansion is not happening like it used to.  In fact, most real estate companies are doing the opposite: scaling back, hunkering down, closing offices, merging, and consolidating.  I talked with a Help-U-Sell broker the other day who was a little intimidated by the new mega-office in her town.  Two medium-sized companies had combined to produce the largest house of agents on the block.   I reminded her that offices consolidate in an effort to cut expenses, and it happens when neither office is making it on their own.   She used to have two competitors, each with 50 agents doing less than half a closed side a month.  Now she has one competitor with 100 agents each doing less than half a closed side a month.  She called back to say she’d run into the new consolidated broker and he wanted to know how she was doing so well.  He’d seen her listing and sales activity and was amazed that she was able to turn the numbers with her minimal staff and small location.

Now let’s get practical.  Let’s assume we have a homeowner with equity (hallelujah!).  Let’s assume this homeowner is in a $300,000 house (that used to be worth $425,000) and has a mortgage of $200,000. That’s $100,000 in equity.  The homeowner is grieving for the $125,000 he’s lost, but still needs to sell.  ABC Realty will take the listing and charge 6%:  $18,000.  But that $18,000 is 18% of the homeowner’s equity! Here’s a homeowner who already thinks he’s lost more than half his equity to the economic downturn and now some real estate broker is trying to extract 18% more!!

Thank goodness Help-U-Sell is in the equity preservation business!  If this homeowner is smart he’ll keep interviewing until he finds a HUS broker charging a low set fee of, say, $4,950.  That works out to a savings of $13,050 and the set fee is just 5% of equity, not 18%.

Yes, we’ve had a huge collective drop in equity.  We all want to hang on to as much of what we still have as possible.  Today, that means saying goodbye to high, percentage-based real estate commissions and hello to Help-U-Sell.  In addition to ‘Save the Whales!’ and ‘Save the Rain-forest!’ let us add ‘Save the Equity!’  List with Help-U-Sell.

 

“What Am I Not Getting?” Commissions Demystified

We Help-U-Sell folk often get mis-tagged as ‘Discounters.’  We take umbrage at that notion because we don’t offer a stripped down version of ordinary real estate (which is what a discounter would do).  Instead, we offer a completely different model, a different approach, one that is more efficient and – surprise! – costs less.  Usually, the ‘discounter’ tag comes courtesy of our competitors who can be quite vocal in defending their turf.  But sometimes, on seeing how much they’ll save with Help-U-Sell, consumers also wonder how we do it.  They’ll say:

‘So, this looks like a great deal, but what am I giving up?  What am I not getting that I’d get with a ‘regular’ real estate company?’

The question is not what you’re not getting;  it’s why are they charging you so much for the same thing we do for a low set fee?

Of course there’s an explanation.  It makes no sense from a consumer or business point of view, but it is an explanation.  It starts with what you’re paying for when you engage a real estate professional.  You could make a list several dozen items long but it boils down to just four things:

  • Marketing
  • Securing the Buyer
  • Representation
  • Managing the transaction details
At Help-U-Sell our brokers take responsibility for three of those four items.  Marketing, Representation and Managing the Details are all the purview of our brokers and though they might delegate bits and pieces out to qualified assistants, they don’t generally assign those tasks to agents.  The Help-U-Sell low set fee pays for those three things, and if the seller locates the buyer for his or her property that’s all they pay and it’s usually a huge savings over a percentage based commission.

How often do sellers find their own buyers?  You’d be surprised.  It’s not unusual for a seller to go to work two weeks after listing, learn of a co-worker transferring in for whom their house would be perfect.  It’s also not unusual for one of the neighbors to drop by with friends and family in tow.  We help our sellers find their own buyers by coaching them on doing their own open houses and letting them help distribute property information.

The ordinary broker charges a steep percentage based commission because his business model involves  paying four different people to do the same thing we do with one.  He has to be prepared to pay his company, his listing agent, the selling company and the selling company’s agent.  So the seller ends up paying not one, but four commissions!

And here’s where it gets really interesting.  Where we allow for the possibility of a seller finding his or her own buyer, in ordinary real estate, the four commission commission is the commission:  you pay the full fare no matter how the house sells.

