Archive for the ‘Consulting & Compensation’ Category

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To continue my series on “Real Estate Consulting: Sounds Interesting, But It Will Never Catch on…” today’s subject is the concern that “No one will pay for services they can get for free elsewhere!”

A common misunderstanding about real estate consulting, specifically surrounding the practice of charging non-contingent fees instead of contingent commissions, is that the consultant basically charges for services everyone else offers “free.” Which raises the obvious concern of “why on earth would anyone be willing to DO that?”

Why indeed? Why WOULD anyone pay one real estate professional a fee for a service they can get free on every other street corner?

Well, they probably wouldn’t unless 1) what you’re offering is far superior to (or distinct from) what they can “get for free” elsewhere; or 2) you create a win/win situation where there is a tangible benefit to the client to pay for the service.

Let’s hit the first: “What you’re offering is far superior to (or distinct from) what they can get for free elsewhere.”

Not all CMAs are created equal. Not all listing agents have the same success rates with short sales. Not all buyer agents have identical HUD expertise. Some agents have specific areas of specialization that their colleagues can’t touch. In short, some agents are really really good at what they do and can therefore ask for (and receive) upfront or non-contingent fees all day long. Yes, seriously.

Or, what you’re offering is distinct from what the competition offers for free. You don’t just know how to search for and show slope-side vacation condos; you offer a customized tour package of the ski-in/ski-out developments in your area, with detailed knowledge of the amenities and nuances of each, as well as of the more-affordable alternatives close-by. Perhaps you have particular expertise working with investment properties, so your service package for professional investors goes far beyond just searching for under-market properties on the MLS and writing up low-ball offers. How about offering a professional, comprehensive and OBJECTIVE analysis for landlords trying to decide whether to re-rent or sell (without pressuring them one way or other depending on YOUR agenda)?

There are many services someone with real estate expertise can offer that don’t have anything to do with a listing agreement or buyer agency contract. And while some agents do perform some of these services “for free,” they do so as a good will gesture in hopes of getting that listing agreement or buyer agency contract sometime in the future as opposed to doing it as a professional, stand-alone, OBJECTIVE service.

Item 2 above – “you create a win/win situation where there is a tangible benefit to the client to pay for the service” – we’ve already covered elsewhere… so I’ll refer you there! “You Can Sell Anything You Believe is a Good Deal for the Customer

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We did a teleseminar show in the SWS Virtual Studio yesterday called “Real Estate Consulting in the Real World – The First Steps” where we talked about what a new real estate consultant might do to get his or her consulting practice off the ground.

One of those “first steps” was to come up with a list of two or three specific alternative services you could offer (by “alternative” we mean a service that is real estate -related but not the traditional buyer or seller representation paid by a contingent commission); services you’re really jazzed about – that you feel you could market and “sell” because you feel there IS a market for them.

To help prime the pump, I provided the following list of potential alternative services:

Traditional home sellers or buyers who are willing to participate in a “shared-risk” arrangement
For Sale by Owners (FSBOs)
… who want a professional, objective CMA
… who found a buyer and want help preparing, explaining and executing the proper contracts and disclosures, and/or
… want help navigating the contract-to-closing period
Homeowners who:
…are considering a significant renovation, but don’t want to “over-improve”
…need help deciding whether to “move or improve”
…need help deciding whether to sell “as-is” or renovate
…need help deciding whether to sell now or wait
…want help interviewing for a listing agent
…want help determining if they have enough equity to pursue refinancing
Landlords deciding whether to re-rent or sell
Owners of expired listings who would like an objective analysis of “what went wrong”
Homebuyers who have found a property and want contract-to-closing assistance
Potential homebuyers who are considering buying, but want objective advice without pressure to BUY NOW
Licensed real estate agents who need another agent to list their homes for E&O (Errors & Omissions insurance) purposes, but will handle most of the marketing and negotiation themselves
Licensed real estate agents who need outside expertise in their transactions (and you have that expertise, e.g. short sales, REO’s , estates)
Investors who find their own properties and want a real estate expert on their team to be involved as needed.

At the end of the show I asked the audience to tell me which of these ideas really grabbed their attention; which ones they could see themselves getting fired up to do! And here were the results:

Favorit-est Idea #1
Offer contract-to-closing services to FSBOs

Favorit-est Idea #2
Offer a “What Went Wrong?” analysis to owners of expired listings

Favorit-est Idea #3
Offering sellers the opportunity to “share the risk” by charging an upfront fee in exchange for a lower commission

Favorit-est Idea #4
Consulting with renters for a fee (not on the list above, but several mentioned it)

Favorit-est Idea #5
Offering a “tour” package in resort communities for a fee that would be credited at closing

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A few weeks ago I started a series of blogs on real estate consulting and the most common objections I hear as the newly annointed Commander and Chief of the Accredited Consultant in Real Estate (ACRE) program.

The first objection I addressed was: “… my broker will never go for it”you can read that here.

The next objection I hear a lot is: “…it will never work in my market!”

The rationale behind this objection seems to be that if you work in a market with a low price point (e.g. the average price of homes is less than $100,000), there ain’t no way you can charge people upfront or non-contingently for your service.

I don’t get this argument. At all.

What is it about a lower average home price that would make people hesitate to pay a reasonable fee for real estate-related services if it’s a good deal for them (which it must be for them to be willing to do it)?

