Zero Commission

[photopress:howie.jpg,thumb,alignright]We’ve been talking down there in the comments about all of the things agents are “not allowed” to do. One benefit of being an independent is that you can be an avant-gardist and try out new and different things from time to time. I had this idea. Everyone knows that when you list a house, you often sell other houses as a result. Buyers call on the sign or from the internet or you meet them at an open house. These buyers may buy the house they called about, or they may buy a different house from you.

How about reducing the commission on the house you have listed, every time you get a buyer client as a result of that seller’s house being for sale?

Let’s say it is a condo priced at $225,000 with a seller’s side commission of $4,500. Someone calls to buy it, but they have a dog and that condo association doesn’t allow dogs. You sell them a different condo that does allow dogs and earn a commission of $5,000. You would never have met that buyer if they didn’t call on the condo listed at $225,000.

So how about taking 10% of the $5,000 you made as a result, and reducing the fee on the listing from $4,500 to $4,000. Get two buyers from calls on the listing, and the fee goes down to $3,500. Of course no one would want their property on the market long enough for the agent to get 10 buyers, lowering their fee to zero. But it would be possible. Maybe it should be 20% each and 5 buyers to get to zero.

What do you think? Too complex? Is figuring that out as hard as trying to figure out what is going on with Howie on Deal or NO Deal? Maybe I shouldn’t have watched that American Inventors show…agents aren’t supposed to be as “out of the box” as you techies πŸ™‚

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

36 thoughts on “Zero Commission

  1. There’s a local mortgage firm here in Denver that is listing homes on the MLS for free. They figure the commision on the mortgage is good enough. With the eventual marginalization of the MLS, Real Estate Agents are going to need to try ideas like yours to compete in the future.

  2. By listing free, you don’t acknowledge the value of the good listing agent and what they bring to the table.this is just as bad as offering full service for 1%. I guess it depends what ‘full service’ means to that agent. I like fee for service.We developed a model that takes a seller from FSBO to full service and is priced fairly for the time spent. Consult with the seller to figure out what services they don’t need, but how can they do that if the types and cost of those services are not clearly laid out, and figure out together what can be dropped instead of faking it like the 1% agents. Give me a break.Given that a listed property with a good agent can command a price 25% higher than a FSBO, there’s obviously value to the services of a good lisitng agent

  3. First, you missed the part where I’m still getting paid the same to sell the house, even when the seller’s commission reduces to zero from him. I’m just giving the seller a credit for the additional business I received as a result of “using his home” to draw in new clients.

    Second, 1% for full service can be more than enough…it depends on the sale price, doesn’t it? This magic being in the percentage just doesn’t wash. 3% of $105,000 is usually not enough. 1% of $1.2 mil that sells quickly can be plenty. There is no magic in the percentage.

    Selling a house is never about “time spent”. Never was, never will be. Same with buyers really. Clearly the least experienced may spend the most time doing these things.

    Why should the seller who has his house picture perfect when I walk in the door pay the same as the one I have to spend two weeks on, getting it ready for market?

    Besides, almost every success story is about savvy and mental energy, not hours spent. And I’ve seen just as many agents “faking it” at 3% as I have at 1%.

  4. I’ve thought about various strategies for competing with the discount brokers too. The conclusion I’ve reached is that there is a value proposition, but it requires a completely different brand strategy and approach. i.e. Daimler Chrysler doesn’t sell Plymouths at the Mercedes dealership.

  5. May I offer an observation?

    I think that many underestimate the enormous weight money plays in everyone’s day-to-day decision making, particularly real estate. Everyone likes to get a great value or bargain. If I go to Lowe’s and my eyes gloss over looking at the Turbo charged, solid state 400sq. inch stainless steel BBQ by Char-Broil and I see the same model at Home Depot for less cost, guess where I’m going?

    For many consumers, there is not a clear differentiator among tranditional companies. And since most homes listed are not sold by the listing agent, it presents a value problem on it’s own.

    Real Estate is money driven-

    So, when you have competing companies and one charges significantly less for the same end result, that is a tangible differentiator. Consumers really understand it.

    Further, when you have technology driving the ability of consumers to showcase their homes (sometimes for free), eventually, due to scale and the huge advantage of leveraging the technology, the cost structure will drop from traditional listing costs. How much and how quick, time will tell.

    My best guess is that the less costly scenario for the same end result would be a compelling offering, if not a no-brainer. In most cases, as more consumers become more aware of less expensive offerings, I think that the model will win out–being an almost insurmountable advantage for those offering these services.

    Southwest Airlines has maintained one of the longest running profit models in their industry. They give the people what they want–going from A to B for less.

    I do think that “discount” is somewhat misleading. We close a fair share of transactions where these companies are involved. I would characterize their service as doing the same, but for less expense to their clients.

    PS. I always get a kick out of all the slogans you see in the magazines, “experience the difference.” — come play in escrow and you’ll see it everyday. πŸ™‚

  6. Question for you, Legacy (sorry, still don’t know your name) how many agents come in and sign with their buyer clients on a percentage basis? How many agents review the HUD 1 with their buyer clients 24 hours in advance per the guidelines? How many agents review the HUD 1 ever with their buyer clients? I’ve never seen a HUD 1 on the buyer’s side that I didn’t have to correct, a neutral party who is the preparer shouldn’t be the one reviewing it with the buyer.

    May I offer an obeservation? LOL

    No offense, seriously, but one of the reasons why buyers are “shortchanged” on the West Coast with regard to representation is the “escrow” process. So saying the discounter does the same “work” as the full service agent, is just noting the “raise the bar” problems of too many “full service” agents. Not giving full service may equal the discounted service, but they are not equal when done by their definitions. On the East Coast, except NY and North Jersey where they are equally short changed by the lawyer escrow process, a buyer’s agent is more responsible for and to their client.

    I may agree that sometimes the “full service” agent doesn’t do more than the “discount” agent, but these companies are copying the least common denominator. Now, I still hold that there is no such thing as a “discount”, as that would assume that there is a “standard fee” from which one deviates, and that is not true. Commissions are negotiable from the seller side for sure, and there is no “standard fee” to “discount” in that regard. Until the buyer “sets” the buyer Agent Fee from the get go, we can’t say the same about the Buyer Agent Fee…but it’s coming.

    There is no standard and there is no “discount”…there’s a meeting of the minds, a contract, an offering and concessions off the “offering” from the seller to the Buyer Agent.

    The word “discount” is a misnomer. There’s a fair price and an unfair price and each agent and the client determine that price. Seller client, that is, at least the way it is done today. If large companies pull out of the mls, there will be a major change though, as the buyer will be able to set and negotiate the Buyer Agent fee without the mls offering. Can you feel the train a comin’?

    Any system that throws the buyer into the “neutral party” pool as soon as they sign a contract, is not offering proper buyer representation. I’ve managed to beat the system most of the time, but the system really doesn’t want me to “interfere” on the buyers behalf. I’ve been clubbed over the head many times when I’ve asked to see the HUD 1 so I can review it for the buyer. Even lenders have said “It’s none of you business what I am charging!” and gotten mad when I compared the HUD 1 against the GFI as to lender costs.

    Also any Buyer Agent who lets the seller pick escrow (Title yes; Escrow no) without trying to move that table over to the buyer’s side, is just selling a house. Sure I’ll try to have both Title and Escrow when I’m representing the seller. But when I am representing the buyer…seller picks Title and buyer picks Escrow. You may say it doesn’t matter, but I know differently. I’ve seen seller charges on the buyer side that I had to move over. I’ve seen escrow tell the seller’s agent things about the buyer that they should not be revealing if the seller’s agent is their “customer”.

    I like your style too, very much so. Just a discussion about right vs. right. Please don’t take my comments regarding “escrow” personally. Just an observation from someone who’s looked at life from both sides now and sees the “discrimation” of the system. It’s better in Washington than in California, BTW. But agents thinking they are done representing a buyer when they “open escrow”?!?! How can that be so if Escrow is a neutral party? Who is representing the buyer from the day escrow opens to the end if the agent runs off to make the next “sale”?

    Sorry, obviously one of my buttons. I’m just as strong minded about the abuse of seller agency. It just doesn’t get discurssed as often. “Agency” is obviously “my thing” πŸ™‚

  7. Ardell,

    Tim here…

    When I mentioned “discount is misleading” a bit, I meant that those folks who work for “discount brokerages” (per industry coining) in many cases do NOT do less work than traditional company agents. Certainly some “discount” models may just list a home and that’s about it. But in my experience, the agents who we’ve worked with from discount brokerages work with the same vigor, skill and customer service that other agents do in traditional brokerages.

    Answering your questions regarding HUD’s:

    In my experience it is a super low number of agents that review settlement statements with their client, never mind themselves. VERY FEW. Probably under 3% even attend signings. Same goes for Loan Officers. I think I understand what you mean by a neutral party shouldn’t have to be the one to review the HUD with a borrower. But, certainly one of our jobs IS to explain to the borrower/seller in detail all the charges & credits that are itemized on the HUD.

    When you state that it’s ‘rare-a-time when you didn’t correct a HUD statement, does that mean that the HUD prepared by the closer had a track record of incorrect figures? If so, then time for you to start shopping.

    I think it’s wierd that the loan officer would go into a tizzy about a HUD settlement statement not being any of your business, nevermind their income disclosed on it. The HUD is sent to your office post- closing anyway. Many LO’s make serious bank, sometimes more than the agent in the deal.

    “Agent’s thinking that they are done representing buyer’s after escrow is opened”– this is what I call the secret agent. Wanna know something cool? I bet you a Vanilla milkshake at Kid Valley that you couldn’t guess what deals we have the most problems with.

    Hint- those with secret agents and those that hand them off to transaction coordinators…ok.. here comes the hate mail.

    PS. The trend continues…escrow is the last to know that clients are out of town. For all the agents reading this blog, regardless of where you close, please let your escrow company know when the parties are out of town.

