The Myth of the Discount Commission….

How lower fees actually cost Sellers money!!

Every seller wants to net the most money possible when it comes to the sale of their home. However, in this pursuit many sellers unknowingly cost themselves money when they choose to work with an agent who offers a discounted commission. Let’s explain how. When a seller chooses a real estate agent who offers a discounted commission there are some underlying assumptions that are typically being made, including:

1. All agents are the same.
2. The home will sell itself.
3. The price will be the price.
4. The property will get the same exposure.

5.      The service will be identical.                                                                   

 All five of these assumptions are false!! Hiring a discount real estate agent in the hopes of netting the most money on the sale of your home would be analogous to walking into a Mercedes dealership and wanting to buy a car for the same price as a Ford (nothing against Fords). While a Mercedes and a Ford are both cars, and both provide transportation, there is a distinct value difference between the two products. The same is true of discount agents and full service agents. Both can get the job done, in terms of selling the home, however how they get the job done can be worlds apart.

 A Discount Agent vs. A Full Service Agent A discount agent has a discount orientation. Their value to you as a seller is they offer to perform their service for less. Their focus is on saving you money. The discount agent is focused on the commission as a fee, which is the smallest part of the transaction – 6% or less. A full service agent has a retail orientation. Their value to you as a seller is their ability to produce a higher sales price for your home. Their goal is to net you more money at closing after all your fees have been paid. The full service agent is focused on the sales price of your home, which is the largest part of the transaction – 94%

Where do you want your agent focused??? On the 6% or less part of the deal…..or the 94% part of the deal? These are two very different approaches. Discount agents use commission as a tool to get your business. Full service agents use commission as part of their marketing plan to attract more buyers to your home in the effort to net you more money for the sale of your home. Discount agents feel certain pressures that full service agents don’t experience; namely volume, time, and money. When an agent lowers their fee from 6% to 5% that is a 17% reduction in their pay. When they lower their fee from 6% to 4% they are now reducing their fee by 33% to 50%. Therefore discount agents must do a higher volume of transactions in order to make up for their reduced fee. Since they are operating on a lower profit margin than a full service agent, they can’t afford to keep a listing on the market for very long before it starts costing them money. Let’s see how this affects you as a seller….

1. Discount agents need to work with more people so they cannot provide you with the same attention a full service broker can give you.

2. Discount agents cannot expose your home in the same way a full service broker can when it comes to marketing your home as their marketing budget is reduced by their lower fee.

3. When an offer comes in, a discount broker has every incentive to get the offer accepted quickly in order to move on to the next deal. They are also less likely to have the skill to negotiate a higher price for your home as evidenced by their inability to negotiate commission on their own behalf. Remember if they gave 17% to 33% of their own money away in order to get your business…. do you really believe they are going to fight for more money when they are negotiating on your behalf? This leads us back to the five assumptions above: All agents are the same - All agents are not the same. There is a wide range in the level of knowledge, skill, and experience that agents possess and the quality of service they provide. Even agents who have a great track record for selling homes may be discounting many of those sales.

1. The home will sell itself - Homes do not sell themselves. Homes may sell quickly in this market; however, getting the highest price possible is not a given. The key is to make sure you are not leaving any money on the table. Also, an accepted offer is just the beginning of the sales process. Having an experienced agent represent you through the escrow process is critical in today’s market.
2. The price will be the price - There is not one price every home will sell for. The final sales price is directly influenced by the negotiation process and the skill of the person representing you. When an agent can’t negotiate effectively on their own behalf… do you really think that agent is going to be able to get you the highest price possible on the sale your home? Knowing which buyer to work with in multiple offers is also essential to a successful closing—not just which buyer will sign the quickest, but which will ultimately pay you the most for your home. The property will get the same exposure - Marketing is a function of time, energy, and resources. Discount agents feel a certain pressure in each of these areas. As mentioned above, a discount agent is hoping for a quick sale so they don’t have to carry the listing for long. Once a property goes beyond a 2 week marketing window, a discount agent becomes limited in their marketing effort due to their reduced fee. Also a listing offering a 2.5% commission to the selling (buyer’s) agent, or in some cases 2%, will not get the agents’ enthusiasm as listings offering a full 3%. Remember an agent representing a buyer gets a 17% to 33% higher commission on a 6% listing vs. a 5% to 4% listing. And since most buyers’ agents only represent 2 -3 buyers at one time, they are looking to make as much as they can on every sale they make. The 17% to 33% differential is very significant to these agents in terms of their income and, thus, their motivation. The service will be the same – The level of service can differ tremendously between a discount agent and a full service agent. Remember the discount agent must do more transactions to stay even. This means they don’t have the same amount of time, resources, and money to make sure the sale of your home runs smoothly and closes in a timely fashion. This fact means you may not see as much of a discount agent, if you should select one. Picking the right agent in this market is very challenging as the competition for business becomes greater and greater. This ultimately works to the advantage of a seller. There are simple traps to avoid when selecting a Realtor to work with. Be wary of… 1. The agent who gives you the highest price. 2. The agent who gives you the lowest commission. 3. The agent who has the biggest “brag book”. Remember it’s about YOU and not how great the agent is.  Instead, look for the following:

