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My Hybrid is a Gas Guzzler

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The business of real estate sales is a business unlike any other. The Real Estate Hybrid is neither energy nor cost efficient. Ours does not fit neatly under the Service Provider heading nor do we have a product to sell in the traditional sense. What we do have, however, is the goal universal to all commercial business ventures – profitability.

Why, then, is it so fashionable these days to portray the real estate agent as overpaid, and the profession in the broadest terms as engorged with greed? Several factors contribute: The consumer’s lack of understanding or their misconceptions of our business model, our inability to effectively communicate and demonstrate our value, and our tendency to carry on a public charade suggesting that our job is one big public service announcement. The latter, of course, is compensation for the former, with the real answer lying somewhere in the middle.

When did profit become a dirty word?

Just Take a Little Off the Top

A business consulting firm, Virtual Advisor Interactive, wrote this about the pure consulting or service-oriented business:

You may tend to think that pricing is not as complicated as product pricing, since what you are offering is less tangible, but appearances can be deceiving… Say you are a hair stylist, for example. Your raw costs will probably include the following: rent and utilities, equipment (including chairs, hair dryers, combs and brushes, sinks, mirrors, towels, washers and dryers, etc.), products (assorted shampoos, conditioners, hair spray and hair color), insurance, and staff salaries and benefits. Also, what about insurance, should a customer slip and fall? So while your service may be hair styling, you must carefully examine everything you will need… to perform that service. You must carefully and continuously list every expense. Once you have determined your raw costs, you can then set up an effective pricing model and figure how much you will need to charge for your service or time in order to break even and/or make a profit.

So, we aren’t hair stylists, but a very large component of our business is delivering service. I won’t offend the reader by listing the costs associated with fueling our business; if you are an agent, you already know, and if you are a consumer, you have a pretty good idea if you are honest with yourself.

One fundamental difference, if you compare Real Estate Sales to the traditional service business, is that we provide the service with no guarantee of compensation. In business speak, this is called a “loss.” And the magnitude of the losses associated with our work is never greater than in a slow market such as the one we find ourselves in today. Once your hair has been cut, I doubt you will feel at liberty to say, “I’ve changed my mind. I kind of liked it the old way, so I won’t be paying you for your time or services.” Yet, buyers and sellers do this all of the time, and we allow it through “right to cancel” clauses, through buyer representation on a handshake, and through fear of enforcement when payment is contractual, because we know our reputation and tomorrow’s business depends on it.

We only get paid once the County Recorder sings. And, this is where the “product” part comes into play.

The Return Policy

Most reputable companies with a product to sell have adopted liberal return policies. If the package is unopened, bring it back – No harm, no foul. After all, they can return it to the shelf and resell it.

This practice does not translate well to real estate sales, but we have willingly adopted the same practice. You see, when you return your listing to me, it has been opened and at great cost to my “company.” For instance, I now have a client who has suddenly decided that renting is a better option than selling. Fair enough, except this was a triple-secret Plan B that I wasn’t privy to when I spent $950 on a stager and staging materials, over $1000 on property brochures and a direct mail campaign, and close to $700 to date on open house advertisements. (I know open houses and open house ads don’t work, but she wanted them.) Almost $3000 later, she wants and will receive a full refund.

So, when the customer decides to return the listing, his brochures, his staging, and his ads are of no use to me. It is fuel that has been spent. Spend less or insist up front that cancellation will require repayment of out-of-pocket costs, you may say? Well, in my business, it just doesn’t work that way.

Return Policy of Chain to Chain Competition was the title of a paper presented at a 2007 International Conference on Service Systems and Service Management. When I came across the abstract, I found some relevance in the central theme.

As the intensity of competition increases, the win-win range becomes more robust… In general, returns policies intensify the competition among retailers, however, within some range of demand uncertainty, returns policies mitigate the competition among manufacturers and otherwise, intensify the competition among manufacturers which leads to a decrease in wholesale price.

Granted, the preceding wasn’t a light, easy read, but the message relates to our field. Our field has become so overpopulated and so competitive, that it has lead to a decrease in wholesale price. In other words, you are getting more for my money. As a consumer, next time you whine that percentage fees haven’t changed as home prices have increased, consider that my “cost of goods and services” has increased dramatically due to the intensity of competition (and, yes, the cost of business fuel). You don’t see it, but I see it, and I feel it (painfully) in the bottom line.

The Restocking Fee

Those same reputable companies that have the liberal return policies also have restocking fees. They do this because returns of opened or otherwise damaged merchandise affect their bottom lines – unless they are able to recover the loss in order to keep costs and, therefore, prices down.

In an article on The PC Guide, they said this:

Restocking fees are a statement by the company that they feel the person who decides to return a non-defective item should pay for these costs. And I personally think this is perfectly fair, as long as restocking fees are only charged in cases where I return an item due to my making a bad buying decision. I don’t expect anyone else to pay for my mistakes.

Yet in real estate, we pay for the decisions of others every single day.

Your Mileage May Vary

This is not something that any consumer wants to hear, but you pay for the mistakes, for the changes of heart, and for the poor decisions of others. You pay the bill at the grocery store, where “shrinkage” losses are factored into the prices of perishables. You pay it at the drug store, where the price of your mascara includes a premium to account for theft loss, and you pay it at Nordstom to compensate for their generous return policies. Why would anyone think my business should be different?

For every three-grand “I didn’t mean it”, I have to make $3001 to turn a profit (forgetting time and non-property specific costs of doing business). A couple of those “oopsies”, and my next transaction is only a break-even event (at least, in Southern California). Were it not for the losses, lower fees would pencil out. In a sense, we all pay.

