The myth of the discount commission...
how lower fees actually cost sellers more
Every seller wants to net the most money possible when it comes to the sale of their home. However, in this pursuit many sellers unknowingly cost themselves money when they work with an agent who offers a discounted commission.
When a seller chooses an agent who offers a discounted commission there are some underlying assumptions that they typically make including:
- All agents are the same
- The home will sell itself
- The price will be the price
- The property will get the same exposure
- The service will be identical
All five of these assumptions are false.
Hiring a discount agent in the hopes of netting the most money on the sale of your home would be analogous to walking into a Mercedes dealership and wanting to buy a car for the same price as a Ford (nothing against Fords). While a Mercedes and a Ford are both cars, and both provide transportation, there is a distinct difference between the two products. The same is true of discount agents and full service agents. Both can get the job done, however, how they get the job done can be worlds apart.
A discount agent vs. a full service agent
A discount agent has a discount orientation. Their value to you as a seller is that they offer to perform their service for less money. Their focus is on saving you money. That is, the discount agent focuses on the smallest part of the transaction - 6% or less in commissions.
A full service agent, on the other hand, is retail oriented. Their value to you as a seller is their ability to produce a higher sales price for your home. Their goal is to net you more money at closing after all your fees have been paid. The full service agent is focused on the sales price of your home which is the largest part of the transaction - 94%.
Where do you want your agent's focus — On the 6% or less part of the deal... or the 94% part of the deal?
These are two very different approaches to the sale of your home. Discount agents use commission cuts as a tool to get your business. Full service agents use commission as part of their marketing plan to attract more buyers to your home in the effort to net you more money for the sale of your home. Discount agents feel certain pressures regarding volume, time, and money that full service agents don't experience.
When an agent lowers their fee from 6% to 5% it equals a 17% reduction in their pay. When they lower from 6% to 4% they have reduced their fee (and income) by fully 33%. Therefore discount agents must close a higher volume of transactions in order to make up for their reduced fee. And since they are operating on a lower profit margin than a full service agent they simply can't afford to keep a listing on the market for very long before it starts costing them money. Consider how this affects you as a seller:
The effect of discount commissions on the sale of your home
This leads us back to the five assumptions from the beginning:
- Discount agents need to work with more people to make a living so they cannot provide you with the same attention that a full service broker can give you.
- Discount agents cannot expose your home in the same way a full service broker can when it comes to marketing because their marketing budget is hampered by their lower fee.
- When a buyer does make an offer, the discount broker has every incentive to coerce the seller into accepting the offer quickly in order to move on to the next deal. They are also less likely to have the negotiating skills necessary to command a higher price for your home as evidenced by their inability to negotiate on their own behalf. Remember if they gave 17% to 33% of their own money away in order to get your business, do you really believe they are going to fight to make you more money when they are negotiating on your behalf?
- All agents are the same - All agents are not the same. There is a wide range in the level of knowledge, skill, and experience that agents possess and the quality of service they provide. Even agents who have a great track record for selling homes may be discounting the commission and the quality of service in many of those sales.
- The home will sell itself - Homes do not sell themselves, though they did sell quickly in the hypermarket of the spring of 2004. Keep in mind that getting the highest price possible is not a given and an accepted offer is just the beginning of the sales process. Having an experienced agent represent you through the escrow process is critical in today's market to avoid the many complicated legal pitfalls of this litigious society.
- The price will be the price - There is not one price that any given home will sell for. The final sales price is directly influenced by the negotiation process and the skill of the person representing you. If an agent can't negotiate effectively on their own behalf, why trust that they will get you the highest price possible on the sale your home? Having an agent who knows which buyer to work with in multiple offers is also essential to a successful closing.
- The property will get the same exposure - Marketing is a function of time, energy, and resources. Discount agents feel a certain pressure in each of these areas. As mentioned above, a discount agent is hoping for a quick sale so they don't have to carry the listing for long. Once a property goes beyond a two-week marketing window a discount agent becomes limited in their marketing effort due to their reduced fee.
Also, a listing offering a lower commission to the selling agent will not get the same volume of traffic as listings offering a full 3%. The amount of money that a seller offers agents as an incentive to bring their buyers directly affects how much viewing traffic the home will see. Remember an agent representing a buyer gets a 17% higher commission on a 6% listing vs. a 5% listing and a 33% higher commission on a 6% vs. a 4% listing. Since most buyers' agents only represent 4-6 buyers per year they are looking to make as much as they can on every sale they make. The 17% differential is very significant to these agents.
