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How much commission should an agent charge?

Theoretically any company could “take over” almost any market by offering their services at a lower price than any of the competition. And sometimes economic theorists like to calculate just how long it is going to be until it happens in various industries. Usually those calculations are just exercises with a financial calculator or spreadsheet – they don’t tend to reflect much in the real world.

Specifically, I remember when Sears bought Merrill Lynch Real Estate and then Merrill Lynch went on a buying spree of real estate companies – one large local firm they purchased was Tom Fannin Realty (this was in the early 80′s). The buzz coming down the pike at that time was that only the VERY largest firms and small (really efficient boutique type operations) would survive. All of the “regular” real estate companies were going to go out of business. The big-money-wall-street-people were going to dominate the real estate industry.

As luck would have it, just doing number crunching (completely skipping the whole “people thing”) made almost everything they (along with all the robot reporters) predicted to be pretty much complete crap. A few short years later Sears was selling (after enormous losses) Merrill Lynch Realty and surprise surprise – the real estate business rolled on, almost like it had all along.

In any industry there are those consumers who believe that “the lowest price” is the most important issue. They constitute about 15% of the home selling public. About 5% fall into the status conscious arena and actually want to pay a higher price. The vast majority of the public (80%) are more “Value Shoppers”. Don’t confuse that for wanting the lowest price all the time. They want the “best deal” – which may or may not be the lowest price. Show them that something is a “good deal” and it doesn’t have to be the lowest price.

One of the more idiotic assumptions made by the howler monkeys at the FTC and the DOJ in their pursuit of “lower commissions for the public” is that “commissions should have come down because of the internet”. The mere fact that they had stayed above 5% (national U.S. average is 5.1%) was – all by itself – proof positive of a conspiracy amongst “traditional brokers” to keep them high.

One of the little points (I fully understand that what I am about to say will be shocking and simply “wrong”) they overlooked is when it comes to what consumers really want THE INTERNET CHANGED NOTHING. Absolutely nothing. Not version 1.0 and not version 2.0. What people want and need is still the same thing it was prior to the internet.

Can a random person in any city with a computer find out about lots of different houses in a matter of minutes? Yes. Does today’s buyer or seller expect (and tend to shop elsewhere if they don’t get it) almost instant service? Again, yes. People want good service – this isn’t new.

How much commission should an agent charge? Well, I suppose it depends on the agent. I charge more than Nu-Way. I charge more than most agents charge. Why? Because I am worth more and I want to. When the market was so on fire that most of the public thought of us as a commodity – and most Realtors couldn’t wait to agree with them, we had potential home sellers call our office every day and tell us they could get someone to list it for less. We already knew that and it made no difference what commission percentage they told me they could get an agent to list their home for – I would tell them, “you can get it for even less than that”.

But there were still loads of home sellers who understood that what we did wasn’t the “same as everyone else”. In that market we factually sold homes for more money. In this one we actually get them sold. Anyone who wants to hire one of the limited service companies (who want to insist on marketing themselves as FULL service at a lower price) gets exactly what they deserve. Those companies track records for selling their inventory really isn’t the same as mine. It isn’t even as good as the market average. Those companies do have a wonderful track record with regard to marketing themselves to the public but not for marketing their listings TO the public.

Oddly enough the average home seller (they don’t tell this to agents) doesn’t believe that the agent will work as hard to get their home sold if the commission is “too low”. They don’t want the commission to be “too low” because they want the agent to “work hard” to sell their house. This was verified by a university research team (they didn’t like the answer they found).

Is it okay with me for every buyer to have access to the inventory via IDX? Sure. Do I believe that will put us out of business? No. My value to the seller or buyer isn’t my access to a secret database. When I go to my dentist or doctor or CPA I am not going to see them because they have access to secret information that no one else can get. I could get all of the information that my dentist, doctor or CPA can get. The problem is I can’t properly EVALUATE that information – they can. They can look at the same information I could look at and see things I would never see.

Just because some people are criminals and start companies that really exchange nothing of value (criminal exchange = something for nothing) for the money they charge (like for example, Redfin) does not indicate the “end” of business as we know it. History is littered with companies like that – they do sometimes disrupt things for a bit, but to last, long term – there really has to be some real service or benefit to the consumer.

In the case of Nu-Way Realty I have wonderful news for anyone who might ever be worried about them taking over – their people. When they hire an agent, that agent has to sign a non-compete contract that specifies they will not engage in real estate sales here in the valley for a minimum time period of two years. I don’t know if anyone has ever tested them in court to see if it would hold up. What I do know is that they are told that Nu-Way has trade secrets and those are only shared with someone who has signed the contract. Having observed this for the past few decades and seeing the kind of person who finds that a good reason to sign such a document, I’m worry free on this one.

Thanks again to Greg for sparking the thoughts above with his post – and for having me here in the first place.

