San Diego Cal Homes

Tuesday, June 14, 2011

Who Agrees With a 6% Commission to Real Estate Agents?

Well… once again, I am setting myself up to be a rebel in the Real Estate community. From the headline alone, I expect to receive tons of messages in objection, and looks of disgust from fellow Real Estate agents. I spent enough years in Corporate America to know that the “old guard” protects the sanctions that safeguard their own interests.

The public opinion and perception of Real Estate agents and the affiliate of organizations and related services, is well… unflattering to me. There are various and sundry reasons that contribute to this overall opinion, however, most painful among them, lies in the apparent belief that Real Estate professionals do not provide value.

Generally speaking, value is a form of consideration when someone else accomplishes something for us, that we are otherwise unable to, or do not want to do ourselves. A physician who heals us when we cannot treat our ailments, or an attorney who defends us in a complicated judicial system, when the understanding of which is beyond our capabilities, or even an electrician who repairs a potential hazardous situation and keeps our family from being hurt, all seem to represent ideals of value. And yet, when it comes to buying or selling a home, most people resist the idea to pay for services, and further do not respect its value.

I think, this resentment to pay a service commission to Real Estate agents, comes from personal disappointment. Many people feel a strong emotional attachment to their home, and, the equity appreciation that has accrued over the years. So, as a result, to pay someone else to do what they think they are capable to do, leads to a perception of being cheated. Human nature being what it is, sellers will necessarily lower their listing price by thousands of dollars, yet will bark at paying a 6% commission to an agent who has worked hard, using their knowledge and resources to get the house sold.

Interestingly, a compensation Lawyer will often receive a 33% commission (ooops they call it a contingency fee) of any damages recovered, a Head Hunter will often receive an average contingency of say 25% of a first year’s salary for candidate placement, and a Real Estate brokerage firm receives about 6% (only if they have survived the beating by the seller to lower the commission rate). In the first example, people are receiving something they previously did not own and therefore willing to give away a percentage. In the second example, people are receiving talent that will help them to solve their problems, and therefore willingly give away a percentage. Whereas in the third case people seem reluctant to give away 6% of something they already possess. Interesting!

Regardless, in my search for answers, I have spent a lot of time trying to survey the opinions of the public. I conduct this research because I believe every business owner should step aside periodically and re-assess the value of their products or services. As I refresh my understanding of what represents value to my client’s, I expect I will then be able to re-align my services so that I, in-fact, deliver that value. In a more recent survey I sent out over 1,000 emails to my networking contacts on the LinkedIn Internet site, a website dedicated to business professionals. I received many responses from people who expressed their dislike for Real Estate agents – however amidst and among all of the comments was one single outrage – confirmation that the public sampled in my survey, does not equate value from the services of Real Estate agents.

Now, I am among the first to believe that the public also does not understand nor fully appreciate all the work and effort required to get the client what they want. The world sees it this way – each Real Estate agent gives a pre-printed glossy company brochure at a listing presentation, influences the client to sign a contract, lists the house on the Multiple Listing Service and then returns several months later to collect a 6% commission check. Not bad – I mean any dummy can sell 12 houses a year – and if each has a $1,000,000 price tag, that is a nice gross commission of $720,000+. At least, this is the perception among many who criticize Real Estate agents. Little does the public know that the agent is lucky to receive only ¼ of that commission after splits, and far less after deducting the direct marketing expenses such as to advertise the property, franchise fees to the broker, and transaction processing fees, and far less yet, after deducting indirect operating costs to run their business.

Apparently, my purpose for being in this business has been all wrong. I thought that we delivered value by getting the client what they wanted – simple as that. And yes, there are those once-in-a-lifetime deals that everyone remembers when an agent listed a house in the morning and it was sold by the afternoon. But, for every one of those, there are a hundred, if not a thousand when the agent earns far less on an hourly basis, than does a Merry Maid, a Stanley Steemer carpet cleaner, some hair stylists, and even some waiters in nicer restaurants. And… gosh, what about all those listings that either did not sell, or the owner decided to take the house off of the market without any regard to the agent’s loss from out-of-pocket marketing costs. And here’s a kick-in-the-ass. Real Estate agents often give their clients a gift in appreciation for the business once the transaction has closed escrow, whereas, it works the opposite in certain other service-based professions (No! Then why are there tip jars at Starbucks?)

