Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.
Your Commission: Why You're Worth It
When it comes to real estate commissions, consumers want to know they’re getting solid value. It’s up to you to explain why you earn every penny. Here’s how.
February 1, 2007
The desire to save money is as American as apple pie. The Promotion Marketing Association Coupon Council reports that 76 percent of Americans clipped coupons in 2006. Many also troll Web sites for the lowest prices on travel, buy at Target and Wal-Mart, and even wake up at dawn to shop door-buster sales at department stores. So it’s hardly surprising that consumers today can be tough negotiators when it comes to setting a commission rate for your services. The key is not to let them save money at your expense.
Negotiating more aggressively for a more favorable fee has almost become part of people’s DNA, says Mike Dean, E-PRO®, GRI, a salesperson with Keller Williams Realty in Leesburg, Va. “People want to pay the minimum for marketing and get the maximum for their house.”
Although commission objections come in as many shapes and sizes as sellers, quite a few are variations on a theme. Use the objection stoppers here to demonstrate your value proposition as a full-service practitioner.
Objection: “We need every cent for a new home, so we can’t afford to pay you the commission you’re asking.”
Home prices have decreased in some markets, falling nationally by 4.4 percent year over year between October 2005 and October 2006, according to the NATIONAL ASSOCIATION OF REALTORS® Research department. As a result, some sellers who took money out when they refinanced are seeing their equity slipping away. So this objection is one you’re going to hear more frequently. In other words, “If we’re not making money, why should you?”
“In a corporate setting, if your boss asked to cut your salary for two months to help him pay for a new in ground pool for his house, it wouldn’t wash. Why should real estate be different?” says Marylyn B. Schwartz, president of Bethel, Conn. based Teamweavers and a real estate author, speaker, and trainer.
Objection Stopper 1: “I’m sorry you’re in that position, but a changing market also gives you a better opportunity to purchase your new home at a good value.”
Danielle Therrien, a salesperson with Century 21 Maher Real Estate in Auburn, Mass., sometimes suggests that sellers who have little equity in their homes stay put for now if they don’t have to move.
You can also help put strapped sellers at ease by acquainting them with financing options such as seller second mortgages and loan buy downs that reduce costs in the first years of a mortgage.
Thomas M. Tinucci, a loan officer at R.O.C. Financial Inc., a Chicago mortgage brokerage, says a 40 year fixed loan can be a good alternative for some strapped sellers. Another option is an interest-only loan. “That can get people out of a temporary bind, but they must have the discipline to pay down the principle once their situation improves,” cautions Tinucci.
If sellers persist in the we’re so broke objection, use it as a starting point to probe into their true financial position, suggests Tom Ferry, founder of Success Strategies Institute, a Newport Beach, Calif., coaching and mentoring company. Prospects may be ashamed to admit they’re on the verge of foreclosure.
You can also help them focus on how their situation will improve once they’re out from under the financial obligations of their mortgage.
Objection Stopper 2: “If I accept a lower commission, I’ll have fewer marketing dollars to promote your home not a good plan when days on market are longer now than in past years.”
“Home owners aren’t saving money by getting a lower commission,” says Darryl Davis, a real estate trainer with Darryl Davis Seminars Inc. in Wading River, N.Y. “They’re actually cheating themselves out of marketing exposure. You need to explain that.”
“Show sellers an accurate portrayal of market conditions and trends from your MLS,” recommends Joan Murphy, director of education with Coldwell Banker Residential Brokerage in Des Plaines, Ill. Develop a graph that illustrates days-on-market trends and demonstrates that unlike two years ago, you’ll probably have to run more ads and hold more open houses for a longer period of time. Davis also suggests assembling a portfolio of articles on current market conditions to provide third-party validation of your statements.
Show sellers how their listing will be displayed, such as with multiple pictures or virtual tours on REALTOR.com and other Web sites. Then say, “Not every salesperson takes the added trouble and expense to add photos to online listings, but statistics from REALTOR.com show that including six photos with a listing increases viewing by almost 300 percent.”