Can a real estate consultant in a lower cost-of-living market charge the SAME fees as someone in a higher-cost-of-living market? Of course not, but they shouldn’t need to… presumably an agent who works in a rural community in, let’s say, Arkansas has a much lower cost-of-living him or herself than an agent who works in Washington DC.

So, maybe the DC agent charges $500 for Service X and that’s considered fair and reasonable in her marketplace. Could the agent in Arkansas charge that? Probably not – maybe he can only charge $100 for the same service. But that $100 will go a whole lot further in his budget than it would in the DC agent’s.

Am I missing something?

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Last week I posted a blog promising a series of subsequent blogs on the subject of “Real Estate Consulting, Sounds Interesting But It Will Never Catch On…”

In that blog, I listed 7 common objections agents have toward the concept of consulting – here they are:

…my broker will never go for it.

…it will never work in my market.

…why would someone pay me to do what everyone else does for free?

…why would I want to make less money?

…charging upfront fees is illegal in my state.

…prices are too low in my market to make charging fees viable.

…I like working on commission.

Let’s hit the first… “my broker will never go for it…”

You know what? You may be right! Your broker may have absolutely zero interest in allowing his agents to offer alternative services and compensation options. But here’s the problem I often see when agents tell me “my broker said no.”

Imagine the scene: an agent trots into her broker’s office all revved up about real estate consulting and announces that she wants to start charging upfront fees and offering alternative services. The broker, probably up to his own elbows in office crises, politely asks the agent a few questions about how it works, but the agent really doesn’t know. She just knows she’s “tired of working for free” and has heard that if she becomes a real estate consultant, she can charge for her time and expertise.

If I were the broker, I’d probably respond negatively myself. I’m guessing I wouldn’t have the time or energy to explore some new-fangled approach to business just because one of my agents suggests that I do. I might tell her I’ll look into it, but I’m pretty sure it would never happen.

But what if the agent schedules a meeting with the broker and comes in prepared to have an intelligent conversation about the benefits of consulting, how she envisions it working in her own business, complete with a business plan that includes the services she’d offer, the client-types she’d focus on and how and how much she’d charge? What if she makes a professional proposal to the broker that is clearly well-thunked out instead of simply saying “I wanna consult, can I do it?”

Okay, so maybe our agent takes this approach and the broker still sez “no way.”

Well… honestly… I got into real estate because I wanted to be my own boss and create a business I could be proud of and excited about, so if my broker doesn’t “let” me do that, I’d probably be looking for another place to hang my license. Once I worked for a franchise (RE/MAX) who let me run my business my own way and later owned my own company, I can’t imagine going back to a company who wanted a say in how I served my clients and what I charged them for my service (as long as I stay within the limits of the law of course!).

There ARE consulting-friendly brokers throughout the country and if you want to see if there are any in your area, you can visit the Accredited Consultant in Real Estate (ACRE) website and check out the ACRE Locator (look for the green markers). There are also plenty of practicing ACREs who might have some insight into getting their broker’s blessing – look for the red markers on the map.

Just something to think about…

Next time… “It will never work in my market.”

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Real Estate Consulting (as defined by ACRE, the Accredited Consultant in Real Estate Designation):
1.To take a consultative approach (as opposed to a sales approach) when working with clients; and
2.To offer choices in the services provided and how those services can be paid for.

As the recently-anointed Commander in Chief of the ACRE program, it falls upon me to spread the word about the real estate consulting movement, at least as far as ACRE is concerned, and to help people understand what consulting is… what it isn’t… and why it’s cool ;-]

Which, of course, I believe it to be. Cool, that is. In fact, I think the concept of real estate consulting is incredibly cool. If I didn’t think that, I wouldn’t have agreed to take over the ACRE program from founder Mollie Wasserman and make it a part of the SWS empire.

But not everyone agrees with me about the coolness of consulting! In fact, many of the people I talk to about consulting in general and the ACRE program specifically seem downright skeptical that real estate consulting is a viable business model, and certainly nothing that would work for them, although most say that it “sounds interesting in theory.”

When I press them to tell me why they think consulting is “interesting only in theory,” I typically get one (or two) versions of these seven objections:

“It sounds interesting, but…Consulting

my broker will never go for it.”

…it will never work in my market.”

…why would someone pay me to do what everyone else does for free?”

…why would I want to make less money?”

…charging upfront fees is illegal in my state.”

…prices are too low in my market to make charging fees viable.”

…I like working on commission.”

All reasonable objections, on the surface! After all, if you believe that your broker won’t “let” you consult; if you’re sure that you’d make less money as a consultant or you’ve heard that offering compensation options is illegal in your market, then I can certainly see why you might think consulting isn’t for you.

But I’ll tell ya what… if the concept of real estate consulting DOES sound “interesting in theory” to you… give me the opportunity to discuss each of the above objections and THEN decide if consulting might be something that’s not just “interesting” but 100% doable!

Deal?

Stand by for further discussion!

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Last week we did a little teleseminar show in the SWS Virtual Studio called “Using a Consultative Approach with Expired Listings,” where we discussed a better way (IMHO!) to work with frustrated homeseller wannabe’s than the traditional pushy, salesy nonsense that’s preached as gospel in our industry.

By “consultative” I mean that you go in with an attitude of “What Went Wrong and how can we fix it?” as opposed to an attitude of “please sign this here listing agreement so I can put MY sign in your yard for another six months and oh, yeah, you were overpriced, that’s why you didn’t sell, see ya in six weeks when I show up with a price reduction amendment for you to sign.”

