One of the best parts of BHB for me, is taking the ideas and the round tablediscussions that happen here and bringing them to the street. (I must admit an occasional guilty pleasure taken, when I use the knowledge I glean from BHB to steer and even dominate these discussions. I am shamelessly looking forward to Unchained, that I might return a 600lb gorilla in gorilla marketing.) There has been some very interesting debate recently, both here and on other blogs, over the valuation of real estate services. It is a tough dialogue because large amounts of money are involved and strong feelings abound.
But asking the agents I work with what they think of the NAR, their sense on the moral obligation of a contract and how they value their services opens up new view points and sheds more light on these issues. Recently I was talking to a Realtor I know and respect about how to answer the question of commission and agent value. Now, there may be many right answers to this question; but I have yet to hear one that cannot be debated and diminished. Not due so much to anyone’s superior skills as a wordsmith but rather the multi-faceted nature of the topic. This agent and I, however, after deciding that the premise of the question itself was suspect, eventually decided that there is one answer that is inarguable, morally justified and epistemologically sound. The very simple answer to the question of how one justifies their commission is this:
I am a real estate agent and, by definition, an entrepreneur. I am in business to make a profit. I charge what the market will bear.
Chris Eliopoulos says:
This is a subject with much debate over the years.
Personally I had only two (2) occasions over twenty five years in business that a client asked/demanded to cut my commission.
In the fist case my replay was “I will if I get participation” ,in the second “you can not effort this property. I will refer you to an agency for down payment assistance”.My reply was instant direct (and rude) as was their demand.
Brokers are getting pushed around and try to be “the good guy” (and they should)yet, one has to make sure that the client understands that he/she (broker/agent) is in business to make money, allots of money.Always disclose how much money are you going to make in a deal, and say it with pride and confidence (believe me you are going to earn it).Your client will feel confident in you (if you do it right) that his interests will be represented by a pro and he/she will be glad you are at his service.Remember commissions are negotiable your knowledge and work ethic is not.
May 8, 2008 — 12:43 pm
Sean Purcell says:
Chris,
Always disclose how much money are you going to make in a deal, and say it with pride and confidence… Your client will feel confident in you…
Well said and amen.
May 8, 2008 — 4:52 pm
Bawldguy Talking says:
Humor me please.
Sans the choir singing Kumbaya, please explain to me the buyer’s right to know how much their agent is paid.
If I buy a $5,000 HD widescreen TV, I’m either happy with the price/terms or I’m not. Whether the salesperson is making minimum wage or gets 80% of the profit doesn’t alter the empirical results of the research I did before making my buying decision. The price of the TV doesn’t change. Of course if I coerce the commissioned employee to transfer his pay to my pocket, Sony still sold the TV for $5,000. All I’ve done is bent the salesperson over the bar ‘cuz I could.
Don’t get me wrong, as I certainly support the right for agents to charge more or less for their services. But the home/investment is worth what it’s worth.
This is where, in my view, transparency loses credibility.
Your right to know an agent’s pay ends when you’re not paying him. What it appears to me, is transparency becomes the default excuse for violating the agent’s privacy, but mostly for transferring money from his Levi’s to yours.
Again, free enterprise makes this approach to business acceptable. Let’s just start calling it what it is — a shakedown executed under the umbrella of transparency.
May 8, 2008 — 5:46 pm
Don Reedy says:
Sean,
You’re right about “strong feelings abounding” in this.
I must, however, agree completely with Jeff.
Let’s not take transparency to a level that eviscerates it. Almost all the BHB dialogue about transparency has been directed at creating an unfettered path for information, knowledge and skills to pass effortlessly and seamlessly FOR THE BENEFIT OF BOTH THE CLIENT AND THE AGENT.
Jeff has it right with his analogy. Do your homework on the product (read the actual HOME here….not how much money the wholesale or retail players make), and consume based on the value of that commodity.
To discuss commission with “pride and confidence” reminds me of pretty much the “dark side.” Remember, “Pride goeth before a fall.” Good Realtors don’t need pride; they need skill. Good Realtors need confidence, but wearing that confidence on your sleeve, rather than rolling up your sleeves, is simply not the best approach to this question.
“I charge what the market will bear….”
Not if I get wind of your ploy. For once you make me aware of the idea that you will bear down on me until I cry “uncle”, I’m going to cry “uncle” much sooner and much more often.
May 8, 2008 — 8:10 pm
Bill Lublin says:
Sean; I don’t want to make the chorus louder by singing along, but I think your premise is inverted. The client cares about the value he receives and could care less about whether I make a profit or not.
To take Jeff’s analogy about the Wide Screen a little further, my interest in the TV is based upon my perception of the value of the product versus the cost of the product. Sales is always about making the value exceed the cost.
