Do you really want that discounted broker’s commission?

In today’s market, it’s easy to see why sellers want to negotiate every penny of the sales process.   Trying to do so on the brokerage side may seem like a no-brainer, and you may even succeed … though, perhaps, to your detriment as a seller.  We often hear “you get what you pay for”.  Fueling this argument are examples of discount brokerage models such as Foxtons, which tried the 2% commissions game, and quickly went out of business.

We thought we would therefore outline the reasons why negotiating fees may feel like a short-term win yet may hurt you in the long-run. 

1. Times they are-a-changin’: Counter-intuitively, difficult real estate markets are the worst time to skimp on fees. Arguably, downturns are the times when you get the greatest value for your commission dollars. Why? Boom markets translated into houses basically selling themselves; brokers opened doors and managed bidding wars. During the boom years, houses basically sold themselves. The difference between a poor and a fantastic selling agent was hard to spot when everything was selling.  With properties on the market two to four times longer, broker quality and skill matters more than ever.

2. Triple the work for the same dollars:  Slow and significant inventory means that every bit of extra attention counts. Just to get the same results, much more work is required across the board to differentiate and move the property.  Agents must therefore consistently think out of the box in marketing the home, constantly tweak the strategy based on market feedback, and maximize showability through open houses and odd showing times.  

3. Incentivizing the buyer’s broker:  Let’s cut to the chase:  more than 85% of transactions happen through co-brokes (situations in which the buyer has engaged a buyer’s broker for representation such that both sides have a broker). In today’s buyer’s market, it is unlikely that brokers are able to show their clients every single property that’s on the market due to the high inventory. A solid financial incentive (or split) for the buyer’s broker may very well make the difference between your property being shown and recommended … or not. If you therefore consider the standard 6% fee, 3% pays the seller’s broker and 3% pays the buyer’s broker. Bringing the overall sales commission to 5.5% means the seller’s broker will keep 2.5% to be able to offer 3% to the buyer’s broker, precisely to maintain that incentive (even when making less than the counterpart).

4. Maintaining ammunition for when it counts:  So many transactions come down to the wire in this market, with the difference between deal or no deal often as small as $10k.  At this point in the negotiations dance, agents on both sides may be willing to compromise on their fee, putting their clients first and making the deal happen. However, if the fee is discounted at the beginning of the process, there’s much less room for maneuvering when it can actually make a real difference.

5. A look behind the numbers:  Breaking down the numbers can often put situations into perspective. Let’s look at a $1MM home with a 6% commission, or $60,000. This fee is then split in two (between the buyer’s and seller’s broker), making it $30,000 each. Assuming the standard 50/50 split between the broker (the firm) and the agent (independent contractor), each agent receives $15,000. (Remember that this is payment stretched over the time on market for the property, now an average of 6 months in Manhattan; that’s $2500/month, which of course is cut in half if the property is on the market for a year.) So, assuming a conservative 2 hours per day, 6 days per week, we’re now at $52/hour, for a job that includes (on the seller agent side):

• Developing and aligning on an optimal marketing strategy (web, broker, mailing campaign, etc.), and re-assessing it continuously
• Organizing staging, photo-shoots, videos and virtual tours for the property
• Constantly advertizing the property across multiple venues (newspapers, broker-broker listing services, email blasts, online services, targeted mailings, etc.)
• Conducting property due diligence and gathering documentation from the management company to fully understand every aspect of the building, its policies and processes
• Promptly answering all questions about the property to brokers and buyers, alike (24/7 access via email, work phone or cell phone)
• Scheduling and hosting all viewings, including open houses and off-hour appointments
• Preparing and discussing weekly activity reports with the owner, tracking all interest and gauging against metrics to determine next steps
• Reviewing incoming offers and the financial suitability of prospective buyers
• Consulting with the seller on offers, negotiating them in the best interest of the seller, maintaining the objectivity of the process and counseling the buyer on optimal ways to proceed (read why studies have shown it’s always better for a third party to negotiate on your behalf)
• Preparing deal sheets and all documentation for dissemination to appropriate parties in a speedy manner
• Overseeing the compilation and submission of the many components of the board package, cross referencing all content and interacting with the management company as necessary
• Miscellaneous services such as coordinating move-in scheduling, forwarding addresses, and special requests as they arise
• Attending and facilitating the actual closing

All of this for a pre-tax $52/hr or $15k … and if you call right now, you’ll receive this handy dandy neighborhood guide for free! 

Seriously, though:  what’s the point of going through this exercise?  Far from trying to generate a “poor you” reaction, it’s meant to provide a glimpse into all of the often under-appreciated or overlooked services that a great agent provides in return for that commission, which is never guaranteed until or if the sale actually occurs.

It may be thought-provoking to consider the profile of the kind of agent who is willing to provide a significant discount to their fee considering the above.  In your own profession, why would you or wouldn’t you reduce your salary or fee?  What would it mean, in your profession, about the volume of your existing business or the value that you place on your skills or services?How would you feel about their negotiating capabilities with potential buyers on your behalf upon yielding with you?  And most importantly:  which of the above responsibilities listed above are points of compromise for you?

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