The topic of commissions garners a lot of attention in the real estate world. Real estate is a brutally competitive industry (not that you’d know it from what you hear in the media – or from the Competition Bureau). Most obviously, the big brands compete (e.g. RE/MAX vs. The Rest); in every neighbourhood agents at the various offices and branches compete with each other for local business; within each office, individual agents are competing with each other, too. It takes a Realtor many years to build a proper real estate business, and to accumulate the experience and wisdom needed to weave one’s way through the infinite number of ways a transaction can play out.
Naturally, with all that competition we sometimes see commission cutting – because when somebody can’t sell their value, they have to cut their price, right? And it’s not only due to pressure inside the industry. We often see ‘advice’ from professionals in other industries (e.g. lawyers, bloggers, ‘financial advisers’) telling folks to negotiate the commission. I think that’s terrible advice, and here’s why: it completely misses the point.
The most important factor for most sellers is maximizing the proceeds from the sale of their home – and rightly so. That’s why it’s so important to put your best foot forward, and to have a winning marketing plan, but here’s what I mean about balancing motivations: keep your eye on the net proceeds of the sale, not the commission rate. If you are focussed on the commission you are looking at the trees, but not seeing the forest. You want (and perhaps need) the absolute maximum from the sale of your property or condo. You don’t get that by obsessing over half a percentage point. You get it by hiring the right agent, at the right brokerage, with the right plan for you and your home. Ultimately, the point of the marketing is to generate an offer on the listing. That’s when I earn my money, and that’s where you, the seller, make yours, too – at the negotiating table. Depending upon the circumstances, we could be talking about tens of thousands of dollars – enough to make that half point insignificant.
I’ll give an example of why I think it’s a mistake to choose your agent based on the commission. Last month I did a market valuation for a local couple. I figured that their four bedroom house was worth something in the range of $579k to $599k. I thought that, with some hard work and a bit of luck (timing is often so important) they might crest $600k. About a week before they were due to come on the market I had a chat with one of them, and the question of my commission was raised. They wanted a ‘deal’. I don’t do ‘deals’. What I *do* is work hard for my clients, with the best of intentions – and I produce results. In short, I’m here to help, and as so many of my past clients can attest, I do that quite well. Because this is how I provide for my family of six, I get paid the market rate - and everybody goes home happy.
After that conversation, it didn’t surprise me when the listing appeared on the MLS with an out-of-area agent at a lower rate of commission. What did surprise me was the price – it was $30,000 below the bottom of my projected range. Now, given that the agent was from the 905 region I suppose I shouldn’t have been so surprised, but the gap was so huge that I could hardly believe my eyes.
The next surprise was a phone call from the seller – a pleasant surprise, of course. (Most folks don’t bother with the follow-up call; I pointed that out and thanked him for the courtesy.) He admitted that they went with the out-of-area agent in large part for the commission savings. When I asked about the price he responded that they ‘didn’t have to accept’ an offer if they didn’t like it…. (That’s technically true, but I feel quite strongly that it’s not fair to buyers to play games like that.) I thought he meant that they were counting on competition to bid the price up to market value, but a week later the house sold for just a touch over the asking price – and *that* was a real shocker.
So, let’s do some math now. I’m just going to guess that the commission savings amounted to half a point – which, on my estimate of close to $600,000 is about $3000, naturally less if the house sold for less. To achieve the supposed ‘savings’ of $3000 all the seller had to do was drop their selling price by $30,000-$50,000. Does that make any sense? It seems to me that they left about $40,000 on the table! I’m still shaking my head….
Like I said, real estate is competitive. It’s a tough business, but I (like most of my colleagues) work hard to provide value and earn my keep. However, if you focus on the commission you’ll end up sitting across the table from an agent who’s thinking about the commission, too. In my opinion, the guy cutting his commission up front is there for the deal, not for you. Is that what you want?
As I always say, I’m here to help. I work for my clients, we get the job done, and a few months down the road, when the transaction closes, I get paid. I don’t, however, try to buy anybody’s business – and I urge you to think twice about somebody who does.
