Alternative business models that offer new commission models including a reduced commission in exchange for less service typically explode in seller’s markets. Do these models represent the future, or will most disappear in the next downturn?
- Cutting commission is a losing proposition.
- Not all agents are worth full commission, but there are plenty of stellar agents who are.
- In seller's markets, it's easy to put a listing under contract. But in a buyer's market, it all changes.
Alternative business models that offer new commission models, including a reduced commission in exchange for less service, typically explode in seller’s markets.
Do these models represent the future, or will most disappear in the next downturn?
Playing the commission-cutting game is a losing proposition. As one expert observed, “It’s a race to the bottom.”
For example, during the last red-hot seller’s market, a discounter was trying to cut into a top agent’s primary market area. When he started gaining traction, the top agent stopped him by cutting her commission (temporarily) to zero.
She had the staying power — he didn’t.
Not everyone is worth a full commission
Few people would argue that every agent is worth a full commission. To illustrate this point, when we listed our house last fall, the agent we hired had just closed two sales in our neighborhood for approximately $100,000 more than the comparable sales suggested.
Two other sellers who listed with less capable agents left $50,000 on the table in one case and more than $100,000 in the other case. The extra money we netted made our listing agent worth every dime we paid her in commission.
The reasons she earned her commission didn’t stop there. She handled the staging, oversaw locating contractors we needed to do our work and also did most of the work for the part-time agent representing the buyers. (If our agent hadn’t picked up the slack, the deal might not have closed.)
A clear-cut historical trend
In seller’s markets where inventory is scarce and multiple offers abound, it takes little effort to put a property under contract.
In buyer’s markets where there is too much inventory and too few buyers, considerable skill and effort is required not only to put the property under contract but also to close it.
As today’s seller’s markets transition into the downturn part of the next cycle, the same pattern will most likely repeat itself as it has for at least the past four decades.
As we observed during the Great Recession, the reduced prices and reduced number of sales spelled doom for virtually every discount model as well as many full-service companies as well.
FSBOs (for sale by owners) take a nosedive
New commission models are normally the most attractive to do-it-yourselfers (FSBOs). Despite the strong seller’s market in many areas, Laurence Yun, the chief economist at National Association of Realtors (NAR), used the words “stunning collapse” to describe the current condition of the FSBO market. In 1991, 19 percent of all sales were closed as FSBOs versus only 8 percent during 2016.
The NAR Profile of Home Buyers and Sellers for 2015 showed that 38 percent of these sales were to a friend, relative or neighbor. (The 2016 survey did not indicate the percentage of FSBO sales that took place between acquaintances or between strangers.)
In other words, approximately 5 percent of the total FSBO sales were to strangers, and roughly 3 percent of the total sales were to people the seller knew.
Limited service versus discounter
In my book “Waging War on Real Estate’s Discounters,” my primary premise was that people love discounts. When given a choice between premium and limited service, a substantial majority of sellers will choose premium service.
What constitutes premium service? Regarding marketing, this should include staging, video, 3-D virtual tours, possible drone video tour, Facebook, Instagram, Pinterest, international marketing in multiple languages, as well as providing traditional print marketing plus brokerage and public open houses as well.
Premium services also include concierge-style treatment that makes selling as simple as possible. As our listing agent put it, “All you have to do is to decide which clothes to take — I’ll handle the rest.”
Showing the sellers how you use this multi-pronged approach allows you to distinguish your services from those who cut commissions in exchange for limited services.
Unbundling the real estate transaction
SoloPro has recently garnered attention by unbundling real estate services. Buyers can pay to have someone show them the property, negotiate their offer or manage the transaction process.
The model helps do-it-yourselfers (FSBOs) obtain the a la carte services they want. It also allows agents who might be great at showing and negotiating but who hate handling the transaction to have clients who are seeking the skill sets at which they excel.
For example, the SoloPro premium program for sellers at $1,399 provides:
- One listing of a home
- One open house
- Attending closing
- One transaction coordination
The “list a home” function includes a yard sign, home tours and an MLS listing.
Now compare this to the premium services above, and you can quickly see that SoloPro model serves the limited services and do-it-yourself crowd.
As the NAR numbers above reveal, this market constituted about 5 percent of all residential sales in 2015.
Bottom line: They want the highest possible net price
No matter which model a seller selects, virtually all sellers have one thing in common — they want the highest possible net price.
For premium agents, your goal is to show the sellers how your premium marketing plan increases their exposure that typically results in a higher net price in the long run.
Who will survive?
When the next buyer’s market arrives with fewer deals, price depreciation and significantly more work required to place a property under contract and close it, I think we’ll see many of these new models disappear until, once again, it’s time for the next seller’s market.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/