Commission

by Sean Purcell

Real Estate Renaissance Man

Author website

There were a number of interesting articles last week regarding the value of a real estate agent.  Essentially asking the agent to justify their commission.  I know it got heated up over on Active Rain and there was some discussion on AgentGenius as well.  Here at BHB we enjoyed two very good posts.  You can read Brian Brady’s post here and Barry Cunningham’s post here.  I disagree with both of them, which is all the more reason to recommend you read them.  That and the fact that they are both very good reads.

Let’s Clarify the Question
First things first: the timing of the whole “justify your commission” question is counter-intuitive.  It is coming up a lot lately, yet one would expect clients to question commissions when home sales are rapid and appreciation high. During those periods it appears simple to sell a home but, probably because of the prices being greater than the seller assumed, we rarely hear this conversation.  Yet times like the current, when homes are not selling and people are most in need of a professional agent, you get the most questions about commissions.  This has a lot to do with the fact that they are making less money than they expected.  So let’s start by clarifying the true nature of the question.  It has little to do with the agents’ value and everything to do with the clients’ profit.

Also, the question of value is directed primarily to the listing agent.  There are some who will question the selling agent about their commission and they will do so regardless of the market.  But for the vast majority of clients the selling agent has very little to do with this conversation.  Why?  Because the selling agent’s commission is already loosely tied to the market and so a function of supply and demand more than intrinsic value.  When homes are moving quickly and inventory is small, the seller and the listing agent discuss what to pay the selling agent and often arrive at 2.5% or even 2% because there is no demand to pay them more (supply of buyers is high).  When the market is slow like it is now, we begin to see the seller and listing agent raise the selling agent’s commission to 3%, 3.5% and even 4% because demand is high (supply of buyers is low).  It is the movement of homes that dictates the selling agent’s commission.  The discussion of an agent’s value (as far as the consumer is concerned) is a discussion of the listing agent’s value.

The discussion of an agent’s value (as far as the consumer is concerned) is a discussion of the listing agent’s value and it has less to do with the agents’ value and more to do with the clients’ profit. Finally, this discussion engages two distinct groups: experienced agents and new agents.

DOLLARS VS EXPERIENCE
Brian’s article suggests a method of valuing your services based on dollarization.  In the comments you can read Allen Butler give one example of this principle and in the comment string of Brian’s post on Active Rain you can read a literal demonstration by Brian himself.  Barry’s article, on the other hand, suggests that your experience is the driving force behind your value.  He lists a set of soul-searching questions that are nothing short of brilliant.  I highly suggest the exercises in both articles as a tool to assess yourself and your concept of your own value, but I doubt if they will help you with the question of value to your clients.

A list of your experiences, past transactions, back office support and so on, no matter how detailed, reflects more on your longevity than your value.  A trully free market would force longevity and value to be closely aligned – in which case I would agree strongly with Barry’s points – but I think we can all draw up a long list of agents that provide little value and yet have managed to continue doing real estate transactions for years.  Chalk that up to uninformed clientele and an industry suffering from low self-esteem made happy by growing membership rather than inspiring excellence.  Further hindering us is the question of what our new agents are to do.  They certainly can and do provide value, yet how does a new agent relate their value without a history of experience?

Using this second group (new agents) will also make plain the problem with dollarization.  Using this method you explain your value in real dollar amounts to justify your commission.  These dollar amounts are not so much the cost of doing business as the value of benefits the client receives from doing business with you.  Yet how to assign those values?  It is all quite subjective.  No one of us can actually show that by using my service your house sold for more or in shorter time.  This is an estimate at best and self-serving at worse.  If we base our value on historical numbers, as Allen did, it looks better but still suffers from the same illness: we do not actually know what would have happened in any reality other than the one that we know.  A lesser agent may have taken the listing and sold it in half the time because they had a sister looking for a home just like that.  We just don’t know.  So the dollarization method is a fancier method of expressing value, but no more valid than just saying: “I am worth this much because that is how good I am.”  How can it be measured?  The problem becomes even clearer when we bring in that pesky group of new agents again.  Their response to the question would, of necessity, be framed with words like: “in my estimation I will sell for more” and “in my opinion I will sell faster” and so on.  Without the false validity stamp of: past predicts future they are forced to admit the subjective nature of dollarization.

SO WHAT’S YOUR BIG IDEA?
In the end we need only remember that the question of value is a question asked by sellers and asked when times are tough.  They are saying “I am not going to make what I expected.  Why should I pay you this much?  What are you going to do that makes you worth more than the agent that just left, pitching his discounted rate?”  In other words: what is your unique selling proposition?  Or, to put it in a question format more familiar still: What is your marketing plan?

Yes, yes, I hear the groans.  This is nothing new and not nearly so exciting as a new method of valuation or a long list of accomplishments.  But the bottom line is simple: you are being hired to sell a home.  Your value is directly tied to that event and your ability to accomplish that event, which is to say your value is your marketing plan.  And that marketing plan – that answer to the question of value – is conveyed in your listing presentation.  I would estimate that over 90% of agents do not use a formal listing presentation.  I would also bet dollars to donuts the small number who do use one get very few “what are you worth” questions.

I have read Russel Shaw discuss this and, while I have not asked him directly, I am going to go out on a limb and say he does not have any difficulty with the question of his commission.  I have not asked Greg Swann this question either.  But when he shows up on a listing appointment with examples of single site home blogs and custom designed yard signs I doubt he has a problem either.  Given the anecdotal success I see by those who use a scripted, well designed and topical listing presentation, it boggles the mind that so few do.  The answer, I think, lies with scripting and the common fear of a script sounding stale.  Brian Brady said it best when he said “people don’t use scripts because they suck at scripts.”

CONCLUSION
I work with an agent here in San Diego that has possibly the finest listing presentation I have ever seen.  When he sits down on an appointment his script goes roughly like this:

My professional fee is 3% and it is non-negotiable. When we are done with my presentation you will know why I am worth every penny and you will want to hire me. The question you have to work on is this: How much do you want to compensate the buyer’s agent?

The value of your service, and the justification of your commission, lies in how well you will do the job for which you are hired.  Your marketing plan is the best indication of what to expect and an honest, well designed listing presentation is how you convey that plan.  If you wish to earn top dollar then your plan of action for your client must be top dollar.  If your listing presentation exhibits that top dollar plan, you will rarely have to justify your commission to your clients.

PS

I just finished listening to Brian on www.realestateradiousa.com discussing these issues again with Barry.  (If you missed the broadcast I HIGHLY suggest going on line and listening to it.  They discuss how to handle this question very well.)  Interestingly enough, however, Brian validated his value by giving his “listing presentation” as a mortgage originator.  Barry also gave a 5 Point treatise on improving the very image of being an agent.  A long resume was not included, but a top-notch listing presentation was.  The only time dollarization came up was when Brian mentioned that, following the dollarization of your services to yourself you will come to know an hourly rate for your sevices.  You must then look in the mirror and decide if you actually feel justified at that rate.  Use Brian and Barry’s posts to assess yourself.  Then make sure you have a listing presentation that reflects your value to the client.