During the show I described an approach that helps both the agent and frustrated homeseller wannabe figure out exactly What Went Wrong and if it CAN be fixed to maximize the likelihood of a better outcome this go-around. I asked the audience to take notes and at the end of the show, tell me which tip or strategy was their favorite of the day…

And here are the results!

Favorit-est Tip #1
Approach the homeseller wannabe with a list of questions about their prior (unsuccessful) listing experience (including asking them why they think the home didn’t sell) instead of coming in with a fancy-schmantzy presentation and sales pitch.

Favorit-est Tip #2
Go in with the heart of a detective (i.e. a consultant) with the goal of discovering What Went Wrong instead of a goal of Getting a Signature.

Favorit-est Tip #3
Related to #1 and #2, have a CONVERSATION with the homeseller wannabe instead of making a presentation; listen more and talk less.

Favorit-est Tip #4
Use a multi-step process – your first visit is solely to gather information, and on the second visit you present your analysis of What Went Wrong.

Favorit-est Tip #5
Take a close look at the prior agent’s MLS listing looking for red flags that might have impeded the sale of the home. Examples of red flags include: important fields not completed properly, the listing describes showing restrictions, the buyer agent co-op isn’t competitive, the home is priced just above a natural threshold, or the listing description overpromises.

Favorit-est Tip #6
You can actually CHARGE to perform this “What Went Wrong” analysis as a separate service and offer to rebate the fee at closing if hired to list the property.

Favorit-est Tip #7
You might discover when doing your analysis that the property simply isn’t sellable right now.

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I’ve been watching and commenting on Leslie Rojohn’s fine blog called “Time is Money– Unless You’re a REALTOR” – about charging retainer fees. Maybe you saw it, too, since it was Active Rain’s headliner of the day last Thursday or Friday.

As typically happens when any topic of non-contingent compensation is featured, the comments came in fast and furiously, most Questionalong the lines of “Sounds great, but it will never happen. If buyers (or sellers) can get it free down the street, why would they be willing to pay for it?”

Indeed. Why would they?

Hmmmmmm?

That’s not a rhetorical question – I’m asking it. Assuming you like the idea of getting a retainer or upfront fee, WHY would a buyer or seller be willing to pay one for your real estate service?

Hmmmmmm?

No answer? Well, then there’s the problem!

Unless you’re some super-duper salesperson who can sell the proverbial snow to an Eskimo, you need to believe that what you’re selling is good for your customer. Great, even. AND IF YOU DON’T BELIEVE THAT ABOUT YOUR SERVICE OR YOUR FEES, no one else is going to believe it either!

Of course, this applies to any product or service someone might be pitching, but for our purposes here, we’re talking about non-contingent (aka retainer or upfront) fees.

“Sounds great, but it will never happen. If buyers or sellers can get it free down the street, why would they be willing to pay for it?”

Well… in the last few years of my active career, I offered my sellers the choice to pay me $500 upfront… and most took me up on it – happily. Was the guy or gal down the street also charging $500 upfront? Nope. Were my seller clients so filthy stinkin’ rich that they had an extra $500 lying around they wanted me to have? Nope. Was I such a super-duper salesperson that I was able to overcome their objections with a masterful script and a mega-watt smile? Oh, heavens NO!

Most of my sellers paid the $500 upfront fee because I made it a good deal for them to do so. And they recognized a good deal when they saw one and cheerfully wrote the check. And because I knew what I was offering was a good deal for them, it was no problem at all for me to “sell” them on the idea.

So… instead of moaning and groaning about how unfair it is that we Work for Free (which we DON’T) and that “no one will ever be willing to pay us non-contingently unless everyone else does it, too,” get out of your own way and think about how you could make getting what YOU want also be a good deal for your customers. And you’ll be able to sell it All Day Long.

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I’ve been a little absent from Active Rain for awhile now – no real good reason, just had to triage my time and blogging took a backburner. Happily, for me anyway, Loreena Yeo’s featured blog yesterday “It Costs $$$ to Do Business inspired me to jump back in and spout some opinions!

In case you missed it, Loreena’s blog was about how there are some deals NOT worth doing – and she referenced one in particular where both a referral fee was due and a buyer rebate requested. When Loreena did the math, she decided that the net paycheck simply wasn’t enough to cover her cost of doing business, and therefore respectfully declined to represent the buyer.

As her blogs always are, it was well-written, insightful and thought-provoking. Neato Frito.Math

However, I must respectfully disagree with the blanket conclusion that an agent’s full commission MINUS referral fee MINUS buyer rebate EQUALS not-enough-payday. Perhaps it does, perhaps it doesn’t; it really depends on the situation and the dollars involved. There certainly IS a cost of doing business, but that cost doesn’t change significantly depending on the price of the home being bought or sold. If a $500,000 transaction MINUS referral fee MINUS buyer rebate does not lead to an acceptable payday, does that mean the agent should turn down business in the $150,000 – $200,000 range which would lead to the exact same payday?

I’m not saying that we should (or should not) offer buyer rebates – I have no strong opinion on the matter. Nor am I saying that we should (or should not) work with lower-end buyers or sellers. Those are personal business decisions every agent (and his or her broker) can make for themselves.

What I am saying (as I’ve said many times before) is that our traditional compensation model where we are paid based on the price of the home we help our clients buy or sell is seriously flawed. And unless someone can give me a compelling argument (aside from “that’s the way it’s done“) as to WHY it makes sense to pay us twice as much on a $500,000 transaction than we’re paid on a $250,000 one, or, conversely, half as much on a $250,000 sale than on a $500,000 one… then I’ll probably continue to dance on this soapbox (in fact, I have two more blogs fired up and ready to go!).

