IT’S TIME TO TALK SERIOUSLY ABOUT REAL ESTATE COMMISSIONS

And discover how to get the best price!

by Neil Jenman

Reading Time: Apx 15 minutes

The first question most home sellers ask agents is: “How much commission do you charge?”

Now, to be sure, commission is important. It’s a factor all sellers focus upon.

But commission is not the most crucial factor in selling a home. There’s another factor that needs to be discussed: What price will the agent get for your home?

Often, agents who charge low commission sell homes for low prices. Your home is likely your biggest asset. You need the agent who’ll get you the biggest price.

WARNING: If agents who charge low commissions sell homes for low prices, it does not automatically mean that agents who charge high commissions sell homes for high prices.

Be careful. Bad enough to hire a cheap agent who gets you a cheap price. Worse to hire an expensive agent who gets a cheap price. That really hurts.

Okay so let’s discuss some facts you need to know about commission.

OVER PAID

Most agents are horrendously over-paid. They rarely do more than ten hours of actual activity to sell a home. The word “activity” should be used, not “work” as there’s almost no work to “selling” most homes. With the average commission around $25,000 in most [city] areas, many agents pocket upwards of five thousand dollars an hour.

With expensive homes, the commission is truly eye-watering.

As one seller wrote: “I have a home valued at $4.5 million. I’m facing commission up to $108,000 plus marketing costs. I estimate, generously, that the agent will spend 12 hours on my home. So, I’m expected to pay about $9,000 per hour plus marketing costs. This is insane.”

It sure is.

UNDER WORKED

Let’s analyse what gets done by a typical agent to sell your home. It won’t take long.

First, agents spend a couple of hours convincing sellers they are the whiz-bang agent. Once sellers sign-up, agents may spend an hour arranging photographs, floor plans and placing the property on-line.

That’s three hours.

And then the agent will hold, say, four open-houses over four weeks. Despite there being 10,080 minutes in a week, agents give sellers 30 minutes, leaving the home unattended 10,050 minutes a week. That’s a time investment of another two hours over four weeks.

So far, five hours.

During a sales campaign, agents respond to enquiries from buyers. Allow about an hour for this strenuous activity (not).

We have now reached six hours total time.

Most agents spend time “conditioning sellers”. This involves sending emails, texts and making calls and, sometimes, visiting sellers. This conditioning process uses what agents call “market feedback” to get sellers to lower prices. The pressure upon owners can be enormous. Some describe it as torture. But agents see ‘conditioning sellers” as part their job. Depending on how sellers resist the pressure, agents could easily spend four hours conditioning them.

Now reached 10 hours.

Once a buyer emerges, that’s easy. The buyers make an offer, and the agent becomes a messenger, passing that offer to the sellers.

Many agents reveal their incompetence at negotiation. They urge sellers to accept an offer, often with statements like: “These buyers won’t pay more.” But strong sellers hold out. And then the agents return and say the buyers (the ones who would not pay more) have decided to pay more.

Eventually sellers “crack” and a sale happens. Sales rarely get made when agents get the best price, because most agents don’t know how to discover the best price buyers will pay.

All up, this process of conveying offers could take another two hours.

Therefore, the entire process involves a maximum of 12 hours. In truth, most sales rarely exceed ten hours of an agent’s time.

Many sales are done in an hour or two – especially, as ironic as it may seem, if agents are highly skilled. More on this in a moment.

JUSTIFY

The commission charged by agents cannot be justified on a time-expended or effort-exerted basis.

Neither can the actions and results of most agents be justified on exclusivity. In other words, what do most agents do that most sellers could not do for themselves?

The answer is nothing.

Indeed, it’s worse than nothing. Most sellers don’t realise they could out-sell most agents.

No one knows homes better than owners. Owners are in the best position to show homes to prospective buyers.

So, unless an agent can justify their huge fees – and the way to do that is by displaying their superb negotiation skills and convincing owners that the agents can get a better price than the sellers could get without the agent, the sellers should not hire the agent.

PAY AGENTS WHAT THEY ARE WORTH.

Let’s say your home is worth around $1.5 million. But let’s say you consider your home to be superior. So therefore, you’re hoping to get at least $1.6 million but you’d be rapt with $1.75 million – that’s $250,000 more than what it “seems” to be worth. That’s your “dream price”.

Well, if you could hire an agent who is skilled in the art of negotiation who managed to sell your home for a massive $1.8 million, you’d be delighted, wouldn’t you?