- The service will be the same - The level of service can differ tremendously between a discount agent and a full service agent. Keep in mind that the most important process of selling a home really begins with the escrow. It is crucial that your agent can handle the legal end of the transaction to ensure a smooth and uncomplicated escrow. The worst thing that can happen is for your home to fall out of escrow because your agent didn't handle things correctly.
Remember also that the discount agent must do more transactions per year to stay even. This means they don't have the same amount of time, resources, and money to make sure the sale of your home runs smoothly and closes in a timely fashion.
The truth is that choosing the right agent in this market is very challenging as the competition for your business always increasing. This ultimately works to your advantage as the seller but there are several traps to avoid when selecting a Realtor.
Traps to avoid when selecting a realtor
- The agent who quotes you the highest value for your home
- The agent who offers you the lowest commission rate
- The agent who has the biggest "brag book"
Selecting an agent based on those criteria will not necessarily net you the most money when your escrow closes. Rather, you should focus on the following:
- Pricing strategy - How are you going to price your home and how will your agent justify that price when negotiating with buyers? Most sellers want an agent to put an exact price on their home. At best an agent can give you a high/low value range because ultimately, the seller sets the price. Many sellers don't fully understand that pricing is 80% or more of the marketing plan. How you price your home on the MLS is the primary force that will attract qualified buyers. Be aware if an agent is trying to appeal to your desire for profit by giving you an unrealistic price just to get the listing or if they offer a pricing strategy that will work to your greatest benefit by actually attracting buyers. It is important to understand why your agent is recommending a certain price or price range and to know if your agent can back up that price during negotiations.
- Preparing the home for sale - How you prepare your home for sale is critical to getting the most money possible. Listen closely to staging ideas, repairs suggestions, and minor improvements that can maximize the value of your home. Just the right touch ups in the right places can net you more money than any possible savings in commission. A great agent will have the time and interest to help you with these recommendations and will have a referral network for getting the work done.
- A marketing plan - This is where many sellers get confused. Fancy ads and color brochures are not what sell homes. Agents do! As we mentioned above, 80% of the marketing of a home is dictated by the pricing strategy and the negotiating. Most qualified buyers are working with an agent who searches the local MLS to select properties to show. Price your home correctly on the MLS and offer a generous commission to entice agents to bring their buyers and you will attract the highest amount of interest in your home.
The internet is also crucial in home marketing in this day and age so be sure to select an agent who can supplement traditional print advertising with great internet exposure.
- Negotiation skills - When it comes to netting the most money for your home you need an agent with above average negotiation skills. The simplest way to determine their negotiating abilities is how they handled establishing a sales price on your home and setting the commission. Agents who tell you what you want to hear don't value their ability to negotiate. Agents who offer a reduced commission as a way to get your listing are also telling you they don't value their ability to negotiate. A great negotiator will net you an additional 5 -15% on the sales price of your home which again far exceeds any savings offered through a discounted commission.
- Service - Once you have an accepted offer the real work begins. Be sure to question your agent on their ability to manage the escrow process. Great agents work off checklists and have in-house escrow officers to assist in smooth closings. They must monitor deadlines closely and provide you with regular updates on the escrow process.
Every seller needs to identify what they are really looking to accomplish when it comes to listing their home for sale.
- Do you want to find the lowest commission possible no matter what? Or...
- Do you want to net the highest amount possible at the close of escrow?
- Do you want the complications from a budget agent? Or...
- Do you want a timely sale with a problem-free closing?
The truth is, if you are simply looking for the lowest commission you will find plenty of agents who will list your home at any price. However if you are looking to net the most money, in the right time frame, with the least amount of hassle we encourage you to look for an agent who presents:
- A well-developed pricing strategy.
- Specific suggestions for improving your home's marketability.
- A written marketing plan.
- A tough stance on commission (Again, if an agent can't represent themselves well... how are they going to represent you?)
- A system and/or staff to service your transaction.
In the end you want an agent who can help you achieve your goals and at the same time earns a fair commission. That is a true win-win for everyone!
If you're thinking of selling your home, please contact us so we can share our marketing and selling strategies with you.