In addition to our discussions here at Bloodhound, if you’ve been reading the blogs lately, the commission debate continues. Jonathan Dalton’s post on Agent Genius has recently spawned a long series of comments regarding how agents are compensated.
One comment (below) got me thinking,
“… I fully believe that my service is worth 6%. Clients in my area seem to be less concerned with getting a “deal” on their commission rate than they are with getting an EXPERT to work for them.”
I am not questioning the agent’s value – it’s hard to debate that consumers want an expert. The issue I have with the comment is “I fully believe my service is worth 6%.”
Why?
What is the significance of 6%? As we discuss the issue of commissions, why are we stuck on a percentage of the sale? Why isn’t the number 10% or higher – or in some cases, lower?
In actuality, if you’re cooperating with a buyer’s agent, aren’t you really saying you’re really worth only 3%?
Indulge me for a moment as I share a little story…
In early winter 2007, I happened to represent a client in the sale of his 3-flat in Lakeview – highly desirable area north of Lincoln Park – the building generated solid rental income. I listed the property and generated 2 offers within the first 20 days on the market. The first deal fell apart due to an over-zealous inspector who told my clients the building was worth no more than land value,
Pardon me, but you’re an inspector, not an appraiser.
But that was the least of my problems …
The second deal blew apart 3 days prior to closing. The zoning certificate was incorrect – issued by the city. Chicago stated that that building was a 5-flat. My client was thrilled – LOOK! We can now ask for more! Um – excuse me, but no. When he purchased the building 2 years prior, the city correctly issued a zoning certificate indicating that the building was in fact a legal 3-flat.
The attorney and I discussed the minor error and kindly informed the Department of Zoning that in fact they had made a simple clerical error, one that surely could be readily corrected – oh – in less the 24 hours in order not to delay the impending sale of said property. “See”, I showed to the head of the department, “SEE! Here’s the zoning certification you issued less than 2 years ago! It’s a 3-flat!”
DENIED.
You see – in Chicago – it’s always your fault. This little clerical error required full building inspections – not one, but three – by the city. New architectural plans were needed to recreate what should have been in the city records all along as well as new permits to de-convert a unit that never should have been in the building in the first place. Of course, no logical explanation was ever given as to how the building was correctly certified as a legal 3-flat when my client purchased it 2 years prior, and now – miraculously – had no records of permits, plans – and had morphed into a 5-flat.
12 months later, the building was sold yet again for $50,000 less that our previous deal.
The moral of this story?
I was worth a helluva lot more than the fee I charged for the sale because, in addition to showing the property and negotiating the deals,
1. I arranged for the architect.
2. I met with the city on 6 separate occasions to clarify the specific requirements needed in order to correctly submit and apply for the correct permits – receiving 4 different responses from 4 different individuals – within the same department no less.
3. I was torn the new a**hole for questioning the competency of the city’s Department of Building and Permits to the Head of the Department of Zoning (in the future, I may not do this again in person)
4. I worked to negotiate through the bureaucracy needed to get the necessary certification to get the building sold with the city because attorney number 1 and attorney number 2 didn’t know how to resolve the problem with the city – and told my client it could be resolved, but he would be charged an hourly rate.
My client focused on the $50,000 less he got for the building and the additional costs incurred due to the goat rodeo we encountered.
I focused on my expertise and knowledge to work through the system to get it done AND the fact that I got it sold. And bottom line – it was my time and effort – ALOT of my time and effort spent to get it done. … but that’s why he hired me.
This was an incredibly value experience for me because I learned that expertise matters and it isn’t cheap. Sometimes it is very hard to quantify at the surface – but other professionals charge by the hour – hmmm – now that’s an idea.
What struck me was how readily my client would have agreed to pay an attorney an hourly fee, but not me. Shame on me.
This is a tough issue to tackle with clients – and believe me, some days it’s just not worth chewing through the restraints – it’s easy to stick with the status quo and work with the fee structure we’re all used to – problem is, the status quo makes me uncomfortable.
Furthermore, it doesn’t always accurately reflect the real value that we often provide both in terms of time and effort as well as knowledge and expertise.
How much are you worth an hour? I mean really worth? How do you quantify the value you provide to your client – do you simply state it as a percentage?
John Kalinowski says:
I’m not arguing for any specific fee structure, just wondering why it’s always assumed that lower rates lead to less service or marketing. What happens one day when a company actually offers more service and results for a lower price, wouldn’t that be an advantage? Wouldn’t they squash the competition?
This whole idea comes from a Seth Godin article titled “The 7% Solution”. Not sure how to embed the link here, so here’s the complete one:
http://sethgodin.typepad.com/seths_blog/2007/11/the-7-solution.html
Here’s part of it:
>>>>>>>>>>>>
The 7% solution
Okay, it’s a simple idea:
If you’re a real estate broker, you work in an industry where everyone used to charge the same fee: 6%. Now, though, discount brokers are turning up the heat on fees. Lots of brokers are unhappy with this.
The challenge is… what if you had to charge 7%. What if you had to charge more when everyone else was charging less?
What would you do? How could you make it worth it?
Now, just imagine what would happen if you did that at 6% or even 5%? You’d be unstoppable.
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September 14, 2008 — 7:01 am
Greg Swann says:
> The 7% solution
This is where we’re headed. I don’t know that we’ll ever actually charge 7%, but we want to deliver so much more added-value that no one else can compete with us. I say “Beyond Competition” all the time, but it’s not a slogan, it’s a battle cry.
September 14, 2008 — 7:13 am
John Kalinowski says:
Greg,
I was thinking of you the first time I read that Seth Godin article. Especially when he said “Now, just imagine what would happen if you did that at 6% or even 5%? You’d be unstoppable”. Maybe 7% doesn’t matter?
September 14, 2008 — 8:08 am
Greg Swann says:
> Especially when he said “Now, just imagine what would happen if you did that at 6% or even 5%? You’d be unstoppable”. Maybe 7% doesn’t matter?
Better ideas we’ve got, and we know how to execute them, how to make them work. It’s spreading the word that keeps me up nights. We concentrate on higher-end properties because the sellers at least know to want better. But, even then, getting them to discern the better from the worse has been a problem so far. Of all the things we do to promote our brokerage, including all the web stuff, our best sales tool is still our signs — especially the “SOLD” sign going up in a sprightly fashion:
September 14, 2008 — 10:03 am
Barry Cunningham says:
One of the problems as I see it is that there are WAY too many real estate agents posturing as experts who have no idea what they are doing. The skillset you detailed in your post is WAY beyond even the comprehension of most real estate agents and as such the “expert” status is too easily conferred.
I commend you for what you did in this instance and it’s really too bad other agents devalue what you do by flippantly applying the expert label as if it is an across the board one size fits all designation.
FYI..we often charge 8% when we work on short sales. Why? We can do what others can’t.
September 14, 2008 — 10:31 am
Thomas Hall says:
Guys, thanks for your comments – greatly appreciated.
Along the lines of Greg’s divorce issue – why represent as a % at all?
Maybe a further clarification: Why my client’s building ultimately sold for less than a prior contract, there was an implied assumption that I wasn’t doing my job – I didn’t get a better price.
Regardless of price, there is an enormous amount of expertise required to navigate through a complex transaction, irrespective of the value of the property.
Tying the fee to the ultimate price does the expert a disservice.
September 15, 2008 — 4:22 pm