Now, if the agent who achieved $1.8 million charged you a commission of three per cent, you’d receive $1,746,000 net. The agent would get $54,000. But you get $246,000 more than you expected, so, really would you care how much time the agent “worked”? Wouldn’t you care more about how the agent’s skill got you a whopping $1,746,000.

If, however, other agents could only sell your home for $1.5 million but you paid one of those agents half as much as you paid the higher selling agent, namely 1.5 per cent (which is $30,000), you’d receive a net price of $1,470,000 – $276,000 less than with the better agent.

See the difference here? See the trap?

If you place your focus on choosing a cheap agent, you will save $24,000 in commission costs, but you will have $276,0000 less in your pocket.

Saving $24,000 to lose $276,000 is crazy. A friend just bought a home and paid $373,000 less than he was prepared to pay. The owner hired a typical agent.

The best way to judge any agent is not by how much commission they charge but by much money they get for you.

The best way to pay an agent, (provided you know values in your area) is by offering them a low rate of commission if they sell your home for a low price and a high rate if they sell for a high price.

HOW DO AGENTS JUSTIFY THIS FACT???

Let’s consider a powerful point about agents’ commission that most agents will hate – but you will love.

Let’s say, again, that your home is worth around $1.5 million. If you put a sign out the front which says: “Home valued at $1.5 million – offered at $900,000”, how many buyers will you get? Likely hundreds. They’d be breaking down your door to buy your home for at least $600,000 under it’s true value which is at a 40 per cent discount.

Everyone loves a discount – except the person giving it.

Okay, if a $1.5 million home could easily be sold for $900,000 or any home could easily sell at 40 per discount, answer this: Why is any agent entitled to a percentage of the first 60 per cent of the value of your home?

If your home is worth $2 million and you hire an agent to sell it for $2 million and the agent charges you 2 per cent, the agent is charging you 2 per cent of every dollar – including the first million dollars.

Yet what has the agent done to create any part of that first million?

The answer is nothing.

So why do so almost all sellers pay agents a high amount for doing nothing towards getting a high price for their homes?

EUREKA! THE FAIR WAY TO PAY AN AGENT

Agents should be paid an incentive. On merit. On performance.

The more they get for you, the more they get for them. And not just tiny amounts more as happens now. By giving agents the same percentage regardless of what price they negotiate for your home, you reward them for selling your home at a lower price.

Think of it this way. At 2 per cent commission on a home for $2 million, an agent will get $40,000. But if the price is $2.1 million, which is an extra one hundred thousand dollars for the owner, the agent gets $42,000, a mere two thousand dollars extra. This is why most agents don’t try to get the best price. They just do enough to get a sale at any price – as happens at public auctions.

As all agents know, no matter what price they get – high, medium, or low – they still get a high commission. As author Jim Grigoriou writes: “Agents get rewarded for short-selling homes.”

Yes, this is insanity. It’s also massively unfair to sellers. And it’s the reason most agents never study negotiation.

Most agents don’t talk buyers up in price, they just talk sellers down in price. And then presto, the agent pockets a big commission.

Yes, for short-selling a home.

The correct way to pay an agent, therefore, is to reward them well when they get a great price and pay them little or nothing if that’s all they get for you.

Like the sound of that? Read on.

HOW AGENTS SHOULD BE PAID

Let’s go back to that home worth around $1.5 million. Let’s turn one of the agents’ favourite sayings on themselves: “If it’s well-listed, it’s already sold.” Yes, agents get excited when they get a listing they can sell fast. They love it when half a dozen buyers want it. Yippee.

But hey, at that price, let’s say $1.4 million (a hundred thousand dollars below what most people think the home is worth), anyone could sell that home for $1.4 million.

If the owner stuck a sign in the front yard, it would sell within an hour. Any agent could have it sold the same day. No real work involved to sell a $1.5 million home for $1.4 million, a give-away price.

So why should agents get the same percentage commission at or below a give-away price as they get if they negotiate the best price?!

Here’s a method of commission that sellers can and should insist that agents accept.

Up until the “give-away” price, the agent gets no commission. Seriously, if $1.4 million is the give-away price, why pay an agent $28,000 for “giving it away”. That’s nuts. No, you give my home away, you get nothing.