The thing is – there ARE alternatives to this model; alternatives that make sense both for us, the real estate practitioner and more importantly, the real estate consumer. 

RELATED BLOGS
“No I Won’t Reduce My Commission, Do You Expect Me to Work for FREE?”
Alternatives to the Commission-Based Model – and yes, we still make a good living

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Fair

For the record, let it be known that I have no problem with real estate agents charging their clients as much or as little as they care to, nor do I have any fuss with the manner in which they do it, as long as it falls within legal limits and doesn’t conflict with their brokers’ policies. Oh, and, AS LONG AS 1) they’re providing good value for the dollar paid, whatever that dollar amount is; and 2) they demonstrate integrity by playing FAIR – that is – not charging one person less than another as a business-buying strategy!

Anyway, a few months ago I wrote a couple of blogs about real estate compensation – specifically our traditional model where we are paid based on the price of the home we help our clients buy or sell. I questioned the appropriateness of this approach since the value of our service really isn’t based on the value of the product.

You can read those ramblings here:
“No, I Won’t Reduce My Commission, Do You Expect me to work for FREE?” 
Alternatives to the Commission-Based Model – and yes, we still make a good living

Today I want to pontificate about the comments left on those blogs that were along the lines of “Yeah, sometimes we make too little and sometimes we make too much on a specific transaction, but it all evens out in the end…” and “50% of Something is Better than 100% of Nothing.”

While quite common among real estate practitioners, I believe these two attitudes are a little dangerous, and even border on unethical in my opinion.

(Ooooh, such melodrama, Jennifer!)

Let’s start with “It All Evens Out”
The fact that it “all evens out” may be true FOR US, but is in no way fair or reasonable to the person paying the bill – that is – our buyers and sellers (and yes, buyers help foot the bill of our commissions just as much as the sellers do; some might argue they’re the ones who pay it).

When our clients pay for our service, they have every right to expect us to charge THEM fairly, which in their minds, has nothing to do with that $50,000 condo buyer we spend 9 months on last year and therefore need to “make up for” when we work with clients in higher price ranges.

“50% of Something is Better than 100% of Nothing”
Is this true? Absolutely! No question, if you do the math, that statement is 100% true, 100% of the time!

BUT

Again, is it FAIR to our clients?

In most cases, no.

Implied in that statement is that, if pressured, we’ll give into a buyer or seller’s demand that we accept less in payment than we normally would, because, shoot, something is better than nothing, especially when it comes to a paycheck.

But is that FAIR to our clients who do NOT request/demand that we accept less than we normally would? Is it ethical to charge one client your “full” price simply because he was too polite to ask for a discount, while charging someone else less because he was a little bolder? Sure, it happens every day, but is a part of the reason our industry is lumped in there with used car salespeople (who everyone knows you must negotiate with)!

Am I saying that you should charge everyone the same “rate?” Not at all. I think every real estate scenario is deserving of individual evaluation and “rated” according to its potential degree of difficulty, among other factors. But to simply discount your fee because someone asks you to while holding to your fee when someone doesn’t reeks of unprofessionalism and even a lack of integrity.

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 fsboIt’s happened to all of us… we drive our buyers all over town, take them to lunch, return their Sunday evening phone calls… and then… BAM! They call us with the fantastic news that they found the PERFECT house! Unfortunately it’s a FSBO and the seller isn’t willing to pay an agent. Our buyer really appreciates all our effort and hopes there are no hard feelings…

Hard feelings… nah….

Your immediate reaction? I’m guessing most of us would sputter and stammer and feel betrayed and many would probably assert our “right” to a commission, especially if a Buyer Agency Agreement is involved. I’m not here to argue the rights or wrongs of that.

But…

I’ve been working with a lender for the last two months, trying to refinance my house. Being a self-employed writer-recently-returned-to-real-estate-sales, I’m a Stated/Stated kinda gal. Not a lot of loan programs out there for us, and they’re dwindling by the minute. Every time my lender has found me a workable loan, it’s vanished – POOF – and she has to start over.

So, a few days ago, I had lunch with another lender friend of mine and told him my woes and he said: “Wachovia has the perfect product for what you’re looking for – here’s the number of my contact there, give her a call!” I did, and she did (have the perfect product) and it’s pretty much a slam dunk.

Here’s my question. My first lender didn’t get the job done. Her fault? Not really. But she didn’t get the job done. Do I owe it to her to BRING HER IN ON THE DEAL and cough up a $2700 origination fee?

Yes? No?

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question

I got a good question the other day from Melissa. Melissa finds herself competing against companies who provide minimal service for a minimal fee. Nothing wrong with that, mind you, it’s a business model that has its place. But it can make it hard on those who offer full service for a higher fee, especially when the seller says those magic words “I need every penny out of my house to break even!” How do you persuade a seller that your services cost more because they’re worth more?

I could probably write a book, or at least a chapter of a book on this topic (oh, yeah, I’ve done that!), but for our purposes today, let me share a little script I came up with in the shower this morning.

When the seller says something along the lines of: “I’m sure you’re worth your fee, but I simply can’t afford you,” how can you respond?