So, where does my thought process go from here? Well… I think a new economy is beginning to emerge, and I hope the Real Estate industry chooses to champion some changes. The new economy is going to force us to rethink the way we charge for delivering value. In order to respond, and survive, in this new economy, we may have to consider transitioning from the traditional percentage commission to another, or perhaps hybrid methods. The following 4 proposals come to mind; (1) a fee-based model for selective services, (2) a shared revenue model for cafeteria plans, (3) a sliding scale incentive commission, or even (4) a commission split between seller and buyer.

Just so that everyone remembers, let me mention that all Real Estate agents are independent contractors, earning a commission. That commission, without regard to any out-of-pocket expenses or hours of work vested to sell the house, is contingent, and only payable at the close of escrow. And everything can, and does go wrong up until the close of escrow which jeopardizes the agent’s commission.

Let me offer an idea for the fee-based model. Let’s say a homeowner prefers to sell as a FSBO (For Sale by Owner), however, recognizes that to gain an advantage in the market, their success may be dependent upon some assistance from an agent. They may choose to engage in a consulting contract that allows the agent to provide a specified number of hours to provide, say, a comparative market analysis, inventory and market reviews, profile of market conditions and trends, caricature of current buying patterns and buyer’s mindsets, and a review of the endless legal and disclosure forms required to convey property – in other words to give the seller an advantage by portraying the current market dynamics. This could be modified to include an option-to-list agreement, so if the FSBO decided to abandon their own efforts to sell, then the consulting agreement could convert to a listing agreement, with any fees collected to-date perhaps credited against the final sales commission. This provides the seller with more options and at the same time provides protection of a commission cap. By-the-way, it also allows an agent to showcase themselves, earn some consulting fees in exchange for services rendered, and perhaps later, still get the full contract. This is somewhat akin to a “temp-to-perm” concept in the employment market.

Let’s try another one. More and more, people with excellent skill sets are transitioning into Real Estate. The shared revenue model could work this way. The seller would interview with the broker – not the agent. After which the broker assigns one of among any pre-paired teams that match the skill sets required by the seller. The team might consist of a former accountant having knowledge and expertise in metrics, analytics and finance, another could be former attorney having expertise in law, another in marketing and advertising, and another in client prospecting. This power team might be better qualified to sell the house. Afterwards, the team would share in the commission. Presumably, the team members each get a smaller cut of the individual sales commission but participates in higher client volume than if working independently. The client gets a team of strong skilled individuals rather than one person who is likely strong in one area and weak in others. OK, maybe not the best management scenario for the brokerage, but perhaps a better alternative for the client. And who knows, more value drives higher fees.

The sliding scale approach might start off at a higher commission that incentivizes the agent to focus immediate attention to selling the property and reducing the days on market. This may serve well for the seller who is highly motivated, rather than one who is simply fishing for high offers. In recognition that the longer time on market, the more it costs the seller - this approach emphasizes greater urgency on the part of the agent. During a “buyer’s market”, a plan such as 8% if sold in 30 days, 7% if sold in 60 days, 6% if sold in 90 days or greater, might incentivize the agent to work smarter and harder to earn a higher commission. At the same time the seller accomplishes their goals quicker, and avoids carrying the cost of ownership over an extended period of time.

OK… if there isn’t enough legislation in our lives, I am actually proposing more. While homes are like cars, meaning that everyone who owns one thinks they are an expert on the subject, in realty, housing and all of the related property rights can be very complicated. It concerns me that so many people who know so little, chose to represent themselves in a Real Estate transaction. Unfortunately they may find later that they made a terrible and costly error or omission. And in this country we know what happens … rather than accepting responsibility for our own actions, we remedy the situation by filing legal suit against somebody … anybody... anybody whether dead or alive. Conveying Real Estate is slightly more at-risk then selling an old toaster on E-Bay. To minimize the costly mistakes, and to provide a higher degree of fair representation to buyer and seller, I propose that it be a requirement of law that every buyer and every seller have a contractual agreement of representation with a Real Estate agent. In addition, I think they should each be responsible for paying their own commission, rather than as is the most typical scenario now with the seller paying all.