Now, from $1.4 million to $1.5 million, the agent can get 10 per cent. That’s $10,000 for selling a home at the price it’s worth. If it takes ten hours, that’s a thousand dollars an hour. A fairly good rate of pay. But less than paid to lazy sods who sell it for $1.5 million and expect a 2 per cent commission of $30,000. Three thousand dollars an hour is too much for a lazy agent

Now, let’s say an agent truly is a trained negotiator and knows how to get buyers to pay their highest price. This is the agent who’s worth paying for their knowledge and skill rather than their time. If this agent can get you a great price, they deserve a great commission.

So, let’s try the following rates:

Up to $1.4 million – zero. Indeed, zero percentage is always applicable on the amount up to $1.4 million. Don’t pay agents to do what a pre-schooler could do. Anyone could under-sell your home. So don’t reward anyone who wants to do it to you.

From $1.4 million to $1.5 million: The agent shall receive 10% = $10,000.

From $1.5 million to $1.6 million: The agent shall receive 15% = $15,000.

So, if the home sells for $1.6 million, the agent will receive $25,000, the equivalent of 1.6% commission. Not as much as some agents charge, but fair as the property only sold for $100,000 more than it’s estimated price.

Now, this is where it can get exciting, for agent and sellers: If the agent can find a buyer who loves the home and the agent is skilled at negotiation, the agent may persuade the buyers to pay the sellers’ dream price of $1,750,000.

When this happens, then on the amount above $1.6 million, the agent can receive 20 per cent. This will give the agent $35,000 on the top $175,000 of the price.

If the agent can sell the home for a price of $1,750,000, the agent will receive a commission of $60,000 – fantastic for the agent (who gets an overall commission near 3.5%) and fantastic for the owner (who gets $167,500 more than a typical agent who would have sold their home for $1.5 million and charged them 1.5% commission).

This is a wonderful way to give agents a strong incentive to sell your home for a great price. Many agents, who are not skilled negotiators, will whine. Ignore them. They are the wrong agents.

But the best agents will be delighted. They will see the fairness in this method. If they get you a great price, they deservedly get a great fee. It doesn’t matter about hours.

Agents who know how to negotiate have spent thousands of hours studying negotiation. You are paying them for the time it took to learn a skill that can give you a sale price far in excess of what typical agents achieve.

Finally, always remember this: Everything in real estate is negotiable, especially commission. You can keep negotiating with an agent until the time your home is sold. So, get it right before you sell.

An incentive-based commission gets it right. It is the best way for you to get the best price.

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WARNING: You may know that I have long opposed what’s called “Kicker Commissions”. This is where an agent (and usually only one agent is interviewed) meets sellers (usually elderly sellers who are naïve and inexperienced) and the agent asks them: “How much do you want?” The home may be worth, say, $2 million. But the hapless sellers, may reply: “Well, we don’t want to be greedy anything over a million will make us very happy.”

The ruthless and unethical agents will then say something such as this: “Well, we will charge you 1.5 per cent of the first million dollars and then anything over a million dollars we’ll charge 25 per cent. How does that sound?”

Now, of course, the ‘give-away’ price of the home may have been $2 million. So, in this example, this agent would earn $260,000 to sell a home quickly at a give-away price.

The total commission percentage would be 13 per cent.

Under the example proposed in the article above (nothing until the give-away price is exceeded), the commission on this sale would have been what it should have been – zero.

The reason I have so long opposed “kicker” or “incentive” schemes is because it’s too easy for unethical agents to cheat inexperienced and trusting sellers.

Therefore, the Golden Rules to an INCENTIVE COMMISSION SYSTEM with an agent are these:

1. Before calling an agent, call Jenman Support and discuss your situation. We charge you nothing. We ask you to sign nothing. We always protect your best interests.
2. Hire a registered valuer. The cost for a valuation report will be one of the best investments you ever make. Unlike agents, valuers have no reason to lie about the price of your home. They give you a price estimate they sincerely believe is honest. Valuers are the hidden heroes of real estate.
3. Meet at least three different agents. Ask them how much they feel your home is worth. Do not – under any circumstances – tell them the price you want. Ask them if they will be interested in an incentivised commission rate. Tell them: “It means if you get us a lot more, you get a lot more.” and see what they say. DO NOT SIGN ANYTHING with any of them, no matter what. Not yet.
4. Contact your support person at Jenman Support and discuss the valuation and the prices quoted by the agents. We will help you work out which agent is best for you. We will also help you to set an incentivised plan – which (and this is important) can be varied by you at your sole discretion. If the market booms (or collapses) after you sign-up, you can adjust the price at where the incentives apply. We will guide you.

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