Well, I don’t believe you should argue with him. Arguing makes you look insecure and somewhat desperate. And it doesn’t work. So don’t do that. Neither should you put down your competition – that will only subtly criticize the seller’s judgment; after all, he chose to consider going to minimum service route. But what if you say something like this:

I hear ya and I understand. You have a tough decision to make. On one hand, you can pay this other company a much lower fee upfront and hopefully retain more of your equity. On the other hand, you can hire a full-service agent, whether it’s me or someone else, and due to the increased exposure and marketing expertise, you might end up with even more of your equity. Either way, there’s no guarantee that your house will sell for what you need it to. I’m sure you’ll make the right decision. Do you have any questions for me that might help you in making that decision?”

The fact that you’re sitting there in the seller’s home means that he hasn’t ruled out paying a full-service company. In fact, he probably wants full-service; he’s just not convinced of its value. But if you first show him that you care about his situation and you trust his judgment, he’ll probably give you the opportunity to persuade him. Just wait til he’s ready…

www.SellwithSoul.com

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I’ve been a real estate agent for twelve years. The entire twelve years, I’ve worked the traditional model… I get paid when the house closes. Sometimes I get paid BIG time, which sometimes doesn’t seem proportionate (in a seller’s eyes) to the amount of work I actually did.np

But a significant part of why we make the money we do is that we agree to work on contingency – if we don’t get our buyer or seller to a closing, we don’t get paid, regardless of how hard we worked or how smart we worked. If we don’t perform… we are not compensated.

Not many industries work under these conditions.

That’s not really the point of this blog today, however. After all the fun a few weeks ago debating the value of our services, I got to thinking. Maybe I could offer a third fee option (I currently offer two; click here to read about them) – How about an upfront fee that is non-refundable, but significantly less than the seller would pay under a traditional commission structure?

Let’s say, illustratively, the seller pays me $3,000 at the time of listing instead of, say, 3% at the closing. If my average sales price is $300,000, this saves the seller about $6,000. ($300,000 x 3% = $9,000 – $3000 = $6,000)

So, I was thinking I was pretty smart. I get paid upfront and in a world where a For Sale sign in the yard is certainly no guarantee of a paycheck in the bank, I might come out ahead. I was all ready to talk to my broker to make sure he was okay with it.

But… whoa, Jennifer, slam on the brakes.

I know how I feel when I pay upfront for something and don’t get the results I expect. I’m mad, I’m disappointed, I’m frustrated. I’m certainly not feeling warm and fuzzy toward the person or company I paid upfront.

I don’t want my clients to feel that way about me. If I take their $3,000 and then can’t sell their home… do you think they’ll be philosophical about it and happily refer me to all their friends? Probably not. They’ll resent me and the fact that I took their money and didn’t perform. Is this fair? Probably not, but it’s how we human beings are wired.

So… I dunno. I’m kind of used to the idea of Pay for Performance and I feel good about it for myself and my business. I may not mess with something that’s working…

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microphone

On Wednesday afternoon, I hosted a teleseminar panel discussion on the Art of Commission Negotiation. And yowsa! It was fantastic! If you missed the show, you missed a great one. If you ask me reeeeeeal nice, I might be persuaded to send you a recording of it.

Anyway, we had five guest speakers, including me, sharing our strategies for that sometimes-awkward commission negotiation conversation with a potential seller. We all had very different approaches, (but none of us advised the “whine your way to a commission” strategy where you basically tell your seller how little you end up with at the end of the day, as if he cares!)

For those who missed it, our five speakers and an overview of their philosophies were:  

Jackie Leavenworth, The Real Estate Whisperer: Comfortable scripts & dialogues, including “No, but thanks for asking. What other questions can I answer for you?” and “No, but thanks for asking. I used to negotiate my commission, but I found it didn’t work for me,” and “No, but thanks for asking, I run my business with integrity and decided that it’s not right to charge someone less because they’re a better negotiator than someone else,” and “No, but thanks for asking. This is actually your first test of my negotiating skills!” Jackie also refers to her commission as a “success fee” and takes the time to explain what that means.

Scott Nordby, Broker Owner of Innovative Real Estate Group: Asking the seller for his thoughts on what is important to him in a real estate agent. If the topic of commission comes up, Scott asks him what he feels is a fair price to pay a professional real estate agent. Most of the time, the seller responds with the figure Scott is looking for, but if he doesn’t, Scott doesn’t back down and is willing to lose the listing.

Loretta Hughes, Broker Owner of Exit Realty Fusion: Raising the total commission payable so that the buyer agent co-op is far above what most other agents are offering, thus encouraging showings. She explains to the seller that by netting a higher price (due to the increased activity), the higher commission they’re paying is offset – that is – the seller ends up with a higher net proceeds. She does not participate in the higher commission – she gives all of it (over and above her own normal listing fee) to the buyer agent.

Tupper Briggs, RE/MAX Top Producer: Tupper uses his prowess in the Evergreen market to demonstrate his value. He shows the seller, using hard figures from the MLS which are updated monthly, how his team sells homes far faster and for more money than the “average” Evergreen real estate agent. Thus, even if his fee is higher than his competition, the seller nets more in the end.

Jennifer Allan, Author of Sell with Soul (me): Being upfront about commission – getting it out of the way as soon as possible so as not to create an adversarial situation with a seller. When sellers ask what I charge, I either tell them or direct them to my website where it’s clearly spelled out. I also offer an option in fee structure – the seller can pay my full percentage at closing or pay me an upfront marketing fee + a reduced percentage at closing, thus sharing the risk.

Thanks to all who attended and a HUGE THANK YOU to the speakers!

