Full-service discounter puts squeeze on commissions

(Part five of a five-part series. See parts 1, 2, 3 and 4.)

Can a 2 percent commission model effectively compete against the traditional 6 percent model? Traditional brokerage in the Northeast is facing a new competitor that may very well reshape how real estate is conducted nationwide.

If 4 percent commissions don’t pencil using the traditional model, how can a 2 percent commission be profitable? Over the last three years, the folks at Foxtons have created a 2 percent model that is creating havoc for traditional 6 percent companies. Unlike other companies who cut services when they reduce commission, Foxtons is a “full service” company that provides excellent service, consistent lead follow-up, and extremely aggressive marketing for only a two percent commission.

As agents, many of us do a poor job in handling our business. We have no business plan, we’re not up to date on technology, and we don’t like to prospect. Agents are notorious for not returning e-mails, not following up after open house, and not regularly staying in touch with sellers, especially when the home is overpriced. After the close, most of us are poor at maintaining contact with our past clients.

Making us even more vulnerable, many major players have eliminated their live training programs, while also failing to adequately market their companies aggressively on the Web. Every time I do a Google search for “real estate,” I’m surprised at how seldom the name brand brokerages fail to appear on the first page of the search. Web-savvy agents often manage a first-page search placement, but where is their “brand name” brokerage? This vulnerability has opened the door for huge lead generation companies such as HomeGain, HouseValues and Lending Tree to skim off considerable market share. I’m also surprised when managers from traditional companies tell their agents to avoid working with lead generation companies. The point is, our industry’s slowness in adapting to change makes us the perfect target for a company focused on capitalizing on our weaknesses.

Foxtons’ is attacking these weaknesses through its team-based approach. Agents are salaried, receive benefits and handle specific parts of the transactions based upon their strengths, such as converting telephone leads, listing properties or negotiating transactions. What makes them different from other discounters is their aggressive “feet on the ground” marketing approach. In its service area, Foxtons is everywhere–on television, radio, train cars and platforms, billboards, buses, as well as its clearly marked fleet of 100 vehicles. When I evaluated the Web traffic figures for Foxtons on Alexa.com, its ranking was slightly lower than the big national brands. Given the company is only in a three-state area, it is clearly doing an excellent job of driving people to its Web site. 

In terms of its listings, every property has a full array of high-quality marketing materials, including a virtual tour, as well as scaled floor plans. Sellers show their own listings, but only after the buyer has been pre-qualified.

According to Bill Tolliver, Foxtons’ vice president of strategy, “Our goal is to provide the client more services than our competitors offer at 6 percent.  Because the company is able to more closely monitor the interactions of its agents, it is much easier to recognize and reward agents for providing outstanding service.” Unlike the independent contractor model where the agent is responsible for tracking the transaction, Foxtons facilitates the entire process, which creates a consistent customer experience.

Can an individual agent defend their commission against a savvy discounter like Foxtons? It’s difficult, but here are a few tips:

1. Relationship is still the name of the game.

Past clients who had a positive experience and a high degree of trust in their agent are much less likely to look elsewhere for representation.

2. Most discounters increase their fee to 4 percent when the seller wants to be on the MLS.

To obtain maximum exposure to the marketplace, the house must be listed on the MLS. Thus, the difference to the seller is 2 percent, not 4 percent. A good way to counteract this argument is to check your personal “average market time” for your listings against your discount competitor. If you sell properties on average at a higher price in a shorter time than your discount competitor, then the 2 percent difference disappears because the discounted listing takes longer to sell and the seller has greater holding costs.

3. Commissions are negotiable.

Commissions actually increase in buyers’ markets. When things are bad, sellers will not only pay full commissions, they will throw in perks, such as televisions, trips to Hawaii, etc., because buyers’ agents do pay attention to commissions. When the strong seller’s market shifts to a buyer’s market, discounters will have to adjust their commissions as well.

4. Web visitors are unaware of local independents and search known brands first.

Outside buyers are simply unaware of local brands. Like many relocation buyers, Web visitors usually search the high-profile, national company that dominates their local marketplace first. If this company has IDX or VOW, the visitor really has little need to search further because they can access the entire MLS.

5. Like FSBO buyers, discount buyers are looking for a reduced price.

Most buyers who shop FSBOs, automatically deduct 3 percent from the asking price. When the discounter’s Web site clearly states how much the seller is saving, why wouldn’t the buyers expect part of that discount to go back to them?

There’s no doubt the commission squeeze is on. Foxtons plans to go national. Even though Glenn Cohen is selling out his founding interest in the company, the fact that Foxtons, the huge London-based brokerage, is making a bigger investment in the U.S. business model is a wake-up call to our entire industry. We need to do a better job of servicing our clientele if we expect to avoid additional commission erosion. If traditional companies fail to seize the opportunity to preserve the current models, we all may be working for a lot less in the not too distant future.

Bernice Ross is an owner of Realestatecoach.com and can be reached at bernice@realestatecoach.com.