What is your time worth per hour? Your fee structure would reflect that amount. Just how does a working Realtor get their income up? Charge more? Get more people to pay them? Both? Some other answer?
A few years ago (late 2004 and through 2005) there was more downward pressure on real estate commissions than I’ve seen seen in the past thirty years. There were a lot of lower commission companies that started and there was a tremendous amount of media coverage about real estate commissions needing to go down. The “news articles” and that viewpoint are still being worked on today by the DOJ and the FTC, along with various professors, among others. It is vary easy for a working Realtor to find articles and opinions expressing the viewpoint that “you charge too much”.
Do you? Do you charge too much commission? Are your fees too high?
How would you find out if your fees were too high or too low? If you lost a listing “because you charge too much” would that be an indicator? How many listings would you have to lose before it was “true”? How about if you can’t pay your bills? Would that mean you aren’t charging “enough”? Or enough people? It is an interesting dilemma for a working agent. Back in the “old days” agents didn’t have this problem; the broker announced to their agents how much they would charge. That was it. No arguments, it was the broker’s decision.
Re/Max wasn’t the first “100% company”, not even the first successful 100% company – that’s Realty Executives. But they were most assuredly the first successful national 100% company and they are the company that set the standards nationally for all other brokerage companies – 100% company or not – working Realtors can pretty much charge whatever they please. Complete and total freedom for working agents. To fail. An individual agent at the listing table hears the seller say, “I will only pay ‘X’ amount of commission”. The agent is broke and needs a deal. This one thing alone has had a bigger impact on commissions than the internet, the Justice Department, the Federal Trade Commission and all the various limited service and discount companies combined. It is up to the individual agent. It is up to you.
So what’s fair? What is a “fair” commission for you to charge?
Please notice that I am not asking random people so we can get a consensus of opinion here on what they think is a “fair commission” for Realtors to charge. Nor am I suggesting you learn some scripts so you can justify to your customers or someone here how much you charge. I don’t believe you need scripts to “justify” your commission – at least not in the way most Realtors and the public seem to think of it. There is just ONE PERSON you do need to “justify” your commission to: you. End of list.
Does it seem right to you? Not, would you like more. Not, do you want more money. Just is it right to you. Different cities have different amounts and percentages that are considered fair or right. A neighboring community might – for no good reason – have a lower or higher typical commission. Price points enter into this, as well. What might be right for you – as a percentage – if you live in the Los Angles area could be very different than if you are a working Realtor in Ames, Iowa.
But it is what you consider “right”. Will you lower your fee if someone asks you to? If they ask nicely? If they demand it as a condition of doing business with you at all? How low will you go? What if the amount you charge is more than they are willing (or even able) to pay? Will you then do it for less? Under what conditions? Is the amount you say you charge sort of a gag – you kind of want that much but you don’t really expect anyone in their right mind to actually pay it?
When do you really decide how much to charge? Do you work it out in full and complete detail during a planning session – where you’ve set aside the time to work ON your business, not in it (with all the various “what if’s” considered)? Or do you have a vague idea that there are “times” you will take less and then you can just make the decision there at their kitchen table if they happen to bring it up. What if they simply won’t pay what you say you charge? Is it then alright to lower your fee? How low? How low will you go if they say they won’t pay “that much”? How low? That is your real commission number. The amount where you are totally willing to walk away if they won’t pay it. At that number (percentage or flat amount), they either pay it or they don’t hire you. Period. Is your walk-away number the same as the amount you say you charge? If not, why not? What successful business principle is being applied to advertise or promote a higher fee and then secretly accept a lower fee? When someone asks me how much I charge, I answer the question. I don’t need to see the house, find out their loan balance, get “further information” or first explain how wonderful we are. Do we have people who tell us they won’t pay that much? Of course we do. Every day. I mean that literally, every day. In fact, (this is probably true for any business) if you don’t have some people telling you they won’t pay “that much” either you aren’t charging enough or you aren’t talking to enough people.
Unless you are planning on building your business with a marketing strategy of: “no matter what we tell you we charge, we will take less, a lot less – have us over and see for yourself”, I don’t know of any advantage in saying you charge a certain price for your services to then routinely accept a lower amount. Just like you would tell a seller who says he will take less for his house, get it in writing so you can tell the world. I am not telling you to lower your fees. I am not telling you to raise your fees. I am telling you (most of you, anyway – there are a few who don’t need to hear this) to spend some time looking this over for yourself so you can sort it all out. Once you know what you are worth you won’t have any trouble explaining to your customers. But the funny part is once you really know you will seldom bother explaining it to anyone.
July 7, 2008 at 3:03 am
In my firm, the company does set the commission rate and modifications are only made with approval from managers. Because we have some lower priced properties, we even have a minimum commission which is a flat fee, so that below a certain price, we obtain enough income per transaction to make the sale financially feasible (in other words our flat fee on those homes is higher then the company percentage rate would be)
My favorite “commission irony” Is the agent who moves from a traditional firm where the commission was “X”, and then ends up charging 1/2 “X” to obtain business because they have no other tools to use to obtain business – Now they’re earning the same amount, but bearing additional costs. Silly business. But as you point out, its probably because they don;t know what they’re worth, or lack the confidence that you demonstrate in your post.
As always, enjoyed reading!
July 7, 2008 at 5:08 am
I too, Russell, am affiliated with company where the manager sets the fees. Special permission is needed to deviate from them. Have I ever “gotten” that “special permission”? Yes. And it wasn’t worth it in the long run. The seller was not worth the aggravation.
I too have seen agents leave traditional companies and join these discounters. Within a year most of them fall flat on their faces. Can’t do it.
What do you consider YOUR commission plan? I really like it and I think I see some agents using it in my area, however, I don’t see anyone promoting it. Is your plan a “cure all” program, pretty much, for you?
July 7, 2008 at 5:44 am
I’m pretty happy with the RE/MAX plan, and the flexibility that comes with it. Does that mean I drop my commission on many deals? No way… But have I used this commission flexibility to swing a few deals that I might have not won? You bet. Especially in counter-offer and (gasp) multiple counter-offer situations — yes, those are still happening in parts of the Bay Area, believe it or not. The ability to make those slight tweaks without having to obtain “management approval” is an ace in your back pocket when you’re battling for a deal on a Sunday night.
Great article Russell!
Jennifer in Louisville
July 7, 2008 at 5:58 am
I *VERY* rarely drop my fees. I explain the added value I bring that no one else in our area is able to provide. If they hedge about So-and-So-Realty is willing to do it for X – I tell them that theres a difference between listing a home by putting it on the MLS and marketing a home. If they want to give the discounters a try – go ahead, I wish them the best of luck, and give me a call if it doesn’t sell.
And if that doesn’t seal the deal, I follow it up with: Why would you trust someone to negotiate on your behalf – when they are unable to negotiate their own rate of pay?
Mack in Atlanta
July 7, 2008 at 6:30 am
In order to answer your question each agent has to know what their costs are. Once they have figured this out it is easy to know what has to be charged in order to show a profit. After all, agents should be looking at this as a business shouldn’t they?
Special circumstances also can determine what commission to charge. ie: A couple gets married and they are going to sell her house, his house and then purchase their house. Will I work with them on the commission, you better believe I will. After all in this circumstance I am not having to spent any money advertising to generate another client. Another circumstance would be the move up or downsizing buyers who are selling. Would you offer them a discount in the commission charged to sell their property, knowing that you are going to get another transaction. Why not have them sign a buyer broker agreement when listing their home and write into the listing contract that the reduced commission is based on their purchasing their next home through you. I reduce the commission on the home they are selling by 1/2% when doing this. What if they are relocating and they will use an agent that you refer them to?
Sorry for the rambling but I think it is important for agents to think the whole situation through, know what your costs are and act accordingly as a business person looking for a ROI.
July 7, 2008 at 6:33 am
Very good article Russell. My opinion is that we need to set a rate that works for us and our market and then stick to it. “Making exceptions” and lowering the rate for some people can cause a lot problems. First it’s not fair for the folks that had to pay more and secondly it get you in to a bad habit of negotiating against your own seller.
I agree that during the peak of the market there was a lot of pressure on commissions. Listings were gold and they were very difficult to find. Now, at least in my market(central Florida), commissions are going up. I’m actually getting ready to increase what I charge by a point due to values dropping so drastically and the fact that listings take longer to sell(if they sell). The sellers will have no issue with the increase. Of course, BAs won’t be happy when they see that I’m making more than them but that’s a topic for another post:)
July 7, 2008 at 7:11 am
People now more than ever want to pay “less” since the cost of everything else is so expensive and unless they actually have equity & bought a while ago, many are struggling just to get enough to pay off their mortgage. Unfortunately, many agents are dealing with the same problem, and if the houses take longer to sell they need “more”.
It’s really all about supply and demand that dictates the commission rate, which is why laws exist that there isn’t one “set price” for commission. It depends mostly on what the other agents are charging and doing, and it’s always good to be a few steps ahead of your competition.
July 7, 2008 at 7:45 am
Speaking from personal experience, (long before I became wiser) :), I worked for a discount company who charged a minimal X % to everyone. The clients understood what services they would receive for said commission. Additional services cost more. All I can say, is 95% of the clients had no appreciation for what we do. If they are hiring, based only on commission, they are not the type of client I want. They generally wanted more services than any other client I have had, for no additional charge.
Now, I know what it takes to run my business and what it costs me to carry each listing. That alone determines my fee. Like Jim, I do give discounts when my clients are doing multiple transactions. Other than that, I need to make my minimum to keep my business profitable and keep my clients happy.
July 7, 2008 at 8:36 am
I personally like the menu approach – especially if you work for a brokerage that allows you to set your own rate. It’s clear and puts the consumer in control.