Therrien also gives sellers examples of her successful print campaigns, such as a recent 300 postcard mailing to renters she did for a listing that was perfect for first-time buyers. If you have marketing specialties, such as staging, explain how they will contribute to attracting more buyers. Back up your marketing claims with proof of your skills, Therrien says.
“Sellers are hiring a real estate professional to bring their home to the market in the most compelling way possible through a marketing campaign,” Schwartz says. Therefore, she recommends that real estate practitioners eliminate the word commission from their vocabulary. “We’re diminishing our value when we call it a commission. It’s a marketing service fee.”
Objection: “What you do just isn’t that hard. It’s not worth that much.”
To some degree, this attitude is a holdover from the go-go days of 2005. Consumers’ perceptions often lag behind reality, and those who sold a home during the white-hot housing market may be in for a surprise when the buyers don’t come knocking down their door. In this case, education is the key, says Dean. He goes to each listing presentation armed with a spreadsheet that shows how big the listing inventory is today and absorption-rate trends.
Objection Stopper 1: “To help you understand the entire sales process and what you can expect, I’ve prepared this 20 item list of all the steps in the transaction.”
If you’re stumped about what to include, a great place to start is the comprehensive list prepared by the Orlando Regional REALTOR® Association.
Giving consumers a detailed list of what you do and how much time you spend on each activity is also an effective counter to consumers who compare your fees with those charged by limited service companies. Support your commission and value by offering a menu of services open houses, online advertising, negotiation, and more. If consumers want a lower commission, ask which services they don’t want, suggests Murphy.
Dean says his listing presentations always include an explanation of where the commission goes even if there isn’t an objection. It helps sellers understand how hard he’ll be working to sell their home. “I don’t want it to look as if I were walking away with a suitcase full of money,” he says.
Objection Stopper 2: “To make your home stand out, I not only have to market it, but I also must have the knowledge to help you price it realistically so that buyers don’t just ignore it. In this more competitive market, my expertise is worth every penny of what I’ll earn.”
Also remind sellers that using a skilled real estate professional gets them a price premium. According to the 2006 NAR Profile of Home Buyers and Sellers, the median price of a home sold by an unrepresented seller was $187,200, a 24.3 percent discount from the median price of $247,000 for a home sold with the help of a real estate practitioner. Then ask sellers, “With prices coming down in many markets, do you want to walk away from that extra money?”
Objection Stopper 3: “My commission includes my earnings, the advertising and marketing costs for your property, and the administrative support of my brokerage company,” says Schwartz.
“Sellers sometimes think you’re putting the entire commission amount in your pocket, but they need to realize that after splits with the brokerage and a buyer’s agent, as well as your expenses and taxes, you may pocket a profit of, say, $1,500 on an average sale. That can be shocking to sellers,” says Joe Meyer, president of Joe Meyer Presentations Inc., a training company in Lake Grove, N.Y.
Although Meyer doesn’t recommend attaching dollar amounts to every activity, some practitioners say they have the most success with the old fashioned pie chart to show where the dollars are spent. Others take a more dramatic approach, such as placing 100 $1 bills into separate piles for each expense, or slicing a dollar into sections that represent your costs. (See “Figure your hourly rate,” page 43, for more on determining where your money goes.)
It may also surprise you to know that most consumers have little knowledge of the dozens of activities that make up a transaction. Often, all that sellers are aware of is your meetings with them and perhaps an open house or two. Below the radar activities entering the listing in the MLS, monitoring inspections and repairs, and ensuring that all documents are complete for closing often aren’t evident to consumers.
Objection: “Someone else will do it for less.”
Objection Stopper 1: “History has taught us that in every profession, the people who charge less typically give less service because they have less revenue to actually fund those services,” suggests Davis.
Objection Stopper 2: “Sometimes sales associates who aren’t able to generate much business will offer to cut their fee just to get a listing. But do you want a less effective salesperson to tie up your home in an exclusive listing for six months and get nowhere? What have you saved then?”