Back to the “public service announcement” I spoke of at the beginning. Please do not conclude that money is our only objective in this business of real estate. It is not, although it is our primary objective, as it is yours when you go to your job each day. You, on the other hand, enjoy company benefits like paid health coverage, paid vacation, and sponsored retirement accounts. I enjoy none of those things, yet I immensely enjoy the satisfaction of the very personal and meaningful work I do. And, first and foremost, I do it for a living, for profit. There is no shame in that.

Time for a Trade-In?

Does the reality beg for a different business model? I don’t think so, but many will argue otherwise. My intent here is not to change it or fix it, but to call it what it is - a hybrid. It is a business, and some days a real estate business can be a big, cumbersome, costly machine to run.

(Footnote: Quite obviously, all three Bloodhound Carnival winners inspired this post. For those of you who made it to the end of this, and I mean both of you, if you feel compelled to shoot them on sight, don’t. It’s not their fault.)

Related posts:
  • The Odysseus Medal competition — Voting for the People’s Choice Award is open
  • Redfin.com builds new listing oversight tools for sellers
  • What Has Your Local Association Done For/To You Lately?

  • 7 comments

    7 Comments so far

    1. Sean M. Broderick, CCIM October 29th, 2007 7:23 pm

      Kris.. well done, you are going for the “O” award this week.. the other (more obvious in commercial) is the “liability” section, in which you represent your client (protect them in every conceivable way) and they still get sued by a “jilted” buyer or seller.. who else gets dragged in to.. the “broker” and agent and “1st born” if they’re really pissed..

      BTW, cool car photo.. it would look great in wine country..

    2. Chris October 29th, 2007 7:28 pm

      One of the rules I do business by is not counting others money. Weather it be the guy fixing my car at the MB dealership for $105 an hour, or a homeowner trying to get the most for their property.

      People see us getting these big checks at closings, and some are pretty massive. On a $1m house you can walk out of a closing with a $30k check. But they don’t see how much of the check we get, and our overhead. Its like complaining that a plumber is charging you $80 an hour, they don’t pocket that.

      We need to comunicate this better to our clients, I certainly have figured out how to yet.

    3. Kris Berg October 29th, 2007 7:36 pm

      Thanks bunches, Sean. I will let you guess how my week is going so far. :)

    4. Kris Berg October 29th, 2007 7:54 pm

      >I certainly have figured out how to yet.

      I am assuming you meant “haven’t.” Otherwise, do tell. The fact is, communication involves a receiver, and clients generally aren’t receiving on this subject. The most painful, yet obvious (to me), part of the message is that while some transactions seem “easy”, whether it be a speedy sale or few issues involved, the not-so-easy sales are part of the cost equation where both sides are concerned. This is necessarily so, as unfair as it seems, as long as this is a for-profit business.

    5. John Wake October 31st, 2007 6:11 pm

      “For instance, I now have a client who has suddenly decided that renting is a better option than selling. Fair enough, except this was a triple-secret Plan B that I wasn’t privy to when I spent $950 on a stager and staging materials, over $1000 on property brochures and a direct mail campaign, and close to $700 to date on open house advertisements. (I know open houses and open house ads don’t work, but she wanted them.) Almost $3000 later, she wants and will receive a full refund.”

      I feel your pain. Well, not exactly, I don’t spend that kind of money on a home. I thought I spent more than most locally but I’m not in your league for cash outlay.

      What runs through my mind when the seller starts talking about renting, “No wonder the old timers don’t put as much cash or time into marketing as I do. That’s how they survive these slow times. Maybe I should spend more cash on getting listings and less on selling listings so when the seller bolts I lose less.”

      There’s some mourning when they bolt but my new attitude is, “Do you want help finding a property manager?”

      If they didn’t give me any sign at the beginning that they might change their mind about selling later on, then I didn’t do anything wrong. It’s not my fault. It just a cost of doing business.

      [The bastards!]

    6. [...] Here is this week’s short-list of Odysseus Medal nominees: Steve Belt — Trulia Voices, Opting out of Trulia VoicesKris Berg — Genoa Petrol, You, ma’am, are no Genoa Petrol!Brian Brady — HR 3915, HR 3915 Is DangerousJay Thompson — Prize money?, A Commission is Prize Money (?!?)Rhonda Porter — Mortgage witch hunt, The Mortgage Witch HuntTeri Lussier — Twittering, Twittering on a wing and a prayerJim Duncan — Martyr yourself?, Are you willing to martyr yourself to the industry?Kris Berg — Gas guzzler, My Hybrid is a Gas GuzzlerDan Green — Investors in ARMs, Falling Prices And Adjusting ARMs: Real Estate Investors Have A Way OutGeno Petro — La spinster?, Mademoiselle? Oui. La Spinster?…ZUT!Brian Brady — Hiring a Realtor, Hire A Realtor Like You Would Sign a Top NFL Draft PickBill Leider — What is a professional?, What Is A Professional?Jim Cronin — RE weblogging, The 7 Reasons Why Your (Future) Clients Should Care That You Are a Real Estate BloggerGeno Petro — Search or sell, Search Or Sell, Young ManRichard Warren — Trickle down, The Economic Trickle Down EffectMichael Cook — Perfect storm, Real Estate Perfect Storm Warning: Do Not Miss This Window of OpportunityGalen Ward — Photos, Photos are worth 1,000 words (and a lot of money too)Kris Berg — The green room, The Green Room [...]

    7. [...] Here is my frustration, which I will share in the form of a sincere plea to would-be buyers – Please be sure you are sure before committing to a purchase. Recently, Offers to Purchase have, too often, become recreation. Purchase agreements have become scratch paper, and I see too many buyers with the mind set that these doodles can easily be discarded when they are no longer amused or entertained by the activity. It is the return policy absent a restocking fee which I wrote about here, a policy about which pcguide.com had this to say: “I don’t expect anyone else to pay for my mistakes.” [...]