Commission Myth

How many times has the following happened to you? You arrange to meet with a For Sale by Owner prospect in the hope of getting him to list with you. But after 30 minutes of hearing why real estate agents are irrelevant, you make a hasty retreat with your tail between your legs.

Or you're well into a listing presentation with a seller and you reach the part you've been dreading. The seller is about to ask how much you charge, and the question hangs in the air like the Goodyear blimp. You're starting to sweat, knowing that, once again, you must defend your fee.

If any of this sounds familiar, it's probably because you've long since bought into what I refer to as the Commission Myth. Simply stated, the Commission Myth says that the less a seller pays in commission, the more money he'll put in his pocket : a false assumption that sellers - and even many real estate agents - believe to be gospel. This myth is the fuel that drives FSBOs, emboldens sellers to ask you to discount your fee, and puts most agents on the defensive.

Do you want to compete for listings and convert FSBOs who believe they're better off without you? If so, it's critical that you not only understand the false assumptions the Commission Myth are built upon, but that you learn how to articulate them with competence and confidence.

Deconstructing the Commission Myth

The very first thing you need to do to overcome the Commission Myth is to learn the difference between the fee you charge and your total cost to sell a home. They really aren't the same thing. As a real estate agent, your total cost to any home seller is the combination of the fee you charge and your average markdown percentage .

What's your average markdown percentage? It's the difference between your average list price and your average sold price. For example, if your average list price to sold price is 98%, then your average markdown percentage is 2%: 100% minus 98%. Add your markdown percentage to the fee you charge and you'll have your total cost to the seller.

Now imagine that you're competing with someone in your marketplace who charges a lower fee than you do. After exhaustive research, you discover that he has a substantially higher average markdown than you do. Your calculations prove that even though he may charge a lower fee than you, his total cost is actually higher than yours.

At this point, you can confidently ask your seller, "If you knew for a fact that I cost less to sell your home than the other company costs, even though my fee may be slightly higher, would you hire him or me?" You will need to back up your assertions with some selective research, but this information is readily available from your local MLS.

Focus on Your Seller's Needs

Understanding how to articulate the difference between what you charge and what you cost to sell a home will have a dramatic impact on your ability to get listings. Your advantage will be this: whereas most real estate pros spend time trying to justify their fees to prospective sellers, you'll be providing solid evidence that YOU actually COST LESS than any of your competitors.

We know intuitively that just because something has a lower price tag doesn't mean it's a better deal. Take shopping for new tires for your car as an example: you could consider either buying the "El-cheapo" tires that are guaranteed to last 20,000 miles, after which they simply disintegrate, or you could go with the more reputable long-lasting brand, which has a slightly higher price tag but is guaranteed to last 50,000 miles.

Spending more doesn't really cost more, does it? Don't let your prospective sellers confuse the price they pay to get their homes sold with the total cost of getting their homes sold. Your job is to enlighten your prospects that in spite of the fee you charge to get their houses sold, you actually cost less than your competitors.

The Commission Myth and FSBOs

But what about FSBOs? Aren't they still going to come out ahead by doing it all on their own? FSBOs present a special challenge to listing agents because they're the most ardent believers in the Commission Myth. Their thinking goes something like this: "If I pay nothing in commission, or maybe offer a 2% co-op fee if an agent brings me a buyer, then I'll walk away with more money in my pocket. All I need to do is to place a couple of ads in the paper, set up a Web page, stick a sign in the yard, and voilá, the phone will ring off the hook."

FSBOs don't realize - and this is what you must articulate to them - that the kind of people who typically buy from FSBOs do so only because they're looking for a bargain. Most FSBO offers from potential buyers tend to be "lowball" offers.

According to a recent NAR study, the average markdown of sellers who do all the work themselves, without any assistance from a real estate agent, is 15.4%. (A separate USA Today study came up with an even higher figure.) They may be paying ZERO dollars in commission, but the total cost of getting their homes sold will far exceed any fee charged by you or any other agent. They just need a little enlightenment. That's where you come in.

Help Sellers Make Informed Decisions

Do yourself a favor: don't let the Commission Myth stand between you and your next listing. Spend a little time doing your research so you can clearly explain the difference between the fee you charge and your total cost for getting a home sold. Then take this newfound knowledge and educate your prospective sellers so they can make a more informed decision. And make sure they know that the right decision is to hire you!