That’s my ranting and raving for the moment. Send me an email with your ideas or comments. None of these ideas for changes in commissions alters the negotiation or bargaining process, nor do I think it interferes with fair trade. It does potentially provide additional revenue streams for Real Estate agents, potentially reduces the population of agents to those matched to meet the expectations of the public, potentially upgrades levels of integrity, and allows more flexibility in the ways that the public buys and sells Real Estate, and … oh yes … potentially alters the perception of value.

Statement of disclaimer; “these are my personal opinions and not those of Prudential California Realty”

Our goal is to help and guide people to buy and sell San Diego Homes: Contact us soon - and let us apply for the job of being your Real Estate agent.

Charles M. Schevker (CPA)
DRE # 01875556
Broker Associate
Prudential California Realty
1299 Prospect St.
La Jolla, CA. 92037
Main Office:                           (858) 551-3319
Mobile:                                  (858) 449-8250

http://www.sandiegorussianrealtor.com

Friday, April 29, 2011

So What Does Real Estate and E Harmony Have in Common?

Like many other relationships throughout our lives, a Real Estate agency relationship is often equally mismatched. Stop, and think about this. You can’t help but when you look at certain couples to say to yourself, My God, what does he /she see in her / him. Go ahead, admit it! Sometimes throughout our past dating endeavors we often witness men seeking out the most beautiful women, even though they themselves are unkempt slobs. Women perhaps layout a plan to catch a wealthy man, even though they know in advance that romantic unhappiness will likely prevail. And…while I am sure that everyone of us can relate to those experiences of great excitement during the stages of pursuit, we can also relate equally to the later pain of our mistakes.

So, why am I attempting to compare romance to business? Well … it happens to be the first thought to come to my mind, but It is more that, I believe there is a certain behavioral pattern that explains our actions The point is that, often times, even if our common sense advises us otherwise, we still feel compelled to reach for the best of the best, even if the “best” is not the best match for us. So, if you are not yet confused, then the question is, why do we do this?

In the Real Estate business I witness this same phenomenon. I constantly see sellers who, when they decide to place their house on the market, simply call the top producing agents in the area. No questions – no discussion. Their impulse is simply that a person who has achieved that top producer status, did so by being the best. And, yes that is true. However, consider, for just a brief moment that, they may not be the best for you. Doesn’t make any sense does it! Let me explain.

I expect that you will think I am exaggerating with these next examples, however, they are fair representations. Typical of most top producing agents in my area, they typically have multiple listing contracts in their portfolios, and often with 7 to 10 homes in the price range of from say $3,500,000 to $9,000,000. And then, in the far bottom corner, there is your lonely little home sitting in their active listings at $900,000. But don’t be insulted… I would love to have your $900,000 listing – I really would. Although it is possible… I am going to say that it is highly unlikely that such houses sitting in one’s portfolio ranging in these prices, will sell to the average person walking in, if it were hosted as an open house. These homes will sell mostly by the networking and prospecting efforts of the agent going through their Rolodex of “celebrity names”. But you see, in these cases they are matching their resources to the task. They have built their businesses to the point where they attract very affluent people wanting to trade very expensive homes. Yet, for some reason, and this is what confuses me, you have selected them to sell your home. This is the part I do not understand!

Now, let’s examine this from the earnings side of the equation. Because this agent is a top producer they are likely to earn a commission split with their broker that provides them with say 2% (just to keep the math simple) instead of 1.5% split (if that is typical). If the average price of all the other homes in their listing portfolio is closer to $5,000,000, instead of the $900,000 like for your home, then the average commission check, payable to them, to sell the “other” homes is about $100,000 each. The commission check to sell your home is about $18,000. So, without having a degree in Accounting (which by the way, I do have), where would YOU, spend more time?

Now this may piss you off because you probably believe strongly that the agent should provide you the same service as to the other clients. Well … yes, I would agree, except for the fact that the agent had reached a point in their business model where they may no longer be interested to provide compatible and satisfactory service to you. Yet, they took your listing, why? Well, why not! They have the expectation that the reputation of their name alone will cause your home to sell. And by-the-way, you thought the same thing... I know. It may be difficult to admit now, though.