Related posts:
  • Greg Swann Joins Redfin – Kelman Rejoicing!
  • How Much is My Agent Charging Me?
  • Learning to negotiate the buyer’s agent’s commission . . .

  • 9 comments

    9 Comments so far

    1. Kevin Boer November 8th, 2006 3:03 am

      Russell,

      In the short time you’ve been blogging, you’ve written some potent stuff. Thanks for another great post!

      I’ve started a series on my blog about how the Internet ain’t gonna put us out of business, no matter how much NAR fears it will and no matter how much the Freakonomists hope it will. This post of yours has me thinking about some of my future entries in that series.

      One of the next headlines will be something like, “Auto-appendectomies, anyone?” — in reference to something I’ve been thinking about, and you mentioned above: all manner of legal and medical content is now available on the Internet, but that doesn’t mean many people are going to be performing surgery on themselves any time soon!

      Keep up the good fight!

    2. Greg Swann November 8th, 2006 6:22 am

      > One of the next headlines will be something like, “Auto-appendectomies, anyone?”

      Thief.

      Just teasing. It’s synchronicity.

      Reciprocity: I played with copy this week using a roller coaster as a metaphor for the buying experience.

    3. Jonathan Dalton November 8th, 2006 8:26 am

      Excellent post, Russell … in a short time you’ve already become a must read.

    4. [...] Mega Agent Russel Shaw has been blogging over on Greg Swan’s site fantastic post this morning on why fantastic Realtors are worth the high fees they charge to list a home: How much commission should an agent charge? Well, I suppose it depends on the agent. I charge more than Nu-Way. I charge more than most agents charge. Why? Because I am worth more and I want to. When the market was so on fire that most of the public thought of us as a commodity – and most Realtors couldn’t wait to agree with them, we had potential home sellers call our office every day and tell us they could get someone to list it for less. We already knew that and it made no difference what commission percentage they told me they could get an agent to list their home for – I would tell them, “you can get it for even less than that”. [...]

    5. Benjamin Bach November 8th, 2006 9:08 am

      Hey Russell
      Great insight. I agree – the internet is a tool for realtors, not a threat. I use it to communicate with and educate my clients and the general public. Your post was my top pick this morning on my blog: http://kwmarketwatch.wordpress.com/2006/11/08/awesome-posts-from-around-the-blogosphere/

      Be Great
      Benjamin Bach
      http://www.benjaminbach.com

    6. Candybags November 8th, 2006 11:07 pm

      You all need to either get real or get off that high horse of pomposity you rode in on. Comparing a Realtor with a surgeon??? what next?? Auto appendectomies indeed! Who do you think you are kidding? You are lowly paper pushers compared to doctors and lawyers who had attended YEARS OF SCHOOLING PEOPLE to get what they have. They didn’t take an online course and sit an easy written test of 150 questions. I am sick of reading about parallels between doctors and Reel-torrrrs. The old adage is alive and well – no one thinks more highly of a Reeltorr than the Reeltorr himself. Perfect. Get real. Be prepared to be disintermediated. Dinosaurs. I won’t be paying no stinkin 6%,5% or even 4%. Try 3%. IT WONT BE LONG NOW.

    7. [...] I love having Russell Shaw with us, because he is serious, rigorous and thorough-going. But he sees the world from where he stands, and very few of us command similar heights. Russell says, in essence, “I charge more because I’m worth more.” This argument has unassailable particular merit, as do the similar arguments made by Our Lady Ardell and the avuncular Jeff Brown. [...]

    8. Trevor Smith November 18th, 2006 3:49 pm

      Your comment about Redfin is not only ignorant it is probably borderline libel. Do you even know exactly what services Redfin does or does not provide? Redfin is not doing much less than your typical traditional agent, and they are providing their customers thousands in refunds… hmmm sounds like a great business model to me. If you are referring to the fact that they do not show their buyers prospective properties, this is no longer true either. So, as far as I am concerned, praise God for Redfin and other discounters who are awakening America to the fact that REALTORS are overpaid.

      As for calling the FTC monkeys… are you serious? You probably think the guys at Enron are innocent too.

    9. Joe December 2nd, 2006 11:40 pm

      >When I go to my dentist or doctor or CPAs I am not
      >going to see them because they have access to secret
      >information that no one else can get. I could get all
      >of the information that my dentist, doctor or CPA can get.

      How many doctors, dentists, and CPA do you know that charge a percentage of the transaction for their services?

      I don’t think I’ve ever met a CPA who wanted to charge me a percentage of my tax refund, or a dentist who wanted to charge me on a similar basis.

      If I did I’d tell them to get lost.

      Why should agents receive more money simply because the selling price of a house is higher?

      Go ahead and tell yourself that the internet “changed nothing.” There’s a lot of auto dealers and travel agents who used to think that way (and that’s the company you should be comparing yourselves with).