July 7, 2008 at 9:24 am
Discussing specific numbers of a specific broker can be misunderstood as possible price fixing, and the result is our need to edit a few of the comments here.
Please stick to the general nature of the post to avoid violation of any federal trade laws.
July 7, 2008 at 8:43 pm
Well I was one of the ones who posted specific numbers earlier whose post got “deleted”. It seems a bit ironic that we talk about the price of gas ad nauseum quoting very specific prices and the FTC doesn’t worry about price fixing there, and yet we can’t mention a commission quoted by another agent a couple of years ago when discussing how high or low commissions can go? I actually considered that angle when I wrote the first post but couldn’t believe anyone would go there. Live and learn!
Anyway…..I had made a point that a smart agent I had interviewed to sell a house in another city had a sliding scale commission:
X% (fill in your own number here): Enter in MLS, professional pictures, sign and lockbox, 2 open houses per month, 2 catered agents caravans, ads in the Sunday homefinder weekly, ads in the local homes magazines, talking sign, brochure box, full color brochures on glossy paper, postcards to the neighbors.
Y% (less…) Enter in MLS, agent pictures, sign and lockbox, 1 open house per month, ads in the local paper for open houses only, 1 agents caravan, ads in local homes magazines, brochure box full color brochures.
Z% (cough…even less) for Enter in MLS, agent pictures, sign and lockbox, ads in local home magazines,
Then she went on to ask for initials on automatic reductions in price after 60 and 90 days. Their market was significantly softer than ours, so I never adopted the approach.
July 7, 2008 at 9:31 pm
I specifically chose a mid-sized independent brokerage partly because I didn’t want my broker dictating how much I can charge. I see myself as a small business owner that is affiliated with a broker. I should be able to set my own fees.
I also believe in having a range for my commissions. Some of the factors that influence what commission rate I offer includes price range, single transaction vs multiple transactions, and the estimated time it will take to sell. I’m much more willing to drop my commission if I anticipate it will be an easier sale. If the supply/demand ratio is good and the house price/condition/location should allow me to sell fairly quickly, I will spend less time on it and can afford to make less. On the other hand, if it might be a 6 month job based on buyer traffic in the area, then it’s hard to justify dropping my commission.
The other thing that impacts my decision is the potential for getting other business from the listing. If the home is located in an area that I really want to target for my business, and especially if it is an area that tends to attract unrepresented buyers that might either buy the house or turn into an other listing/buyer client, then it might be worth it to make less on this one deal. It’s about the big picture, not just the direct expenses for this particular listing. On the other hand, if the house is a 45 minute drive and only $175,000, then dropping the commission rate doesn’t make sense. It would be better to lose it and focus my time on more productive activities.
Richard Johnston, Sherman Oaks Homes
July 8, 2008 at 1:02 am
I charge 6% in this market because it takes a lot of hard work to sell a home. Plus, the selling agent would prefer to get paid 3% too.
When a seller debates the commission, I simply state that this is my fee. I mean, there are agent who will probably pay the seller to sell their home.
Working with a professional makes a big difference. They thing their saving that 1%, but actually losing more than that.
July 8, 2008 at 3:18 pm
Russell: The very subject I have been thinking about for a long time. There are two things in the equation: Income and Expenses. You generate a profit if income is greater than expenses… basic and simple enough.
Income is generated from sales. Not every listing sells. The ones that do sell pay the “freight” for all… the ones that don’t sell get a “free” ride. Risky!!!
Although there has never been a “standard” commission established, there has been a “perceived standard commission” as plastered all over the media, cited in examples, and generally accepted as the measuring stick in a real estate commission….. making the consumers, and their “advocates” goal to beat down the commission. The commission is the target!!!
Agents came up with all kinds of ways to differentiate themselves, but often times it becomes a “hard sell”, often loosing to the agent that will cut their commission or you feel forced to cut your commission to get the business. Service is not uppermost in the consumers mind… it was price.
Expenses: Since there is no “standard package” for listings and sales, expenses are harder to quantify into a business PLAN… what will a listing cost?
Throw into the mix that we operate in a high risk market….. what are the chances the listing you just took will sell before expiration?. Also take into account the over supply of labor (agents) and lack of a standard service….what do I, the consumer get for my money?
Until we in the industry figure out a way to reduce the risk and spread the costs to everyone, to go from the big payday to the steady payday, and adopt some sort of comparable, predicable service package… the answer to the question is: COMMISSIONS WILL BE AS HIGH AS THE MARKET WILL BEAR AND AS LOW AS YOU WILL ACCEPT…. Is there a bottom? 100% Thanks, Chuck Licari
July 9, 2008 at 12:22 am
This is very interesting post but I think agents can learn alot from their lenders who deal with pricing issues daily. See how they handle it and try to adapt to your own situation. Mr. Shaw’s menu is one approach the many lenders use currently. Also, be ready to answer the question directly as Russell points out as now there are tools for consumers like this real estate agents hourly rate calculator