Meyer warns against bashing the competition specifically, however. Instead, let your personal sales statistics and your track record on list to sale price ratios or average days on market compared with those of others in your area speak for themselves. “You have to prove, not tell, that you’re worth the money,” he says.
Also explain to sellers that your expertise and your errors & omissions insurance helps protect them from lawsuits. “Most people have no clue about disclosures such as lead-based paint and radon,” says Therrien. “Cost issues diminish as your value rises,” says Schwartz. “Once you’ve done a good job of proving your value, the 1 percent that home owners are beating you up over becomes nil.”
In a competitive market, Davis goes so far as to recommend asking for a larger commission to drive more traffic to the property. He also suggests offering cooperating brokers a higher amount as a marketing tool to attract more buyer’s agents to the property and get the house sold faster.
“It’s not self-serving; instead it shows a greater level of commitment to the seller and getting the property sold,” he says.
Just remember, however, that Article 1 of the NAR Code of Ethics requires REALTORS® to subordinate their interests to those of their clients. So when representing buyers, you must decide which properties you’ll show on the basis of their needs and desires, not the amount of cooperative compensation being offered by the listing broker.
At the end of the conversation, if sellers insist that you lower your commission, don’t be afraid to walk away. Say: “I appreciate your concerns about costs, but I won’t be able to provide the level of professional service I’m committed to for that amount of money. Perhaps you should talk to another salesperson.”
“Set yourself apart and provide a level of service your competitors can’t duplicate,” Murphy says. “The home owners will come back to you.”
Figure Your Hourly Rate
Calculating your hourly wage after expenses can be eye opening for both you and your clients. It can also serve as a motivational tool when you’re negotiating your commission.
“You may realize you’ve been giving away the farm,” says Tom Ferry, founder of Success Strategies Institute, a coaching company in Newport Beach, Calif.
The exercise will also show you the cumulative effect of seemingly small commission cuts. Even if you give up $500 on each listing, you’ve walked away from $5,000 in income if you close 10 transactions a year.
In its simplest form, an hourly wage is just your income minus your expenses divided by the number of hours you worked. But the devil is in the details. Use the following tips when calculating what you make. An hourly rate expense worksheet is available at REALTOR® Magazine Online.
Be sure the commission figure you use reflects your portion of the fee after the buyer’s representative and the brokerage receive their shares.
- Don’t forget to factor in your other income sources, such as referral fees, fees for teaching, and income from managing rental properties for owners.
- Focus on business expenses; don’t mix your personal expenses such as your home mortgage or health insurance premiums with those relating to your business.
- Differentiate between fixed costs, such as desk fees and car insurance, which remain the same regardless of how many homes you sell and variable costs, such as advertising, which differ depending on how many homes you list and how much marketing they require.
- List all fixed costs and assign a monthly dollar figure to each. Fixed costs include car lease payments, or at least the portion you deduct from your taxes; cell phone costs, assuming you have unlimited calling; real estate license fees; desk costs or other set monthly fees you pay your broker; a salary for your assistant; the monthly costs charged by your Internet service provider; any monthly flat-fee contracts with outside direct mail or Internet lead generation companies; and association dues.
- List all variable costs and assign a monthly dollar figure to each. The best way to do this is to tabulate actual spending each month for six months or a year. If that’s too time-consuming, calculate costs for one month, then multiply by 12. Variable costs include advertising both print and online (use different expense categories for property advertising and personal marketing and promotion) closing gifts, premiums you use in personal marketing, gas to drive customers around, and referral fees for leads paid either to your broker or to a third party.
- Deduct all expenses from your income and then divide that figure by the number of hours you worked. Consider not only hours you spent with clients but also those you spent calling vendors to get inspections done and loans completed, hours you spent in personal marketing, and hours you spent in class to grow your business skills or comply with continuing education requirements for licensure.
There you have it. Shocked? Pleasantly surprised? In any case, get out there and defend your commission so that you’ll like what you see this time next year.
A final thought: To project your income and expenses for next year, factor in an increased percentage for advertising and your time based on the increase in the days on market in your area.