What’s fun in this is that our listing brokers usually make more on a sold listing charging a low set fee than their competitors who charge a bloated commission.  The Help-U-Sell broker doesn’t have to split the dollar four ways!

The four commission situation is at the heart of the ordinary real estate world.  It probably won’t change anytime soon because there are about 1 million licensed real estate brokers and agents who depend on that model for their livelihood.  The industry will change when enough consumers find out they don’t have to do it that way.

Here’s a nice footnote to this discussion.  We haven’t talked much about the fourth item, locating the Buyer.  Yes, we allow our sellers the option of finding their own buyer and if they do they will experience maximum savings.  If one of the agents in our office finds the buyer, the seller pays the set fee plus a showing fee – which still ends up being much less than the four commission guys will charge.  If the seller wants, we’ll even put the listing in the MLS and offer it for sale through outside brokers.  If one of them brings the buyer, the seller pays our set fee plus whatever commissions will be necessary to take care of the selling agent and broker – but that’s still just three commissions, not four and it almost always costs less than what an ordinary broker charges.

Best of all, regardless of whether the seller elects to offer the house for sale through our agents or even through the MLS, if in the end he finds the buyer himself, the low set fee is all he pays.  It’s a great system.

ADDENDUM (The next day)
I’ve been asked to ‘demystify’ this post.  At Help-U-Sell we all understand what I’m talking about – but sometimes those on the outside need a little more explanation.

When you hire an ordinary real estate agent (who will likely charge a percentage based commission), you’re agreeing to pay not one, but four commissions:
  • 1 for the listing company
  • 1 for the listing agent
  • 1 for the selling company
  • 1 for the selling agent
You’ll be charged the same percentage based commission regardless of whether it takes all four commissions to get the job done, with any un-allocated overage going to the listing company and agent.


When you list with Help-U-Sell you get flexible pricing based on how the property sells.  Your low set fee covers marketing, representation and managing the transaction details.  If you locate your own buyer – which happens more than you think – you pay just that:  one commission.

If one of the buyer agents in the Help-U-Sell office locates the buyer, you pay two commissions – the low set fee to the Help-U-Sell office plus a showing fee that will compensate the buyer agent.

If an outside MLS agent brings the buyer, you pay three commissions:  the low set fee for the Help-U-Sell office, plus a commission for the selling company and agent.

With Help-U-Sell you may pay one, two or three commissions depending on how your house sells, but never four.

With ordinary real estate you pay four no matter how your house sells.

Make sense?

Why We Charge A Set Fee

The Low Set Fee is the heart of our identity.  It is the engine that produces the result we are known for:  consumer savings.  There are several reasons why we charge a Set Fee instead of a percentage based commission.

  • It is logical. If you know how your market behaves at any given time, if you know how long it will take to sell a properly priced property, if you know what you’ll be spending each month on marketing — you are able to know what it will cost to sell the typical home.  That, plus a ‘fudge factor,’ is your carrying cost.  Add a reasonable profit for your company and you have a Set Fee that makes sense to you and to the consumer.
  • Percentage Commissions, on the other hand, make no sense at all.  Think about it:  if your company charges, say, 6%, the guy with a $200,000 house is going to pay $12,000.  His friend, two blocks away with a bigger house, worth $300,000, is going to pay $18,000.  What did the friend get for the extra $6,000 he paid?  $6,000 more advertising?  I don’t think so.  Is his agent going to work $6,000 harder?  Doubtful.  Truth is:  they’re paying hugely different prices for the same thing.  It’s nuts and the consumer knows it.
  • It is a differentiator. Differentiation in the real estate business is a good thing.   The California Association of REALTORS has been asking consumers for years if they’d use the same agent again in a real estate transaction.  In 2004, 79% said ‘yes.’  In 2009, only 22% said ‘yes.’  If that’s not a confidence crisis, I don’t know what is!  Seems to me, the smart thing is to look as little like the rest of the pack as you can.  Charging a Set Fee instead of a Commission says you’re different.
  • It drives more business to your door. The Low Set Fee that produces savings over what ordinary brokers charge has great appeal to Sellers, resulting in large numbers of listings which create a strong flow of buyer leads through the office.  More Sellers = More Buyers = More Business.

