Wednesday, October 3, 2007

Why discount commissions can hurt you

When you hire a real estate agent, the law says you are free to negotiate the commission. There are some very fine agents out there who routinely work for less than 5 or 6 percent of the sellling price. But if you engage such an agent, there are some things you should keep in mind.

First, when you engage someone for a lower fee, you may not have the right to expect the same amount of service you would get from someone who wanted a higher fee. For example, I knew a RE/MAX agent in Morris County who used to routinely take listings at 4 1/2 percent commisisons. And based on the amount she would make on each sale, she calculated how much she could afford to spend advertising that house. I distinctly remember her telling me that one of her clients had reached her budget limit, but that client was still expecting the home to be advertised aggressively. It wasn't going to happen.

If you are expecting an agent to advertise your home a lot, don't expect a broker or an agent to be willing to do that for a reduced commission.

Likewise, if you want a listing agent with great capabilities on the Web, including virtual tours and the ability to tell you how many times people looked at your home on his or her Web site, don't be surprised if you won't get those services from a discount broker.

Last week, Foxtons declared bankruptcy. Why did that happen? Because their business model was flawed. They thought they could make their money on volume sales, and originally, they wouldn't even cooperate with other brokers on their 2-percent commission listings. Yes, they put every listing on the Web and gave it a virtual tour, but that wasn't enough to sell every house. But Foxtons -- it was called YHD or Your Home Direct in those days -- couldn't make a profit collecing only 2-percent commissions on each sale unless they didn't have to share that commission with another broker.

Then, when that model didn't work well enough, I believe YHD had to get an investor. Foxtons -- a British real-estate firm -- came in, ostensibly to give YHD the money to expand to other states. A lot of industry leaders I know were skeptical that YHD was making enough money to not need that infusion of capital here in NJ for its original offices, but that has never been proven. What I can say is that after Foxtons came in, the 2-percent commission finally disappeared and eventually even the YHD name disappeared. Foxtons took over, modified the business model somewhat and tried to make a go of it at 4-percent commissions.

Do a Google search of Foxtons, as I did last week, and you will read postings from hundreds of people who regretted listing their home with Foxtons because of the terrible service they got.

When Foxtons declared bankruptcy, we got an e-mail from another discount broker, Thomas Fisher, of in Bridgewater. I think what he has to say is worth quoting in full:

"The current downturn in the real estate market was only half the story concerning the recent demise of Foxtons real estate.

"Foxtons business model of discount commissions charged to home sellers is viable. Our own discount business has been in existence since 1998 and continues to be profitable.

"Foxtons' failure is due to their bombastic and competitive relationship with competing real estate firms. Their advertisements mocking the higher fees charged by other brokers won them no friends. In essence, the residential real estate community wanted to see them fail.

"Secondly they ostracized themselves further by cutting the amount of commission paid to the selling broker from 3% or 2.5% to 1%. In essence Foxtons did not want to share their listings with other brokers as they wanted to sell the house themselves in order to keep the entire 3% they were charging the homeowner. This hurt their sellers' chances of receiving offers from buyers working with other brokers. Clearly Foxtons wasn’t looking out after the interests of their own clients."

Which brings me to my last point for today. The most powerful tool for selling a home is the Realtors' Multiple Listing Service. This is a database of all the homes listed by brokers in a given area, and the brokers and their agents agree to show each others listings. This is a win-win situation for everyone: the sellers get the best exposure, the buyers get the best possible selection and the agents get a large inventory of homes to show. As long as the brokers cooperate with each other, it works pretty well. But when brokers like Foxtons think that they can treat other brokers unfairly, it doesn't work to anybody's advantage.

At the opposite end of the scale is a broker like Rick Weidel (Weidel Real Estate). A few years ago, he took a look at the trend for brokers to reduce their commissions, and he came to a different conclusion than most: he decided that to compete effectively, he should insist that his agents take 6-percent commissions on all listings. He reasoned that the best way to motivate his own agents and agents in other companies to sell Weidel listings was to offer a 3-percent selling commission (the listing broker gets 3-percent and the selling broker gets 3-percent). His motto is "Everyone loves to sell Weidel," because everybody likes to make the big commission. His program has been successful enough that he's been asked to show other brokers around the country how his company does it.

As I said, there are many fine brokers and agents who will often work for a lower commission. And if you engage one of them to sell your home, you may be very satisfied with their service. But before you engage them, make sure they will provide you with the level of service you want and deserve.

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