    PSS. Oh, almost forgot, if escrow receives loan docs on THE very last day (usually late morning or early afternoon) a borrower can possibly sign, this is a red-light that loan transaction management has been lacking. When escrow firms receive loan docs, they are not printed off ready to go, Viola! Oh, contrare! I think this is one of the most misunderstood aspects of escrow.

    It is not possible for escrow to receive loan docs, prepare the package and legal stuff, call the borrower who is usually at work, and say, “hi,your loan docs are ready …by the way, they must be signed today. Our work does not start at 6pm when borrowers get home from work. In many instances, this results in INCREASED cost to the borrower. Why? Many title companies hire an army of mobile notary agents (at fees from $125-250) to come to the rescue under these circumstances. This cost is passed on to the borrower, completely preventable in IMHO.

    I can’t emphasize how important a good loan officer is in preventing this from happening. In my opinion, the value of a good, ethical and customer driven loan officer is woefully underestimated by agents.

  8. All of this talk about discount brokers, FSBO’s, cut commissions – it’s all going to be GONE when the buyer’s market truly hits.

    It’s easy to sell in a seller’s market, but when the tide starts changing (already is) you actually have to try to sell a house. You have to advertise, door knock, advertise again, stage, farm, advertise more and more and more.

    to sell a $1mill house in Hawaii you have to spend thousands of dollars now and it can take a year. So no, 1% is not going to cut it for the commission.

    Sellers here are now offering MORE than 6% sometimes because they need to sell. If the market comes crashing hard, I predict commissions above 6% will be common. Like, 3% to buyer’s agent plus a $10k bonus. I just saw that last month here.

  9. Tony, Offering a bonus to the buyer’s agent is “old thinking”.

    If the buyer’s agent is representing the buyer, why should the agent be “enticed” by a bounus. The best house is the best house for the buyer….not the one with the bonus. This is why I intentionally do not look at the commission until after the offer is “signed around”. One exception being, when I need to participate financially in the offer for the buyer to get the property. Then I need to see it during negotiations.

    Bonuses to the buyer’s agent should no longer be used to sell houses. That’s from the old days when all agents represented sellers.

    An extra $10,000 in my pocket should not make that house more attractive to my buyer. Offer the $10,000 bonus to the buyer, not to the agent. Maybe it will make the house look better to the buyer πŸ™‚

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  11. I think the idea of commission reduction for buyer business generated from the listing is a great one.

    Of course, if I want to implement it, I’ve got to figure out how to capture and track the buyers so that proper credit is given. But I’m already working on how to make that happen. Thanks for a good new idea!

  12. Jim, you track it the same way you track referral business. I’m sure that you already have a system to track a referral from out of state, to be sure to pay the referral fee to the out of state broker at closing.

    Most states have laws against paying third part referral fees, so it’s a tad touchy. There’s no law against reducing the commission for “other business generated” before the listing closes. But, I’m pretty sure you can’t go below zero or actually “pay” rather than “reduce” a commission, as there are laws against that in most states.

  13. Tim at Legacy:
    You’re right on re:the loan docs hitting escrow in enough time to have a smooth closing.I think the same problem exists with the lenders as with the agents when both turn the deals over to transaction coordinators.I like my lender who is hands on, always knows where we are in the process and when I attend closings and review the HUDs I always know they’re going to match the Good Faith.
    When the docs are late, the customer has a bad experience and when that happens, everything you’ve done all thru the transaction to make if fun but professional for your clients goes down the toilet.
    BTW,I just got a HUD with a $200 recording fee!!!Ever heard of that?

  14. Eileen- good morning…thought I’d just drop this to you before I run the kids to school this morning.

    $200.00 in recording fees? Unusual? Depends on where you are closing. Most transactions we close recording fees are well $100 for recording fees.

    Warranty Deed is $33 plus a $1 for each additional page, Deeds of Trust are $34 and $1 for each additional page. Some counties may vary slightly, but not much. Buyer pays these.

    What is happening is that escrow firms (several in Puget Sound area) are charging overages just because they can. In other words, they keep the difference. Illegal, no. Unethical, in my opinion yes. But then again, our firm is customer driven, not profit driven. You must have the prior solved before the latter occurs.

    Another charge that is blatantly absurd is e-mail fees. We see these charged by competitors upwards of $150-200. How do you charge a client an e-mail document fee? Many are, and it’s never questioned. This is how most all escrow firms receives loan docs. It’s a routine daily function of work, like picking up the phone. Will the industry invent another junk fee soon? Bet on it.

    If you disect the potential escrow junk fees that are out there, it could potentially increase profits to the firm by 30% or so. I would love to gross 30% more than we are.

    Our rate structure is on our website, but to save you the trouble: Most of our purchase transactions close for $495/side plus tax. $100,000 sale, same. $500K sale, same. No junk, no fluff, no e-mail fees. At our company, we think it’s smart business to charge a little to a lot of people than charge a ton to just a few. And, we have a strong belief that the last people your clients see in a transaction will have a lasting impact on the long-term business relationship you have with your client. End of commercial.

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