Maurine Grisso, on the Broker Roundtable Call today, presented the Set Fee as well as I’ve ever heard it presented.  She talks in term of 3 ways your home might sell:  You Sell – We Sell – They Sell.  No matter how it sells, you always pay the Low Set Fee.  If you find your own buyer (You Sell), that’s all you pay.  If our Help-U-Sell office finds the buyer (We Sell), you pay your Set Fee plus our Selling Fee.  If you elect to go into the MLS and another Broker brings the buyer (They Sell), you’ll pay your Set Fee plus whatever % Commission you offer to the selling broker.  In all cases, the Seller saves over what they’d pay a traditional broker.

The Set Fee is who we are.  It’s what sets us apart from the crowd.  It’s what motivates consumers to call us and ask, ‘How’s that work?’  Set it wisely and re-evaluate it regularly, and wear it like a badge of honor.

Charging Less, Making More

The ability to go into the marketplace with a financially attractive offer for consumers AND walk away from the transaction with more dollars than your more traditional counterparts is at the heart of Help-U-Sell’s appeal to brokers.

Think like a traditional broker for a moment.

  • The success of the office is built on one thing:  your ability to attract and retain productive agents.
  • Your primary tool in accomplishing this is commission split — you know to be successful you need agents and to get them, you’ll need to pay well.
  • Unfortunately, the health of your bottom line is dependent on how many commission dollars you retain after splitting with your agents.

Put all of that in a hat and shake it up and you’ve got  . . . a mess!  Your formula for success is at war with itself! No wonder ordinary real estate offices suffer from embarrassingly low profitability if they make a profit at all (despite the fact that consumers think they’re paid way too much!).

Help-U-Sell takes dynamite to all of that nonsense.  First thing we do is demystify the listing process.  We toss out the notion that personality is what sellers buy when they list their property for sale.  Bunk! we say.  Listing is a logical thing.  If you present a system with a track record of success for a fee that is reasonable, most people jump at it.  Instead of two hour marathons where traditional agents warble on about how wonderful they are, listing presentations become simple, short and matter-of-fact:  here’s what we do, here’s what you do and this is what it costs.  Listing is so easy in Help-U-Sell that, well . . . even a Broker could do it.  That’s why we take the listing side of the business out of the agents’ hands.

We believe the listing side of the business belongs to the company, and the broker or an assistant (that’s different than an agent) takes all listings.  The agent’s role is on the buyer side, where we can afford to split commissions.  But, since we create all the leads for our buyer agents through our large number of listings and the power of our well-conceived marketing, we don’t have to give away the farm to get and keep salespeople.  We’re not asking them to call on FSBOS or Expireds, to knock doors or make cold calls to find listings.  We’re not asking them to master a slick listing presentation or memorize responses to two dozen common seller objections.  We just want them to take the prospects we’ve created and find them a property.   Good agents thrive at Help-U-Sell.

Back to the listing side;  here’s how the dollars break down:

Here’s where the ‘yeah-buts’ start to echo from the mouths of ordinary agents.  Yeah-but, with no listing agent the seller’s getting less than full service! Says who?  Full service is getting the property sold for the greatest walk-away dollars in the right time frame — and we do that every day.  Yeah-but, you get what you pay for!  When you list with me I’m going to actively market your property until it’s sold! Um, let’s see . . . ‘actively market‘ . . . I guess that means put a sign in yard and a listing in the MLS, which then syndicates to a couple dozen Internet sites, right?  In my experience that’s what ordinary agents do when they get a listing.  In my Help-U-Sell office, we have a comprehensive marketing plan, orchestrated, monitored and constantly improved by . . . ME.  It’s not just a bunch of agents running around willy-nilly, making it up as they go along on every listing they take.  I could go on with the ‘yeah-buts,‘ but we try to keep these posts to a ten minute read or less.

We are a very proud group, and rightfully so.  We’ve taken the fluff and snake oil out of selling real estate and converted the process to logical systems that get results.  We’ve done it in a way that saves consumers thousands of dollars and makes our brokers a nice profit.  Who could ask for anything more?

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