When we talk about justifying our commission (a term I hate – I don’t need to justify anything) We are actually talking about demonstrating to the consumer that the value of our services exceeds the cost of the services. I don’t ever remeber discussing with a client what my profit might be as a business person. I don’t discuss it for two reasons – its none of their business and they don’t care. If the client gets what they perceive as value, I don’t believe it matters ot them if I am earning a profit or losing my shirt.
To bring the conversation back to real estate from appliances, I think that Jeff, who is an investment specialist would agree that in the case of a buyer of an investment property, their concern is their perceived return, not whether the seller is making a profit or not. They wouldn’t be prouder to buy a property from an investor who is making a profit (though they might be more comfortable about their ability to do so) then they would from someone who is sustaining a loss, as long as they (the buyer) were getting a property where they perceived the value exceeded the cost
I think where agents struggle is believing that they add value and therefore have difficulty in advocating that position. I know that as an active agent I added value because I tracked the highest offers received by FSBO’s before they listed with me (and I included verbal offers with no substance) and the actual sales prices after I had the property listed. Over the period I played this little game I averaged 9% more then the best offer they received. Substantially more then my cost to the seller. That made it easy for me to really believe that I added my services added value that exceeded the cost of those services. And if I owned property in San Diego and needed to sell it, I would be looking for Jeff’s number, because I believe that the most knowledgable agent, working in my interest, would get me the highest price and best terms possible, and that his services would provide me with more value then the cost of those services.
In regards to the moral obligation of a contract, I would have to point out that people with a strong sense of moral obligation don’t even require a contract to compell them to perform under the terms of an agreement. They do what they say they will do when they say they will do it.
Contracts, IMO are there to provide clarity to the terms and consitions of agreements, to compel people to perform in the manner they agreed to perform, and if needed to be used as blueprints to assist courts in making decisions about who is right when one party or the other fails to perform satisfactorily.
May 9, 2008 — 2:14 am
Greg Cremia says:
This is so basic it gets overlooked. We are in business. Every decision we make has to factor this in. If we don’t charge enough or pay too much for a service or give away our service for free we won’t be in business very long.
May 9, 2008 — 4:18 am
Bawldguy Talking says:
Don — I was interested in your take on Sean’s policy regarding what he charges — ‘what the traffic will bear…’
Don’t all businesses, whether selling widgets or services, whether they’re Nordstrom or K-Mart, charge what they perceive the traffic will bear?
Do you charge less than you think the market will pay you? I ask that due to my experience over the years with various markets and business models. Just guessing blind here, but if I had to bet real cash I’d wager more RE brokerages have gone under due to charging less than the traffic would bear, than their higher priced competition.
How do you look at it when it comes to setting what your end of the paycheck says?
May 9, 2008 — 10:02 am
Mary McKnight says:
It’s guerrilla marketing, not gorilla marketing. You know, like guerrilla (from guerra, the Spanish term for “war”)
May 9, 2008 — 10:11 am
Rebecca Levinson says:
Well said. Most real estate agents are working professionals, not philanthropists.
May 9, 2008 — 10:30 am
Sean Purcell says:
Jeff,
I agree with your analogy but have a different take on transparency. As you know, I am a strong advocate of open book lending and transaction transparency. I believe that a borrower/buyer should know what he is paying for the service he is receiving. In the retail store the price on the shelf includes all services and how that gets split is not the consumer’s business, agreed. No more than the buyer knowing how my splits work with my broker. That is not germane to the purchase value and none of their business.
Unlike the store, however, real estate commissions are broken out from the “product” price. I think the one paying it has a right (an obligation really) to know what he/she is paying. If they would like to negotiate it then they can have at it. The problem I have been witnessing is the agent’s inability to stand strong in that negotiation.
Jeff, you deal with investors which makes your job a little easier even while it is harder. Your clients know there is a commission and have no problem trying to negotiate it down, except that you provide such a strong rate of return that they don’t dare. Your ability to justify your commission is apparent and your “product” (the rate of return) is your defense. Residential agents do not have that argument.
May 9, 2008 — 11:04 am
Sean Purcell says:
Don,
Pride is an important aspect of any undertaking. If you are not proud of your work, your service, your product and your accomplishments I would suggest finding a line of work in which you do find pride.
Making money is not a sin. It is a responsibility: to ourselves, to our family and to our broker.
I said that the response to the question of justifying your commission is “I charge what the market will bear.” and you called that a ploy? I suggest the ploy would be arguing that an agent in San Diego does 4x the work of an agent in Idaho and therefore deserves 4x the income. Or explaining a $20,000 commission on one transaction by mentioning all the transactions that do not pay (as if the consumer cares about that). The ploy is trying to justify income based on some specific criteria that did not actually play a part in creating the commission structure in the first place. Answering honestly and with the full force and power of a free economy is not a ploy. “I charge what the market will bear.” It has the added benefit of being the truth.
