Examining Enticements: The Risks of Oversweetening

March 1, 2008

Buy this house, and you also get the $40,000 luxury car in the garage.

Sounds like an enticing offer that just might clinch the sale, right? “It didn’t have any impact,” says Phil Wood, CEO of John R. Wood, REALTORS®, in Naples, Fla., of the incentive one of his company’s sellers tried in 2006. “Buyers looked at the home and said, ‘I guess this house is $40,000 overpriced.’

Because of that and similar lessons, Wood says his team now tells sellers to skip incentives to buyers. “On our advice, just about all of our sellers have stopped doing incentives,” he says. “We advise them to price perfectly, and then no incentives are necessary.”

The logic behind offering an incentive to a buyer to purchase or a salesperson to sell a property is simple: By buying or selling this house, you get something extra for free.

A handful of states ban incentives to entice someone to buy a particular property, says Mike Thiel, associate counsel for the NATIONAL ASSOCIATION OF REALTORS®. Because state statutes can be confusing on this point, Thiel recommends that you check with your state association before you offer any incentive to buyers.

Even in the vast majority of states that allow buyer incentives, those inducements may not be effective. Many practitioners say that while they sometimes suggest that sellers consider offering an incentive, what really makes a property sell is its price.

“You can offer incentives all day long, but usually buyers see through that,” says Ben Coleman, broker-owner of Century 21 Hartford Properties, a 40- person brokerage in San Francisco. “The single thing that’ll drive buyers and salespeople to a property is that it must be priced at today’s market value. If that happens, you’ll get buyers at the property, and you’ll get practitioners there, too, because they believe buyers will buy.”

Richard Quigley, a salesperson at @properties in Chicago, generally agrees. “Probably the greatest incentive in the world is a price reduction,” he says. Quigley and his fellow @properties practitioners don’t often advocate that sellers offer incentives. In rare cases, however, Quigley has recommended that sellers sweeten the deal for buyers.

“If the property has needed help, I’ve suggested that a seller offer something,” he says. “Say the property doesn’t show well, and the seller isn’t particularly cooperative, so the purple bedroom remains the purple bedroom. I’ll say, ‘Why don’t we offer a decorating allowance? Maybe that’ll catch somebody’s eye.’ ”

Quigley says he’s recently seen a range of incentives in the Chicago market. They’ve included covering a condo unit’s assessments for a specified time, offering a free deeded parking space, paying the buyer’s closing costs or local transfer stamp fees, covering the mortgage for a set time, offering to pay for new appliances, and throwing in gift cards.

Coleman isn’t entirely opposed to incentives either. His team sometimes offers vacations to buyers or to the cooperating salesperson. His brokerage has also begun to offer five-year home warranties rather than the more common one-year plans.

In Naples, builders who offered cruise vacations 12 to 18 months ago have switched to offering “more value-added things,” says Wood. “Builders used to charge extra for a pool, but today they’ll say that, for one month, they’ll throw in the pool for free.”

Although such perks may increase traffic to a property, if the property sells, practitioners say it’s not because of the incentives. “They’re just fringe benefits,” says Coleman. Quigley agrees. “The buyer has to already like the property, and the incentive facilitates moving forward,” he says. “No buyers will purchase something they don’t want just because they’re getting a new refrigerator.”

Catching the Eye

When you’re trying to get salespeople to show and sell a property, money still talks. “The most motivating factor usually is the commission,” says Coleman. “People are driven by dollars, whether it’s making or saving dollars. That’ll drive practitioners to the property.”

For instance, rather than halving a commission with a cooperating broker, Coleman’s seeing brokers offer a 55 percent to 60 percent split to the cooperating broker. “We’re also seeing builders offering referral fees to practitioners when they bring a buyer and then offering a commission on top of that.”

In the Chicago market, Elizabeth Ballis, a broker-associate at Coldwell Banker Residential Brokerage, says incentives to buyers are more common than perks offered to sales associates. “I’ve seen them,” she says, “but they’re not rampant.”

Salesperson incentives are “a slippery slope,” says Ballis, “You have to make sure they’re legal, and they’re not perceived in a good light by buyers. That’s why my recommendation to sellers is to make sure incentives are targeted to the buyer’s benefit, not the salesperson’s.”

Thiel says offering increased compensation to a buyer’s representative is fundamentally legal through out the country, but related legal and ethical issues could still arise.

“Are there requirements that buyers receive a disclosure that the salesperson is getting an increased commission? No,” he says. “But if there’s something that materially influences the buyer’s agent to do something that affects the best interests of the client, that could raise ethical concerns, and it raises the possibility of the buyer’s agent getting sued.” The bottom line: Again, check with your broker or state association before adding commission incentives.

Quigley and Coleman both say the most effective way to get salespeople to sell your listings remains impressing them at a broker’s open house, and that requires getting them there in the first place. So keep those luxury cars in their garages and stick to basics like pricing and broker tours to get properties sold.