    

   1. Pricing strategy – Where are you going to price your home and why? Most sellers want an agent to put an exact price on their home. At best, an agent can give you a high – low value range. Ultimately, you the seller, set the price. And many sellers don’t fully understand that pricing is 80% or more of the marketing plan. Where you position your home on the MLS is the primary force that will attract qualified buyers. When it comes to pricing your home, be very careful to see if an agent is giving you a price to get the listing or a pricing strategy that will work to your greatest benefit. Also, agents may quote you the very same price, though for very different reasons. It is important to understand why your agent is recommending a certain price or price range.
   2.  Preparing the home for sale – How you prepare your home for sale is critical to getting the most money possible. Listen closely to staging ideas, repair ideas, and minor improvements that can maximize the value of your home. Just the right touch-ups in the right place can net you more money than any possible savings in commission. A great agent will provide you with these recommendations and have referrals for getting the work done.
   3. A Marketing Plan – Here is where many sellers get confused. Fancy ads and color brochures are not what sell homes. Agents do!! As I mentioned above, 80% of the marketing of a home is dictated by the pricing strategy. Most qualified buyers are working with an agent. Agents go to the local MLS in selecting properties to show. Price your home right in the MLS and you will attract the highest volume of qualified buyers. At the same time look for an agent who has a detailed marketing plan in terms of: Advertising, Open Houses, Broker Opens, and the Internet. When you meet personally with the agent, listen to their plan and discuss marketing materials. Don’t expect to just look at a report to make a choice. Can you talk to the agent? Do you feel comfortable? You’re going to be dealing often with the person you chose.
   4. Negotiation Skills – When it comes to netting the most money for your home, you need an agent with above average negotiation skills. The simplest way to determine their negotiating abilities is how they handle establishing a sales price on your home and setting the commission. Agents who tell you what you want to hear don’t value their ability to negotiate. Agents who offer a reduced commission as a way to get your listing are also telling you they don’t value their ability to negotiate. A great negotiator will net you an additional 3 - 12% on the sales price of your home which, again, far exceeds any expected savings offered through a discounted commission.
   5. Service – The real work begins after you accept an offer. In today’s market, many buyers are going into escrow and out of escrow very quickly. With rising prices, come rising emotions. Be sure to question your agent on their ability to manage the escrow process. Ask your agent if they have an assistant. The best agents typically have an assistant so they can best serve you. It can be very challenging for a single agent acting alone to oversee the entire process. Great agents work off checklists and have long standing relationships with their escrow officer. Deadlines and contingencies are monitored closely. A great agent will also supply you with regular updates on the escrow process.

    

   CONCLUSION: Every seller needs to identify what they are really looking to accomplish when it comes to listing their home for sale.

   1. Do they want to find the lowest commission possible?

   2. Do they want to net the highest amount possible?

   3. Do they want certain terms and conditions?

   4. Do they want a timely sale (short or long)?

   5. Do they want a problem-free closing?

    

    If you are simply looking for the lowest commission you will find plenty of agents who will do it for less. However if you are looking to net the most money, in the right time frame with the least amount of hassle I encourage you to look for an agent who presents:

   1.       A well-developed pricing strategy.

   2.       Specific suggestions for improving your home’s marketability.

   3.        A written marketing plan.

   4.        A tough stance on commission (Again, if an agent can’t represent themselves well… how are they going to represent you? And what effect does a discount commission strategy have on agents working with qualified buyers in the marketplace?)

   5.       A system and/ or staff to service your transaction. In the end, don’t you want an agent who can help you achieve your real estate goals? By focusing on making you more money, instead of saving you money on fees, the agent can actually earn his or her commission. That is a true win- win situation for everyone.

    

   Adapted from an article by Steven Shull, Performance Coaching, Santa Monica