May 9, 2008 — 11:15 am
Sean Purcell says:
Bill,
I think we almost agree. You said: The client cares about the value he receives and could care less about whether I make a profit or not.
This happens (see my comments to Jeff above) but the premise here is that some clients do ask whether or not you are making a profit. They do so by asking you to justify your commission. I started out saying the premise of the question is suspect and I believe this is where we agree. That question assumes that what I am charging needs to be justified. I don’t believe it does. Just as with any other professional, you should charge what your skills and abilities will bring you in your particular market. It is a self-correcting mechanism. If your value as an agent is not what you think it is, you will not have much business until you adjust your pricing accordingly. But the pricing itself is not justified by some measurement, calculation or yard stick. It is the most you, personally, can charge your clients within your market.
Again, in San Diego the average agent will earn $10,000 on one side of a transaction. In Idaho (I am using Idaho without actually looking up the numbers in that state; if you disagree please insert whatever state you know will work) the average agent will earn $2500 on one side. They have each earned what their market will bear.
We also agree that the client does not care whether or not you are making a profit. None of their concern. That is all the more reason to have an answer ready for those clients who do ask the question. “I charge what the market will bear”. Whether you are making a profit, going broke or getting rich at that price is none of their business.
people with a strong sense of moral obligation don’t even require a contract to compell them to perform under the terms of an agreement. They do what they say they will do when they say they will do it
I was very pleased to find that the vast majority of agents I have spoken to regarding this issue agree with you entirely. It speaks very well of the industry.
May 9, 2008 — 11:30 am
Sean Purcell says:
Greg,
If we don’t charge enough or pay too much for a service or give away our service for free we won’t be in business very long
Business economics in a nutshell – well said.
May 9, 2008 — 11:31 am
Sean Purcell says:
Jeff,
Do you charge less than you think the market will pay you?
Great question. Since posting my previous comments I have thought of another question for you in particlar. Your business is different from most of those reading this, but I do believe that all business is more similar than we give credit. So are you ever asked to justify your commission and if so how do you handle the question?
May 9, 2008 — 11:35 am
Sean Purcell says:
Mary,
Thank you. I am aware of how to spell guerrilla. I thought it would be funnier following the 600lb gorilla thought to keep the word going. But apparently it was not. I appreciate your correction.
By the way, any thoughts on the subject at hand?
May 9, 2008 — 11:38 am
Sean Purcell says:
Rebecca,
Most real estate agents are working professionals, not philanthropists.
Although the goal may be to become so good at being a working professional that you can become a full time philanthropist. 🙂
May 9, 2008 — 11:40 am
louis@homegain.com says:
“I am a real estate agent and, by definition, an entrepreneur. I am in business to make a profit. I charge what the market will bear.”
And I might add, by providing quality service you can maintain or increase the price that you charge; in effect impacting what the market will bear.
Mary, its “Gorilla” marketing when Max is involved 🙂
May 9, 2008 — 12:14 pm
Sean Purcell says:
Louis,
You are absolutely right, as is the corollary: if you do not increase your learning and your expertise on a consistent basis, you will have a hard time even pricing yourself with the market.
May 9, 2008 — 12:37 pm
Bawldguy Talking says:
Sean — We’re pretty much on the same page here.
The buyer however pays for nothing. Therefore they have no say. I can prove this by the HUD 1 statement showing the seller having paid the entire commission to whomever it was paid.
The buyer doesn’t get to know squat. (A real estate technical term.) Yesterday a buyer asked how I was paid, and I told them the sellers paid, and how much, ‘cuz I chose to. They were well mannered enough not to ask, as it didn’t have anything whatsoever to do with the value for which they were paying.
I don’t think we disagree, generally speaking.
May 9, 2008 — 3:09 pm
Sean Purcell says:
Jeff,
We are in agreement, but I keep trying to pin you down and squeeze some of that experience out of you. 🙂
What do you tell the seller?
May 9, 2008 — 3:24 pm
Bawldguy Talking says:
Sean — You asked, So are you ever asked to justify your commission and if so how do you handle the question?
It’s the occasional seller who broaches the subject. The last time was several years ago when we were about to embark upon a tax deferred exchange involving many properties and two states.
My answer was simple.
Which way has your net worth, after tax cash flow, and general tax shelter gone since you’ve been following my advice? You’re gonna pay me about $60,000 to get this done for you. You’re gonna be trading over half a million more than you had before you knew who I was. I’m not sure I understand the question. 🙂
Oh, sorry.
