In a country where advertising is interruptive, intrusive, pervasive, and pandemic, it's little wonder that consumers want deals. How else can they afford all the stuff they're importuned to buy?
That's only one of the reasons why real estate agents may be encountering more resistance from consumers about commissions.
And it doesn't help that there's a steady drumbeat from the press lauding "discount" real estate industry models as innovative, consumer-friendly and timely. Apparently "full-service," which is composed of risk-management, liability-sharing, and facilitation, is a clumsy anachronism consumers don't really need.
What no one talks about is it's impossible to rewrite the laws of economics.
Discounts can be obtained on any goods or services, but the service provider has to keep an eye on the bottom line. Discounting usually means cheaper labor. And cheaper labor has an impact on all transactions.
Companies can achieve cheaper labor costs a number of ways, but in real estate, that means less service. Real estate is one of the few service industries left with face-to-face service providers. If consumers don't want that level of service, their only choice is to do some, most or all the work of buying and/or selling a home themselves.
Look at the airlines. Most of the American carriers are facing bankruptcy, except for the low-cost carriers. They don't bill themselves as discounters -- they simply perform fewer services. Southwest Airlines has never had to adjust to lower service level as American Airlines has. American has had to offload meals, pillows and many flights in order to compete with Southwest, JetBlue and other low-cost carriers. In some airports, you even pay to check your bags. Overbooking is rampant. Even if you have a ticket, you might not make it on your flight.
That may be fine with most travelers, but service should also be about helping consumers get where they wanted to go. Low-cost tickets aren't much of a bargain if you can't get home.
Consumers always want something for less - they may be right, but they're not always right, because companies may tip themselves into bankruptcy trying to serve them.
One reason commissions are under fire is because people simply don't understand how the system works -- so explain it to them.
- Commissions are paid on the back end of a transaction. Much like a tip or a carrot on a stick, commissions encourage promptness, competency, attention, and cooperation. If you don't close, you don't get paid. So a real estate agent's job is to help the buyer or seller get through closing -- if that is what the client truly wants.
Agents need to clearly outline what services they provide for a full-service commission -- in detail. According to one writer, there are at least 20 ways a real estate agent helps clients market a home. When your client asks you what you are going to do for the commission, don't be coy, glib or flip, or go on and on about your professionalism. Unfurl a detailed list of actions you will take in their behalf. Be sure the list is long enough to unroll until it hits the floor.
- With some forms of fee-for-service, often confused with discount services, buyers and sellers pay up front for limited service. They may or may not accomplish their goal or buying or selling, but since they got what they paid for -- a listing in the MLS, advice on a purchase, or assistance at the closing table, that money isn't refundable. Why? The consumer is assuming the risk for a reduced fee.
- What agents can better explain to their customers and clients, is that with commissions they're paying for risk mitigation. The reason they pay a commission is to offload some or most of the risk onto the real estate agent. Those risks include making sure the paperwork is circumspect and will stand up in a dispute, protecting the home from being entered by unqualified buyers who may be more interested in raiding the medicine cabinet than buying a home, and making sure all the steps to closing are met on time and with professionalism by all parties.
- An important part of risk is money. If the client were to go to the bank and ask for an unsecured loan to pay for marketing their home, what would the bank charge? As a real estate agent, you can answer that question very simply. Pull out a credit card and show your client. Most credit cards are 18 percent and higher. And those are loans that have to be paid back, or the bank can ruin the cardholder's credit. If you don't sell the house, you have to absorb the marketing costs, and the seller pays nothing. So is charging 6 percent when you have to 1. share the money with other service providers, and 2. might not close too high?
- Another part of risk in selling a home is time management. When does the client show the home? How does the seller screen buyers? Do you take off work? Wait til the weekends? What do you do with a relocation buyer who absolutely must find a home that day? Do they wait until it's "convenient" for the seller to show their house?
- Buyers are being told that they can share in the commissions, but let's think about what that really says. Either the seller is either overpaying the commission or there's wiggle room in the price of the house.
There's something unsavory about taking a giving a portion of a professional fee to a client. The fee is negotiated between the seller and listing agent. The listing agent pays the fee out of her portion of the commission to another professional. If the buyer is going to end up with the fee in cash, isn't that a little underhanded to do to the seller?
It's all a marketing ploy. In most cases, the buyer can come out just as well by asking for the same percentage off the cost of the home. If the buyer argues that he or she prefers the cash and to heck with the seller, show them how they'll make out! It's immediate gratification versus long-term equity building. If the rebate amount were applied to the loan, it would significantly reduce what they owe on a home after five years.
Here's how to show the buyer. In the following example, the buyer wants a rebate. As the buyer's agent, it's your job to help them save money. In some states, rebates are legal, but show the buyer instead how positively they could impact their loan by simply taking that same amount off the price of the home. Here's how it works:
On a 30 yr. fixed rate loan at 6.75 percent:
| Loan Amount | Payment | Balance after 5 yrs |
|---|---|---|
| $100,000 | $648/mo | $93,755 |
| $98,875 | $641/mo | $92,700 |
| $98,000 | $635/mo | $91,880 |
calculations courtesy of David Reed, author of Mortgages 101, Amacom.
The difference for the buyer could be substantial. They have a kind of forced savings, lower monthly payments, lower property tax rates, (not shown) and after five years, they will owe less money on the home than they would have if they'd taken the rebate. After five years, will they even remember what they spent the rebate on?
The takeaway for real estate professionals should be that if you are in the position of having to defend commissions, you'll do better if you have real black-and-white information to give the client. Numbers. Reasons. Explanations. Examples.
Discount companies aren't the enemy. Lack of transparency is. The discount companies are simply giving consumers what they want -- fees they can understand. If "full-service" brokers and agents do the same, then consumers can truly make informed choices.