I often review with great awe at the listing portfolios of top producing agents. I mean after all, I want to keep a keen eye on my competition as well as the market. All too often, I find that the average time on market for a home in a top producer’s portfolio is greater than 180 days. In the case of the $9,000,000 home, well, the pyramid gets smaller at the top, with fewer people able to purchase at that level – so, you might expect the time on market to be long. However, in the case of the $900,000 listing, perhaps it implies that your poor little house has been neglected. L

I saw a classic case of this situation recently. A long-lost friend now living in another State contacted me, and asked if I could help her father. Her father has a great condominium, and had listed it for sale at a price of $1.3 million with a well-known top producer. The condo has now been on the market for over 200 days. There could be many reasons why the condo has not yet sold, some the result of the agent, some to blame on the “market”, and well, others unknown. The other day at a weekly broker caravan, I previewed a new listing of this same agent. This new listing is a drop-dead WOW house, 8,000 square foot ocean front, listed north of $11,000,000. Now think this through carefully. Would you rather spend the majority of your time selling a home to make a commission of $220,000 - a very respectable annual income from just a single sale, or would you beat your head against the wall to sell the other house for a commission of $26,000. The latter commission is barely enough to pay for the fixed costs of doing business. And while we are at it, let’s not overlook the publicity exposure in magazines and the like, peer envy, and end-of year ceremonies where awards and accolades are handed out… well, in part, because of those “BIG listings”.

The other day, I was saddened by a finding. It happens all too frequently though. A homeowner had listed their home with a top producer. I do not know the arrangements, expectations, or any other factors. I know this much. Natasha and I hosted open house events at this property on several occasions. There was casual interest expressed among visitors, although the price was considered too high, and the house was vacant, which does not cause any house to show well. The homeowner had their home listed with this particular agent for nearly 10 months. The home did not sell, and perhaps, because of the emotional attachment to their decision, the seller chose to remain with this particular agent. I estimate that the cost of ownership during this extended listing period burdened the seller with about $70,000 of extra costs. I saw that finally, the house had been re-listed with another agent which is… well, maybe the good news, however, the bad news is that the bank foreclosed on the mortgage – so it is being sold as a bank-owned property.

So my friends, I would strongly suggest that when selecting a Real Estate agent, whether you are selling or buying, or perhaps doing both, that you seriously consider matching your needs to be compatible with the agent. I have nothing against top producers of course – why should I – after all I also aspire to that level one day. I do however, think that my personal satisfaction level is higher to service someone buying or selling a $1,000,000 home versus a $11,000,000 home. So, instead of seeking out one of those Match com agents of the world, and being blinded by all that “bling”, try using the E Harmony approach, and find someone who “glitters” for you, by matching yourself on the 29 compatibility factors of chemistry. Just a thought!

We offer you value through our excellence in Real Estate services, however, we are not relationship experts. J

Statement of disclaimer; “these are my personal opinions and not those of Prudential California Realty”

Our goal is to help and guide people to buy and sell San Diego Homes: Contact us soon - and let us apply for the job of being your Real Estate agent.

Charles M. Schevker (CPA)
DRE # 01875556
Broker Associate
Prudential California Realty
1299 Prospect St.
La Jolla, CA. 92037Google Keyword = Homes in La Jolla CA

Main Office: (858) 551-3319
Home Office # 1: (858) 750-2578

Home Office # 2: (858) 412-6082

Mobile: (858) 449-8250

Wednesday, April 13, 2011

My Guarantee to You – Secrets to Selling Your House

Regardless of the market favoritism, meaning whether it is classified as a buyer’s market or a seller’s market… if it is time to sell your home, you want to yield as much cash as possible. Let’s face it – terms like return on investment, equity, residuals, profit, unrealized gains, etc. are irrelevant – the truth is that “Cash is King”. We all need to know the amount of cash to net from a transaction, so we can plan for future events that will ultimately use that money.

Useful to remember as we continue with this writing is a concept call TVM or the time value of money. So … not only is the amount of cash important, but also is the timing at which you receive it. Meaning that, $100,000 in your pocket today, is worth more than the same amount 6 months from now.

For those who have been living under a rock, the Real Estate market conditions today cause it to be classified as a buyer’s market. Typically this means that supply exceeds demand, although not in every case, but more importantly the buyer’s activities are the driving force that most significantly effects pricing. The typical buyer today is very knowledgeable about the housing inventory, the features offered by houses and by neighborhoods, and the pricing levels that represent value to them. Buyers’ today are very casual in their searches, often taking months before making the final selection. They are looking for, er uh, maybe demanding to find homes that are in turn-key and move-in condition, with extreme features, and all at discounted pricing.

Having said all that I have above, then, selling a house is still possible, although certainly not without its challenges. My business partner and I have hosted more than one hundred open house events within the last year, and from those, we can provide some of our observations and opinions for your benefit. Homes that are well maintained and free of defects, will generally sell in fewer days, and generally will receive higher offers than their dilapidated counterparts. See if the following thoughts make any sense to you.

Mindset Preparation:

Buying and selling homes is an emotional decision first, and then justified by logic. And sometimes the emotions can become highly charged. This is why, in my opinion, it is not a good idea for either, buyer or seller, to represent their own interests – plain and simple they are not of clear mind, nor in an objective position. Identify the motivational forces that are influences to you selling, and embrace them as you move forward with your plans.

Use visual imagery. While in the process of making the decision to sell, peacefully imagine that your “home” is now converted into an inventory item called a “house”, and that you will now detach your feelings. It is now time to think like a business owner. Your house is a product, and you are selling this product to a very discerning customer base. Others like you are competing for the buyer’s money, and now the responsibility rests with you to differentiate your product. Take ownership of your decision, take your memories with you – but alienate your emotions.

Next, begin to imagine your house from the perception of value, however, do so from the eyes of a buyer – and not your own perception. Begin thinking about an action plan to physically prepare your house for sale, and visualize in your mind’s eye that you are handing over the keys to a buyer as you drive away to your new destination. Continue the imagery by connecting with the good feelings you expect from achieving your goals and moving onward.

Hire a Competent Real Estate Agent to List Your House:

This is where you expect me to spend most of my writing time – by sending you direct and subliminal messages to hire me as your agent. Well … this is not an advertisement – sorry to disappoint you. If you need for me to give you at least 20 good reasons to hire an agent, then call me.

Curb Appeal:

Let’s face it – you do not want your house to be just a “drive-by”. You want your house to be inviting and welcoming… to say to prospects “look no further, this is the home for you”. What is that expression? … “You never get a second chance to make a first impression” – well that applies here also. Tour the outside of your house and make a complete list. Maintain a keen eye toward simple and tasteful landscaping, fix sidewalk cracks, replace falling gutters and downspouts, put on a fresh coat of paint – in other words, de-clutter and refresh. While you are at it, have a pest inspection and remediate any issues.

Bringing Your House Up To Selling Standards:

This is where many people get confused. Repairs and maintenance items such as replacing the malfunctioning HVAC or worn out roof, is not upgrading your house – it is merely maintaining its integrity – a condition of purchase that any buyer would expect. If your house has functional issues such as 12 bedrooms and only one bathroom, then you have real problems, otherwise, consider cosmetic improvements and ordinary and reasonable fix-up. Some of the obvious examples would include, (1) fix and remediate mold, (2) repair cracks, (3) replace broken and non-working windows, doors, light fixtures, plumbing fixtures, (4) spackle and refresh paint, (5) remove odor sources, (6) fix crooked doors and cabinets, (7) clean carpets and floorings, (8) clean all appliances and make sure they are in good working condition, (9) remove oil and grease spots from areas like garages – consider a protective floor coating, (10) hide or remove loose phone and internet wiring, (11) look for and resolve safety issues, particularly where people may stumble or fall. Do I need to go on forever, or do you get the picture? And by-the-way, ask a friend or non-occupant family member to help with your house’s self-inspection.

Upgrades:

This is a tough call. Are you actually going to spend thousands of dollars to upgrade your house when you plan to move onward with your life? And in addition, what insight do you have about the personal decorating tastes of the potential buyer – or as an alternative thought, will you narrow the field of potential buyers because of the upgrades that you choose? If your house is not already upgraded, then this may not be the time to commit. All too often, while hosting open houses, I hear people comment that they appreciate the upgrades, but they would have preferred to save the money on the purchase price of the house and used that differential to perform the upgrades themselves. Real Estate agents differ widely on their views on this subject. I think consideration should be given to just accepting that your house must sell in its present state, and as an incentive to the buyer, offer a price reduction to compensate for the deficiencies, or offer a credit back to the buyer for them to apply toward upgrades of their choice after move-in. Think of it this way! What if you just spent $20,000 to install brand new Berber carpet, and the buyer prefers hardwood floors. Do you think the buyer is going to pay your asking price, and then rip out the carpet?