I thought his wife was gonna hit him. 🙂
May 9, 2008 — 3:39 pm
Tom says:
Long time lurker at BHB and hopefully buyer in the next year. I am a collector of information/data and so I visit many different sites. I understand I am not the key audience for this blog but it provides insight into how agents think. While many here believe the information is none of the buyers business based on who pays, business, etc. The fact is the information is out there just as invoice on a car is on edmunds. The commission does impact the cost of the transaction to both the buyer and the seller. Value shoppers research the true cost and than shop for the best price. I don’t think either the buyer or seller wants a service for free, just a clearer understanding of what the ‘value-added’ truly is. While it is probably gut-wrenching to watch your job model change so drastically in the next few years, from an academic perspective it is an incredible time.
May 9, 2008 — 4:22 pm
Sean Purcell says:
Tom,
The key audience for BHB is anyone looking to expand their knowledge and create independence of action and thought. I hope you stick around.
I don’t think either the buyer or seller wants a service for free, just a clearer understanding of what the ‘value-added’ truly is.
I agree with you and this really is the crux of the matter isn’t it? The problem is how does one define their “value add”? I believe an agent should give the best value he/she knows how and earn the business by standing out as an expert in some niche (area, transaction, type of client, etc.). But what the agent is actually paid cannot be dollarized or based on some kind of “cost” model. The agent charges everything they can while still earning the business they wish to earn.
I am not sure why real estate should be different from any other profession. If you become a medical specialist you generate business because of your specialized knowledge and you charge whatever the market will bear. If you become an ace auto mechanic the system is the same. Based on your skills and knowledge you can charge some amount of money within the curve that is dictated by your local market. The only question after that is “how much do you want to make and how much do you want to work?” The answer is obviously not the same for every agent.
The commission does impact the cost of the transaction to both the buyer and the seller. Value shoppers research the true cost and than shop for the best price.
One last thought: remember that price is what you pay, value is what you get. What I mean by that is the cost to both the buyer and seller can be many fold the cost of a commission if the contract or transaction is fumbled; not to mention the time and money cost to a client whose time is wasted by an agent that does not know their business. Shop for the best value… which does not always relate to the immediate price. (Nordstrom vs. Kmart)
May 9, 2008 — 5:15 pm
Tom says:
Sean,
Thanks for your perspective. I just read Gregg’s idea of the ideal internet lead and felt it was describing me to a tee. Here’s the deal, I think in real estate, the informed buyer is probably only about 7-10% of the market. The rest are human (emotional, at time irrational) and don’t behave logically. I approach this transaction as the largest I will probably make in my lifetime. Just as when I buy a car, I go in and tell the salesman that I am not interested in monthly payments, etc, only the bottom line drive out; with my house purchase I have explained to my agent that I will walk away from the closing if everything is not disclosed beforehand, ie. no surprises. I have no problem forfeiting money if I feel that I have been mislead. I recognize that makes me weird. I also know ‘buyers are liars’ (no, I’m not in sales, I just read A LOT) but I go in with a full representation of who I am: FICO, approval letter, what EXACTLY I want (4/3/3, etc.) and expect that the agent will hear what I’m saying. I have been disappointed so far. The kind of discourse you have here gives me hope. BTW, I define value in the sense of Warren Buffet when he buys a business. He looks at management of the company (realtor reputation?), niche in the market (location?) and cash flow (price of the house?). Thanks again.
May 9, 2008 — 5:29 pm
Sean Purcell says:
I recognize that makes me weird.
No, not weird. That makes you a dream client. Believe me, a top agent (at least as I would define one) wants to give you a stunnng amount of value in as short a time as possible. Working with someone who knows what they want is ideal.
The “no surprises” mantra I take a little closer to heart because I still originate loans and that is the area where surprises seem to pop up most. I say don’t walk away… run away!
I like your Buffet analogy. Here is my favorite Buffet quote (very applicable right now): “when others are greedy be fearful and when others are fearful be greedy.”
May 9, 2008 — 5:44 pm
Tom says:
Sean (and to the other posters)
I learned a lot tonight (East Coast) and was reminded of some more. Thanks. Sean, obviously we read some of the same books. The tide is almost out and we’re about to see truly who was naked (Buffet). I’m not a cult of personality kind of guy but his pragmatism and utilitarianism strike a nerve. I guess that’s why I commented on your thread (similarity confluence).
On another note, I hope the credit crisis, FNM structural issues, declining market tags, etc. clear up soonf for your industry. There are real people and families getting hurt that played by the rules and just wanted a job and place to leave. Good night and peace.
May 9, 2008 — 5:57 pm
Jim Lee says:
Like the professionals, I’m in this business to make money and make a living. My wife is highly in favor of this concept.
I also agree that it’s none of the client’s business what I make and will make from their transaction although having said that I do tell the few that ask.
It’s also none of their business whether I wear boxers or brief; thankfully none have yet asked.
May 10, 2008 — 8:37 am