As REALTORS® in many parts of the country, we automatically seem to assume that the commission we charge should be 6% or 5%. I'm not sure why that is, other than "that's the way it's always been". It seems to me that the commission we charge is based on some old principles, and is not based on the realities of operating a business, such as return on investment, operating expenses, payroll (for yourself), profit, etc.

The fee we wish to charge is most often not a problem with the seller; it is the way we sell the fee that determines whether the seller sees the value that we claim to bring to the table. I firmly believe that our success in getting paid the fee we want to charge lies in our belief and understanding of why we should charge that fee. When you believe in something, and understand all it's nuances, it becomes natural and easy to sell that thing.

Yet, that may not be enough to convince the market. With FSBOs on the rise in many areas, how much we charge, and why may not be the issue so much as are we willing to elasticize our services for each unique seller. The 'One Size Fits All' approach doesn't work with a FSBO, nor does it work with many sellers. In order to strike a deal with these potential consumers, we need to be able to offer them some alternative fee structures. So, how do you determine those fees?

There are two main components in the fee you charge - the fee you need to charge to run a profitable business and the fee that the marketplace will bear.

What does it cost to run a business?

This consists of both hard costs, and an hourly value that you put on your services. You are the only one who can determine your hard costs, but you must remember to include the following things in the equation when calculating this:

- The percentage of your listings that don't sell

- How much does each un-sold listing cost you in hard costs - advertising, MLS Fee's, time spent on the listing, etc.

- Your monthly fees paid to your broker

- The average number of listings sold per month

- Average income per deal

This is by no means an exhaustive list, but it covers some of the items one is likely to forget to include in the calculation. This information is quite easy to calculate for me, because I get a summary from my broker that tells me a lot of the information.

To calculate my time on a deal, I keep a log book that details what I do on sample deals from start to finish. I break this down into 5 minute increments, and I get a fairly accurate record of the time a deal has cost me. Once I know the average hard costs per deal (including 33% for profit), and I know the income from the deal, I can determine my average hourly income per deal.

So, now I have my operating costs, I can determine the fee that I need to charge to keep my business operating successfully.

How to charge the commission rate you want

Once you have calculated the commission you need, you have to be able to sell the prospect on paying it to you. This may seem like a simple thing, but I think this is where many Realtors fall off the tracks. It has to be an automatic reflex for you to be able to explain to prospects the value that you bring to the transaction, and you have to do it convincingly.

I like the analogy that compares my business to that of my lawyer or my doctor; they dictate the terms under which we do business, and if I don't like it, they won't cry if I take my business someplace else. They are IN CONTROL of our professional relationship. When you go on a listing presentation (buyer or seller), you must be in control of the interview.

Make it clear from the very get-go that you are interviewing them as much as they are interviewing you. My line when I first walk in the front door of the home is " Let's look around first, so that if we mutually decide that it will be profitable for us to work together in the sale of your home."

We look around, with me taking copious notes and pictures as we go, and then we sit down to 'talk turkey' about a possible business relationship. Go through your presentation, politely deflecting their questions about price and commission, until you feel the time is right to ask a question such as "If we can agree on a price that will allow you to meet your goals, and a fee that allows us to help you meet those goals, is there any reason that you cannot sign the listing tonight?" If they have objections, deal with those before going into price and commission. Make sure that all of their objections have been dealt with, and they have agreed to list with you before dealing with price and commission.

Never talk about price or commission until you have sold them on using your services.

Does this approach work as well in the real world as it does in theory? It does if you decide to work only with people who meet your terms. I will walk away from a possible listing rather than compromise my standards and business profitability. I deal from a position of strength, in that, while I would like to take most listings, I'm not going to take it personally if I cannot convince a prospect that I am the best one for their needs.

To get paid the fee you deserve:

1 - Determine your operating costs, including profit

2 - Develop a presentation that will help the prospect feel you are worth your fee

3 - Be prepared to walk away if you cannot sell the fee to the prospect

4 - Be in control. Remember, they need you at least as much as you need them!

Go to the Interactive version of this article.

Published: October 12, 1999

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