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Last weekend I posted a blog that generated lots of impassioned comments (I love it when that happens).Debate The topic du weekend was the sacred cow of real estate – our compensation structure that pays us based on the price of the product we sell.

My firm belief is that there is very little correlation between the price of the product and the value of our service. In other words, my efforts on a $1M property are not worth 10 times more than my efforts on a $100,000 property (or conversely worth 1/10th on the lower-priced property). In fact, sometimes that $1M transaction is far easier than the $100,000 one… and sometimes… it’s harder. But the degree of difficulty of the transaction is not simply a matter of the price; many other factors are involved. 

Some of my readers called me on my stance with an implied “Okay, Miss Smarty-Pantz, if you don’t like the way it’s done now, what’s YOUR solution?”

Well, thanks for asking! I’m happy to share my thoughts on the matter (Really?)

First, let’s talk about the difference between a Commission and Contingent Fee (they aren’t the same thing!). A Contingent Fee is paid only if the outcome is successful, as defined by the parties to the transaction. That Contingent Fee could be a flat $1 or $10 or $10,000, OR it could be a percentage based on the price of the product; e.g. 1%, 2%, 7%, 15%, whatever (and usually called a “Commission”).

Therefore, in the real estate industry, our compensation is traditionally Contingent Commission-based – that is – we don’t get paid unless we are successful AND that pay is based on the price of the property we sell.

  • Commission = Compensation based on the price of the property
  • Contingent = Compensation NOT necessarily based on the price of the product, but not paid unless there is a closing.

So, as real estate agents, we could work on a Contingent (non-commissioned) basis – that is – we set a price for our service that we feel fairly compensates us for our time, expertise, effort and risk, and collect that fee if and only if we are successful. That fee will vary by client; some home-buying or -selling scenarios are potentially more difficult, more risky, more costly or more labor-intensive than others, and as professional real estate agents, we should be able to identify which projects merit a higher (or lower) Contingent Fee (I’ll talk more about this in a future blog).

At the other extreme, we can also charge by the hour, project or service, upfront, and eliminate all risk of “working for free” (which will usually result in a lower per-transaction fee due to the lower risk absorbed, but possibly a higher overall income.).

Of course, there are hybrid plans where the agent charges an upfront fee as part of his compensation, with the remainder being paid on a Contingent basis – that is – when the property closes. (This was my business model for years – loved it!)

Or, there’s Mollie Wasserman’s consulting (ACRE) model where you offer the client a choice of paying 100% upfront or 100% contingent, or somewhere in between, depending upon the situation and as agreed-upon by both parties. (While I’m an ACRE, I probably just did a lousy job explaining the ACRE philosophy – for more information go here: http://www.theconsultingtimes.com/)

There’s absolutely nothing sacred (or even sensical) about charging our real estate clients based on the price of the product they’re buying or selling, regardless of whether it’s at the low end or high end. At the low end, you probably aren’t paid enough and at the high end, the pay is probably in excess of the value provided.

But just because you don’t get paid on Commission doesn’t mean you can’t make a heck of a good living selling real estate. It’ll just make more SENSE!

 RELATED BLOGS:
No I Won’t Reduce My Commission – Do You Expect Me to Work for FREE?
Why Should I Work for FREE? You DON’T!”

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The other day I wrote a blog about how I wish the whole world operated under the Tempur-Pedic model of Satisfaction Guaranteed or Your Money Back! Which, in a way, is how our industry operates as well since in most cases we don’t get paid until/unless we perform. However, I promised to also explore the other side of the equation – that is – a real estate industry without commissions, without the emphasis on Pay for Performance.  In other words – a salaried or fee-based model.

The most common objection to the salaried real estate agent (and for simplicity, let’s just call all non-contingency-based models “salaried”) is that without the incentive to perform, service to the client would suffer.

In theory, that makes perfect sense; as I’ve experienced way too many times in the last year, once you’ve paid for something, you’re stuck with the service you get or don’t get, whether you’re satisfied or not satisfied.

But here’s the thing. That blanket assumption actually CONTRADICTS a big part of the traditional real estate compensation model – specifically – that we are paid a PERCENTAGE of the deal. That is – we make far more money on a $500,000 deal than on a $100,000 one. Therefore, the anti-salary line of reasoning says that we will naturally work far harder on the bigger deal than on the smaller deal.

I don’t know about you, but I don’t work that way. My $100,000 clients get pretty much the same attention and service as my $500,000 ones.  Not necessarily because it’s the nice thing to do, but because that’s WHO I AM. If someone hires me to do a job for them and I agree to be hired by them, my pride ain’t gonna allow me to give them a half-a$$ed effort, regardless of the final paycheck. That’s how I’m wired. Aren’t you?

So, if we agree that we don’t treat our lower dollar-versus-higher dollar clients much differently, is it really that big of a leap to assume that we are capable of providing excellent service under a salaried model?

If you were hired and paid a decent salary to take great care of a handful of buyers and sellers, would you really do a sub-standard job because you aren’t being paid on contingency? Or would you take your job seriously and do your best because that’s who you are?

Now, I’m not talking about prospecting. I’m talking about doing what needs to be done to market, contract and close your seller’s home or getting your buyer into his first home, next home or dream home.

But see, this is where it gets fuzzy. BECAUSE of how we’re compensated, our business tends to attract practitioners who view the career as primarily sales, not service. They enjoy the chase, the hunt, the pursuit – that is – they like to prospect. And there’s nothing wrong with that. But those aren’t necessarily the skills and talents that make a great real estate agent – one who gets her deals to the closing table – leaving a stream of satisfied buyers and sellers in her wake.

