Wednesday, October 27, 2010

All of the Commission Doesn't Go to Your Agent or Even Between Your Agent and her Broker

I came across a person the other day who like so many, thought that the commissions that realtors make are high and that all of it goes in the agent's pocket.  Commissions are not net income but are revenues from which expenses must be deducted.

Commissions are split with the Broker who out of this portion pays for the office:  rent, computers & photocopiers, electricity, the front desk that handles all of our bookings - 7 days a week from 9:00 AM to 8:00 PM, insurance, MLS listing fees, print ads - both branding and for open houses, credit bureau service - which by the way requires a lot of insurance and security.  As you can imagine we are handling very sensitive information and it has to be handled correctly.  In the case of a branded firm such as Prudential, we also have to take out a licensing fee from both the Broker and Realtor portions of the commission.  Again, Pru provides a lot for that fee - above the line advertising, their websites and distribution, and so on.

A good full-time agent is also going to have her own marketing programs.  Not all agents are the same and if you are selling you really should look for someone who is online, who has a strategy rather than someone who is just going to slap up your listing on the MLS and wait to see what happens.  Any marketing strategy that they have costs money and comes out of her portion of the commission.

I run this website.  I have hosting fees, programmers who continue to help me improve the map.  We have had 4 releases this year!  I have an Admin - Becky, who is absolutely fabulous, and helps key data each week to bring it to you. 

I have to pay for data feeds to populate certain tools such as the property valuation tool and the service that sends you updates based on your schedule.  Plus the tool itself has to be paid for.

I have created customized Hoboken and Jersey City maps with graphic designers based on what buyers really want - a one page map without any advertising that provides useful information about the location where clients are considering buying - schools, daycare centers, Corner and Zip Cars, The HOP routes, NJ Transit, Light Rail and PATH locations.  As routes and locations change, these materials have to be updated.

I also subscribe to an additional flyering service that I pay for on a monthly basis to expand my listing's online distribution; premium memberships with Trulia, Zillow to get better placement on those sites, placement on sites such as Hoboken City Guide and Mile Square View.  When I do an open house, I like to send postcards to all the neighbors inviting them because A) most of them liked the building after all they bought there, B) maybe they know someone who was thinking of moving and maybe they would like them in their building, etc.

Writing articles for the website is also time consuming.  Personally, I enjoy writing and I hope that my readers find the articles informative.  Articles drive traffic to the website, generate brand and name recognition and create better uptake when prospects see one of my ads for your property elsewhere.  I also occasionally, post an article about an open house which is another added benefit, cost and risk that I take with my brand to sell your home.  

I did an open house at Maxwell Place, I dropped 300 postcards to the building.  It was a card I designed with a graphic designer and then personalized for the event.  I also have custom signage.  I have put up signage one week in advance and then prepped 6 street A-frame signs the day of the open house with customized materials and take ones.  The event was only 3 hours but in total time dedicated between me and Becky it was at least 10 and that does not include the time to develop the postcard itself.  In one open house I have over 25 households come through in 3 hours!  How much to you get paid for 10 hours of work?

All of this is done to attract the limited number of buyers that are currently in the market and all of it is paid for out of commissions.

Net, net, you need to consider that when you think about the cost of hiring a realtor.  The commissions are revenues, not net income.  Some of it should be going into advertising your property through ongoing means that have built up momentum such as a blog like this one or any other market presence strategy that an agent is pursuing.  Chose someone with a plan.  Only after all of this is paid for, does the commission "go" to the realtor. 

I have just described the sell side of commission.  You also have to consider the buy side.  

Read more after the jump.

Given that it's a buyer's market i.e., more properties for sale than there are buyers, one factor is commission to the buyers agent.    If a buyers agent has literally dozens of properties to chose from that fit what their client is looking for, what are they going to do if they see one seller offering 2% commission and another offering 4%?  The buyer's agent is going to pick properties where they are going to be remunerated for their services.  And, I don't blame them.

There is a short term v. long term decision here.  An agent can take the low commission perhaps to get "quick" money or can make the decision to uphold a standard in the industry for the long term.  All of this infrastructure cannot be upheld if agents are not paid for the service they provide. 

Buyers should consider hiring an agent under a Buyer's Agency Agreement.  This type of contract elevates the level of responsibility the agent has to inform you about the property and is expressly on your side.  Without this agreement, the agent is acting as a Transaction Broker where they legal liability is limited to helping you complete the contract of sale document and accompanying you on all showings.  When I am acting as a Transaction Broker, I like to provide the Buyer's Agency Service level anyway but am not obligated to do so.  The other side of the Buyer's Agency Agreement is the buyer has more of an obligation to the agent.  Should the buyer find a For Sale By Owner with a low commission, the buyer would have to pay the difference between the commission stated in the Buyer's Agency Agreement and what the seller is offering in broker commission.  By the buyer agreeing upfront to remunerate the agent regardless of the commission offered by the seller, the agent will have no cause to eliminate low paying listings.

And, yes, I did say 4% above.  4% is out there in today's market as a buyer's commission.  This is a buyer's market.  "Full" commission has typically been considered 6% - 3% to the buyers agent, 3% to the seller's agent.  But in this market, I am seeing quite a number of properties that are offering more than 6% in commission - 3.5% each side, 4% to the buyer's agent, 3% each side + a $5,000 flat fee incentive even 4% + buyer's agent bonus incentives. 

I often see on the MLS For Sale By Owner (FSBO) listings where they are offering 2% commission to the buyer's agent.  FSBOs can chose to pay a firm a flat fee just to put their listing on the MLS - i.e., no sales support after posting, the Owner does all the marketing.

2% is below the market for broker compensation and really does not remunerate the agent for more than marginal costs.  I can't tell you how many times I see both a low commission offered by FSBOs in conjunction with a higher than market listing price.  I don't know why anyone thinks he/she is going to sell their property in this market offering less to a buyer's agent than the market will bear at a price above market.  Did you read my article from Monday about how this type of listing is used as a tool by Buyer's agents to juxtapose another listing to show just how much more the client can get at the same price point elsewhere? 

A good realtor is a consultant who takes all the risk upfront.  We pay for advertising not knowing if we will be remunerated.  It's the only industry I know of that is like that.  At the end of the day, this service has to be paid for or it won't be there when you want to sell your home.

Interview your realtor.  Interview several.  Ask them what their strategy and tools are.  When you hire someone who has a good strategy value it by remunerating them.

Provided by Donna Antonucci
Prudential Castle Point Realty

No comments: