I decided that a response to David Daniels comment on my post "Stop "justifying" your fees - and stop letting the talking heads make you feel like you have to!!" needed to be made in a new post, so here it is.
David's entire comment can be read at the above post link.
...it would be in our best interest to make sure we can absolutely define what our worth consists of...versus just saying our fee is justified and "I ain't budging for anyone".
With some Realtors, Sellers see homespun inkjet printed flyers (if they do any at all). Yes, that may seem self-serving given what I do now, but I cannot imagine NOT using the most professional materials to market your listings! You're making a big mistake if you don't...and it certainly doesn't lend itself well when trying to justify "x%" (we all know what the x stands for in most cases.)
There is a difference between showing prospective clients what our worth consists of vs. giving a list of minutia with prices next to each item showing how much each one costs.
No one but the business owner has a true idea of the cost of doing business. There are dozens, if not hundreds of variables that need to be included in the "justification" of a commission including things like: gasoline, car maintenance and repair, business cards, desk fees, franchise fees, signs, lock boxes, MLS dues, employees, time, phones, IT, computers, etc. Costs that really can't be broken down for the seller in this type of "justification".
Not only that, by opening up a justification you are opening your business costs and expenses up for critique and interpretation. In other words, what I see with agents that justify their fees with lists and numbers is a reason to look into their business and say, well, I don't directly benefit from that so you shouldn't be charging me that. Or, why does it cost so much for this, it shouldn't cost you more than $X for this.
Here's an example - an agent who drives a Prius vs. an agent who drives a Hummer. Often, I find people who simply feel a Hummer is a waste of money - they refuse to see any justification in using that vehicle. It costs more to own and maintain a Hummer than a Prius, yet the Hummer is a valuable tool for certain REALTORS(R). Why should someone else, who has nothing to do with the Hummer REALTORS(R) business decide it's an unjustifiable expense? Because of personal philosophy? Because they can't see beyond their own world? Exactly, they shouldn't. They aren't living that REALTORS(R) business on a daily basis. They don't have a clue.
I can tell you right now that no other profession justifies their costs in the same way talking heads are trying to "demand" that REALTORS(R) do. Airlines are in the middle of fixing that predicament by charging for every little thing. They were forced into this same situation and now the consumer is realizing that and plane ticket costs more than they thought it should cost.
The fees I charge a seller are not simply to cover fees and time associated only with that seller's home. It's the same thing as the cost of an item you purchase - the cost is not simply to cover the cost of that item. It's to cover all costs associated with the whole business. In other words, a retail business owner knows how much it costs to run their business + the cost of the product. The price of that item is made according to the costs of the business, NOT simply the cost of the item in question. That item covers the cost of remaining open for business when it's only "lookie loos" that come into the store.
I whole heartedly agree with you that REALTORS(R) need to get away from DIY looking marketing materials but I'm going to skip this to focus on the topic of commission justification.
Sellers read on real estate blogs all day long about price-fixing...and how it's against the law. So they watch as agents use "X%" instead of...um...let's say...6 or so (I'm just pulling a figure out of my hat). Who are we kidding?? We've taught sellers that price fixing is illegal, but they also know when an agent is "standing by their guns" as far as commission goes, it's one particular number. Makes our entire industry look foolish if you ask me!
Well, this is up for debate. I charge my fees based upon my business. The fee I charge VARIES depending upon the property, workability of the sellers, probability of it closing, estimated length of time it will take to close, etc. I have a "scale" I use in my business to coordinate my fees on listings. For example, I charge a higher % on lower priced properties, a slightly lower % on properties that sell fast no matter what, a slighty higher % on properties that tend to sit no matter how well they are priced and a totally different % when it comes to land or luxury homes. Additionally, my fee is separate from the "whole fee". In other words, what I educate the seller to offer to a cooperating broker depends entirely upon their competition and the current market. Rarely does it fall in the "6" category you've stated above.
During our listing presentations, we have no problem telling the seller he's overpriced...and needs to "get real" in his market value. Sometimes that means a $10,000 reduction. Sometimes that means a $50,000 reduction. But we get pretty darned upset if a seller asks us to reduce our commission by 1%. Let's see...we just asked them to get real by reducing the sales price by $20,000, and he asked us to reduce our commission by $3,000 (presuming a $300,000 sales price). Of those amounts...the seller actually takes a FULL $25,000 hit (in his mind)...and we lose $1,500 x 80% for a grand total of $1,200.00. Some sellers have a hard time figuring that out.