Balancing motivations
May 22, 2012 by Simon
The topic of commissions garners a lot of attention in the real estate world. Real estate is a brutally competitive industry (not that you’d know it from what you hear in the media – or from the Competition Bureau). Most obviously, the big brands compete (e.g. RE/MAX vs. The Rest); in every neighbourhood agents at the various offices and branches compete with each other for local business; within each office, individual agents are competing with each other, too. It takes a Realtor many years to build a proper real estate business, and to accumulate the experience and wisdom needed to weave one’s way through the infinite number of ways a transaction can play out.
Naturally, with all that competition we sometimes see commission cutting – because when somebody can’t sell their value, they have to cut their price, right? And it’s not only due to pressure inside the industry. We often see ‘advice’ from professionals in other industries (e.g. lawyers, bloggers, ‘financial advisers’) telling folks to negotiate the commission. I think that’s terrible advice, and here’s why: it completely misses the point.
The most important factor for most sellers is maximizing the proceeds from the sale of their home – and rightly so. That’s why it’s so important to put your best foot forward, and to have a winning marketing plan, but here’s what I mean about balancing motivations: keep your eye on the net proceeds of the sale, not the commission rate. If you are focussed on the commission you are looking at the trees, but not seeing the forest. You want (and perhaps need) the absolute maximum from the sale of your property or condo. You don’t get that by obsessing over half a percentage point. You get it by hiring the right agent, at the right brokerage, with the right plan for you and your home. Ultimately, the point of the marketing is to generate an offer on the listing. That’s when I earn my money, and that’s where you, the seller, make yours, too – at the negotiating table. Depending upon the circumstances, we could be talking about tens of thousands of dollars – enough to make that half point insignificant.
I’ll give an example of why I think it’s a mistake to choose your agent based on the commission. Last month I did a market valuation for a local couple. I figured that their four bedroom house was worth something in the range of $579k to $599k. I thought that, with some hard work and a bit of luck (timing is often so important) they might crest $600k. About a week before they were due to come on the market I had a chat with one of them, and the question of my commission was raised. They wanted a ‘deal’. I don’t do ‘deals’. What I *do* is work hard for my clients, with the best of intentions – and I produce results. In short, I’m here to help, and as so many of my past clients can attest, I do that quite well. Because this is how I provide for my family of six, I get paid the market rate - and everybody goes home happy.
After that conversation, it didn’t surprise me when the listing appeared on the MLS with an out-of-area agent at a lower rate of commission. What did surprise me was the price – it was $30,000 below the bottom of my projected range. Now, given that the agent was from the 905 region I suppose I shouldn’t have been so surprised, but the gap was so huge that I could hardly believe my eyes.
The next surprise was a phone call from the seller – a pleasant surprise, of course. (Most folks don’t bother with the follow-up call; I pointed that out and thanked him for the courtesy.) He admitted that they went with the out-of-area agent in large part for the commission savings. When I asked about the price he responded that they ‘didn’t have to accept’ an offer if they didn’t like it…. (That’s technically true, but I feel quite strongly that it’s not fair to buyers to play games like that.) I thought he meant that they were counting on competition to bid the price up to market value, but a week later the house sold for just a touch over the asking price – and *that* was a real shocker.
So, let’s do some math now. I’m just going to guess that the commission savings amounted to half a point – which, on my estimate of close to $600,000 is about $3000, naturally less if the house sold for less. To achieve the supposed ‘savings’ of $3000 all the seller had to do was drop their selling price by $30,000-$50,000. Does that make any sense? It seems to me that they left about $40,000 on the table! I’m still shaking my head….
Like I said, real estate is competitive. It’s a tough business, but I (like most of my colleagues) work hard to provide value and earn my keep. However, if you focus on the commission you’ll end up sitting across the table from an agent who’s thinking about the commission, too. In my opinion, the guy cutting his commission up front is there for the deal, not for you. Is that what you want?
As I always say, I’m here to help. I work for my clients, we get the job done, and a few months down the road, when the transaction closes, I get paid. I don’t, however, try to buy anybody’s business – and I urge you to think twice about somebody who does.
Posted in Market Commentary | Tagged Market Commentary, RE/MAX Hallmark, Real Estate, Realtor, Simon Milberry, The Beach, Toronto Real Estate Market | Leave a Comment »