Which is, in my humble opinion, something we need more of in our industry.

But that soapbox aside, I can easily see a model where real estate agents are paid a salary to do the job their buyers and sellers hire them to do. The companies that have the best tools, training and systems in place to serve their customers will naturally get a larger share of the local business, assuming they have a decent marketing department. Sure, there would be a sales force, but most real estate license-holders would focus on taking care of their current customers, rather than on the pursuit of new ones.

This little blog isn’t meant to be any sort of manifesto crying out for change, or anything like that. Personally, I like being paid on contingency because it means if I do a good job for my customer, I get a juicy paycheck, due to the risk I agree to take by working on contingency.  And I like juicy paychecks. But if I were to open my own real estate company, I’d seriously consider a salaried model, simply because that’s the sort of practitioner I want to attract – one who would rather serve than hunt.

Just a few too many rambling thoughts on a chilly Monday morning…

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Last week sometime I posted a blog questioning whether or not a salaried model of selling real estate could work. Personally, I think it could, and will even go so far as to say that the public might be better served under that model. And I’ll probably expound on that opinion in the near future.

But not surprisingly, most respondents didn’t much care for my idea of the salaried real estate agent. Various objections were raised, including the rather ego-centric one of “But I don’t WANNA work on salary! I like being my own boss!”

And hey, I agree – I, too, enjoy the pay-for-performance compensation structure of the traditional real estate model and I love the challenge of never knowing if next month will be my biggest ever… or, um, not even close. And I most certainly have no desire to punch a time-clock.

But that wasn’t really my question – whether or not “we” like the idea for ourselves. The question was whether or not it is a viable business model. And again, I’ll likely pontificate more on that later.

For now, though, let me ask this question. Would you have gotten your real estate license and gone into the real estate business if:

  1. The average SALARY (that is, guaranteed pay) was $75,000 + benefits & bonuses, and
  2. You had no sales responsibility (that is, your job was to manage the transaction, not procure business)?

Just curious – your thoughts? (And no, I’m not thinking of opening up my own salaried shop – egads – SO not my thing to manage people!)

Part III Here

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I’m on a ranting roll this week and it’s only Tuesday.

My friends… let’s stop complaining about “working for free.” Let’s stop proclaiming that we need to better protect ourselves from the home-buying and -selling public who live to abuse our willingness to do work “without any guarantee of compensation.” 

WE DON’T WORK FOR FREE. WE WORK ON CONTINGENCY.
There’s a big difference!

Our willingness to work on a contingent basis – that is – to not be be paid until or unless we perform, is precisely WHY real estate fees are what they are. We are able to charge a lot of money to do what we do, far more than we could charge if we were paid by the working hour or by the job, upfront.  

Working by contingency is risky. And when something is risky, it means, by definition, that there’s risk involved (duh). In our industry, the risk is that we may not be paid for our efforts. No, we don’t much care for that outcome, but it’s the chance we’re willing to take to be able to charge the hefty fees we do when we’re successful.

If you don’t want to work on a contingent basis, you’re welcome to find a different model that better suits your personality. There ARE other models out there – Mollie Wasserman’s ACRE program is a great one, and there are hybrids where you reduce your fee in exchange for a retainer or upfront marketing fee.

But if you, like most of us, enjoy the challenge of shooting for the sweetest possible payday, stop worrying so much about those “wasted” hours!  As long as you were doing something that taught you more about your real estate market and/or put you in front of a warm body to impress with your wonderfulness, you weren’t working for free. You were just building up credits toward that next sweeeeet payday!

Rant over.

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Bed

I was watching TV the other (sleepless) night. Caught a Tempur-Pedic commercial. Seems the Tempur-Pedic is a spectacular bed for whatever reason, so spectacular that the company gives you a 90-Day trial period. Not 90-days of simply looking at your new bed, but 90-days of actually sleeping on it. If you don’t love it, you give it back. No questions asked.

Now, that’s a guarantee.

I’m not in the market for an expensive bed these days (I’m actually sleeping on a blow-up right now – don’t ask), but I tell ya – I’m impressed. I’m sure Tempur-Pedic’s 90-Day guarantee is mostly gimmick, and I have no idea if they stand behind it, but I’ll give them the benefit of the doubt. And proclaim that we could use more gimmicks like this in our world.

What if everyone guaranteed their product or service this way? Wouldn’t that be SWEEEEET? If your doctor doesn’t cure you, he returns your money. If your publicist doesn’t increase your exposure, he doesn’t see a payday. If that pay-per-click campaign you shelled out $500/month for doesn’t produce results, you get a refund.

Sure, there are innumerable flaws in this model, but isn’t the overall philosophy wonderful? Put the pressure on the provider to 1) be worth his or her fee, and 2) analyze the situation before accepting payment to determine if your money will be well-spent, and I imagine we would see an exponential improvement in the quality of products and services delivered to the marketplace. I can’t tell you how many times I’ve paid for a service and been told after a disappointing experience – “Well, we never guaranteed results!”

Why not? Why did you TAKE my money if you didn’t think it was a good investment for me? (Okay, that’s a silly question, but I still think it’s a fair one).

While I believe that the real estate industry’s compensation model is seriously flawed, I do like the message we send that if we don’t perform, we don’t get paid. Unfortunately, all too often we DON’T perform, even under this model, but that’s a topic for a dozen different blogs. Philosophically, though, I like it.