For every dollar the seller lowers his price, my paycheck is lowered as well, without reducing my commission %. Let's look at this realistically. A seller of a $200,000 home reduces his price $20,000. That's a 10% reduction. The agent is also taking a 10% reduction in payment simply because of the reduced price on the home. But, when you ask an agent to also take a 1% reduction off say a 4% listing side commission, that is a 10% reduction plus a 25% reduction. Why would any agent do that? It's my job to get the home sold for the most amount of money, in the least possible time for the owner. It is not my job to share in any "losses" the owner experiences. If that is the case, I'll simply send the emergency room bills for my son who is very active (smile) to the seller because after all, my expenses should also be his/her expenses. It makes no sense. My financial planner doesn't share in my losses beyond what his commission charge is - why should he? Additionally, I often pay my financial planner a flat fee for various services.
It makes me reflect back on my own real estate career. I'm not exactly sure what risks we're talking about. I always paid a fee for E&O insurance per transaction, so I don't think we're talking about the BIG risks. So...are we talking about the $150.00 we spent to market their home? Are we talking about the 3 hours it took to prepare the CMA and take the listing? Is it the hours we spent sending out Cherry Pie recipe postcards?? Why would we do that anyway??
I've read wayyyyyyyyyy too many blogs where agents have completely cut out print advertising, so let's not include newspaper or magazine advertising expenses just for argument's sake as far as risks go, ok? No one does that anymore. It USED to be a good justification for our fee, but not anymore.
Here's the risk I'm talking about - in our current market, less than 20% of all homes are selling and that number is getting lower and lower every day. That means 8 out of 10 homes do not sell, even well priced homes. It simply isn't possible for every home to sell when there are not enough buyers. Yes, there are a boat load of over priced homes. But, there are also many homes, well priced, that don't sell because there are 5 homes for every buyer (not an actual stat, just an example of more homes than buyers). I can have 2 homes, exact same floor plan, same street, same price. One will sell, the other will not. Does it mean that one is over-priced? No, it means there aren't enough buyers and yes, lowering the price will get it sold IF there are more buyers by lowering the price.
I'm talking about the risk of only selling 2 out of 10 listings (not my stats, the local market stats). That means that I'm putting out time and money for 10 things and only being paid for 2. Not a good business model at all. A value of my service is that I consistently outsell the local market. I definitely show this to sellers, it's valuable to them.
For what it's worth, it costs me more than $150.00 to market the home, significantly more. It takes more than 3 hours to do a CMA, a listing appointment, paperwork, market prep, etc. I want to position that home to SELL, not just list the home. Selling takes more work than listing. Everyone also seems to forget all of the other time involved - every week - every day.
FYI, you are right, I don't do actual "print advertising" anymore. With that said, I have a monthly newsletter IN PRINT that goes out via SNAIL MAIL to over 5,000 people. Yep, I'm old school that way. Thing is, no matter how much success we've had getting buyers (and some listings) on the web, our biggest success at getting listings and getting buyers is our SNAIL MAIL NEWSLETTER. The more listings we have, the higher % of our properties sell. That's an 'intangible' that isn't directly charged to the seller, but seriously benefits each seller.
Well, if that's such a huge risk, perhaps we shouldn't have taken that particular listing. If it doesn't sell, it was either priced too high...in horrible condition, the sellers wouldn't accept perfectly good offers, etc. WE'RE the determiners of the amount of risk we're willing to take. And it's up to us to make sure the risk is a reasonable one. We can't penalize future sellers because we did a poor job in the past.
Based upon how much I am able to charge my sellers and the current market conditions, I absolutely have to take the risk. When the market is a sellers market (less than 1/3 of the time by the way) and I can sell properties faster and sell a significantly higher % of what I list, costs go down, it's that simple.
It's not about penalizing sellers in the slightest. It's the price they pay for the convenience of no up-front costs to them and zero risk to them. It's not about doing a poor job, not even close. It's a fact of the market, depending upon the market you are in. When sellers are willing to take the risk by paying an upfront fee, prices will drop pretty drastically. When I don't have the risk, especially in this market, I can easily charge less (and I do offer it). But I also mentioned the con's of doing this in my previous post.
Before Walmart comes out with its own $1,500 flat fee real estate brokerage, and offers more service and value than many of our existing full-service brokerages....let's see some REAL justifications. All I've ever read are broad stroke generalities...or lists that contain things like putting an ant-trap beneath the kitchen sink.
It may happen, but it won't be successful. They can't mass produce the product or streamline the manufacturing. The carrying costs alone would kill them. It would require employees that want to develop relationships with people (and minimum wage won't cut it), it would require E&O (even at discounts), it would require signs and flyers, etc. Things that because it's all local, Walmart won't have the capability of controlling. The biggest issue is the agent/employee. A good REALTOR(R) and loan officer is paid based upon their ability. It's incentive and it works. Walmart wouldn't be able to compete and wouldn't be able to hold onto good employees. This isn't what my post is about so I'll abstain from more things about this model.
Agents that "justify" to the minutia are not doing anyone any favors, including the consumer.