Staging:

Many people, myself included, have little, to no creative insight. Second worse to selling a house in poor condition, is selling a vacant house, or one with old and beat up furniture. Most people need visual assistance to help them to see how their lives will look in a new environment. A vacant home immediately gives the impressions of void, loneliness, emptiness, and even emotional depression. Junk furniture emphasizes to the potential buyer, that their new life, if they buy your house, will become broken and dilapidated, just like your furniture. There appears to be an associative reflex between how a house is presented, and how people view the transformation in their lives as a result of buying a home.

I offer no analytical data in support for my next claim, except to say that these are my observations. Houses that are left vacant or poorly furnished, are on the market for at least 4 months longer, and receive offers at least 5% to 10% less than their staged or furnished counterparts. While there is reluctance on the part of homeowners to pay additional overhead costs for staging, it does not take a financial genius to realize the advantages. Let’s just say that a house is marketed at $1,000,000. It is in very good saleable condition, however, it is vacant, and the cost of ownership (mortgage, insurance, property taxes, HOA, etc) equals $6,000 per month. The incremental time on market alone, will cost the owner an additional $24,000 (4 months X $6,000 / month). Further, there is a risk of forfeiting from $50,000 to $100,000 cash because buyers view a poorly presentable house as one with negative issues. Oh, and don’t forget about my earlier comment about the time value of money. (For those considering to rent their homes, see my earlier blog on this subject.)

Defects and Price Concessions:

My mother was not successful at raising the most intelligent son in the world, but she was successful at teaching me the value of honesty and integrity. My advice is to erase the concept of caveat emptor or “buyer beware” from your thoughts. The world is different today. Both you, and your Real Estate agent will be obligated to complete a full disclosure about all known material defects of your property. It is better to deal with these issues up front and adjust your expectations about selling prices. I feel it is in the seller’s best interest to acknowledge and disclose any defects that cannot, or will not be corrected (i.e., the house’s backyard has become a resting point for migratory birds, or your house is located adjacent to a public waste water recycling facility) and consider making a price concession to attract and retain buyers.

Market Pricing:

Of course, you already have some idea of the price at which you would like to sell your house. This was established in your mind before you reached the decision to sell, and was likely predicated on the recent selling price of your neighbor’s house. But, of course, you are convinced that your house is far better than any of your neighbors. Now is the time to re-engage with your motivation to sell. Putting your house on the market to see what kind of offers you will receive is not motivation, that’s called fishing. The amount of money that you need to, or would like to net from the sale, has nothing to do with buyer’s perception of value. Consider this – if you bought XYZ stock for $100 per share in 2007 and it is now selling at $75 per share, what makes you think that you will find a buyer willing to pay you more than market value.

If you have hired a competent Real Estate agent like I suggested, then that agent has already provided you with additional market data to help you in determining the price at which to list your house, and a price that will cause it to sell. Keep in mind that one of the key reasons for any property to not sell, is because the price was not realistic to the market conditions. Yes, you can argue location, house condition, upgrades, etc. but everyone has a price-point. If you have not received many offers, or if those offers that you have received, are substantially below your list price, then this is a hint that your house may be over-priced.

Timing:

Although, you may have already selected a Real Estate agent, now you are in position to actually sign the listing contract and set the price. To place your house on the market for public exposure before it is ready for sale can be a mistake. Remember our discussion about first impressions. Plus, you want to avoid any negative associations as a result of your house being on the market for too long. So, to place your house on the market to get initial exposure, remove it to remedy defects, and then return it to the market, may only create unwanted suspicions among those highly informed buyers.

Our goal is to help and guide people to buy and sell San Diego Homes: Contact us soon - and let us apply for the job of being your Real Estate agent.

Charles M. Schevker (CPA)
DRE # 01875556
Broker Associate
Prudential California Realty
1299 Prospect St.
La Jolla, CA. 92037
Google Keyword = Homes in La Jolla CA

Main Office: (858) 459-0501 ext. 319
Home Office # 1: (858) 750-2578

Home Office # 2: (858) 412-6082

Mobile: (858) 449-8250