That said, and yeah, this will sound really inconsistent, but I could also get behind the model of real estate agents as salaried professionals or pay-per-project consultants. Which I’ll elaborate on next time!

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I’m watching Jason Crouch’s featured post today entitled: “How many other professionals work on contingency all the time?” The premise of the blog is to explore other compensation models that don’t require us real estate-types to do so much work for free.

Good stuff.

riskHowever, what I don’t see discussed (much) in the post or comments is an acknowledgement that part of the reason our fees are what they are is that we’re paid on contingency AND THAT’S WORTH SOMETHING! Working on contingency is risky and is therefore entitled to a higher compensation structure.

If we remove the risk associated with our compensation, it follows that we should also reduce our fee. More RISK = More REWARD. Less RISK = Less REWARD.

And I’m not sure that’s what we, as entrepreneurs, really want. We got into this business because we thrive on the challenge of working on commission… which by its very nature, involves risk. Maybe we’re not so enamored with our entrepreneurial-ship these days when the risk seems to outweigh the reward, but just a few years ago it was FUN! We LOVED it.

And we can’t have it both ways.

Many in our ranks have abandoned their real estate careers in favor of a guaranteed paycheck – and all the goodies that with that like benefits, paid vacation and oh, yeah, weekends off. Of course, also included in that lower-risk job is a boss, an inflexible schedule, a salary cap and perhaps excruciating boredom, ‘specially after the thrill of being your own boss.

If we want some semblance of guaranteed pay, we must be willing to forego some of the potential upside of a contingency-based pay scale.

Frankly, I’m probably fine with that, although my tune might change when good times return. And maybe that’s okay. Maybe in today’s less certain market, it makes sense to charge upfront or by the hour, and when good times return, revert to the traditional real estate model of a 100% success-based model when success is much more likely…

Related Blog: Upfront Fee versus Pay for Performance… I’m torn!

Here’s an excerpt from Sell with Soul on the topic…sws

Successful real estate agents can make big bucks. For a career that requires only a month or two of education, the rewards can be tremendous. But be aware of the reasons the economy supports paying real estate agents such high fees…

First ……

… Second, you agree to be paid on contingency. You take the risk every day that the work you do will not be compensated. More Risk = More $Reward$. Less Risk = Less $Reward$. Not too many professions work with no guarantee of payment. Therefore, you can justify higher fees upon success. If you could convince your clients to pay you hourly (good luck), you could charge a reasonable hourly fee and would probably make much less money per transaction. Overall, you might come out ahead though.

So remember that the next time you get a $10,000 paycheck for, say, ten hours of work-that $10,000 is also paying for those flaky buyer clients who run you around and mysteriously disappear. It doesn’t mean that you and your services are worth $1,000/hour.

We real estate agents get spoiled by our big paychecks. We actually think we earned that $10,000 check during that specific transaction. Even if a client put you through the wringer for a year, it’s not likely you spent more than 50 hours on his transaction. And, $200 an hour is pretty good pay for anyone.

My personal mantra is that “I sell real estate every day. Sometimes I even get paid for it!” It keeps me sane!

So before you get hostile toward prospects who never take you to a closing, realize that real estate fees are structured to pay you for that “wasted” time. Of course, the better your closing ratio, the less you have to worry about such things, but in your first year(s) you will “waste” a lot of time on unproductive people. But, as we will see later, there is no such thing as wasting your time in your rookie year.

 

www.SellwithSoul.com

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Have you ever heard the commission-negotiation-avoidance strategy of creating a menu of packages for a seller to choose among? For example (all figures are illustrative only), you might offer a 4% package which includes minimal services; a 5% package which has a moderate level of service and a 6% package that includes a kitchen-sink level of service.

Sounds good, doesn’t it? After all, it demonstrates to the seller what you actually DO to sell a house and probably reduces the likelihood of his asking for a discount. If he wants to pay less, he gets less. HIS choice.

Sorry, but I think this is a lousy idea. Why?menu

Oh, let me count the ways…

You want to sell the house don’t you? Yes? Well, then why are you asking your SELLER how to market it? As the expert in selling houses, YOU know what needs to be done and you, as a professional, should do those things.

You should also know what doesn’t sell houses in your market. And you shouldn’t be offering and charging for those services if you (as a professional real estate agent) know they aren’t effective.

When I get a new listing, I really want to sell the damn thing and I spend a lot of time and energy figuring out what we need to do to make that happen. By “we,” I mean me and my seller. I don’t market every house exactly the same, nor do I advise every seller to do the same things. It’s part of my service to analyze each situation individually and proceed accordingly. Some listings will benefit from Open Houses, some won’t. Some (most) homes need staging, some don’t. Some listings will benefit from newspaper ads, most won’t. It’s my job to know these things.

Besides, you want to provide exceptional service to all your clients, don’t you? Don’t you want their future business and referrals? By purposely limiting your service (especially if it affects the marketability of the home), you may be blowing your reputation and credibility with this client and potential source of future business. And of course, you may also be blowing your chances of getting a paycheck if your seller doesn’t pick the right package and the house doesn’t sell.

I do offer two commission options, but they aren’t priced according to the service provided; they’re based on whether or not the seller pays an upfront marketing fee. You can learn more about this strategy on my website…  and yes, I tell the world what my commission is – which is a topic for a different blog, but it works amazingly well!

Be a professional real estate agent and do what it takes to sell your listings. That’s your job.