Tuesday, March 13, 2012

Globe Article may be "insider-out"

This morning's Globe (March 13, 2012) included a featured article on choosing a Realtor ( http://ow.ly/9D8Xk).  They pushed it pretty hard:  the top banner on the front page ("Pick the Right Real Estate Agent ... an inside look at the first - and most crucial - step in selling your home"); then an illustration and teaser taking up almost half of the front page of the Globe Life section ("Looking Beyond the Sign ... Don't get snowed by your agent...inside the industry ... what you need to know to make sure you get the best price..."); and finally the article itself.  This is going to attract some attention.

There are good points throughout the article but I feel that overall it is more "outsider" than "insider" and misrepresents a number of aspects of the overall process and the motivations of various players.  I'm not just sticking up for the industry here -- I'm afraid there are lots of reasons to be very careful when selecting a real estate agent.

But I would like to add some alternative, maybe deeper, perspective to a few of Fabrice Taylor's points.

[But first ... if you can't bear to read this whole ramble, at least scroll down or search for the "NO NO NO NO!" heading.  There is one suggestion in the Globe article that I strongly advise against.]

"Don't Hire A Friend" she says.  Often good advice, but perhaps a better idea is "Don't Hire an Agent Just Because They are a Friend".  Also, as the article suggests, it isn't even a friend: it's a friend's daughter who just got her license, or a cousin, or ...  Fabrice mentioned someone hiring a childhood friend who "pressed him for the listing".  Awkward.  But "pressing" implies quite a bit more than just offering your service and explaining what you can provide.  There are lots of "pressers" out there.  I wouldn't hire them, personally; I would be looking for a trusted consultant more than an aggressive salesman.  But different strokes ...

We have had friends go elsewhere because they are uncomfortable or worried about "doing business with friends".  It's disappointing, but we understand.  We have also done a lot of business with friends that was very successful.  Our relationship meant they knew they were getting an agent they could trust and who cared about them and the business.

Ms. Taylor's "takeaway tip" is right on: "Make your agent earn your business, whether you know him or not."

"A Quick Sale Benefits the Agent".  True in the short term.  And there is no doubt that quite a few agents have a pretty short term focus. To oversimplify, there are two basic kinds of agents:: those focused on the deal, and those focused on the client.

A guy selling goods out of his trunk is deal/short-term focused ... sell, sell, sell, move on.  A business owner selling the same sort of goods in a community-based store -- successfully -- is more likely client/long-term focused.  Satisfied, loyal clients come back and send their friends.  We are client-focused; our success is measured by client satisfaction; the commissions (and referrals) come as a result of doing a good job for the client.  If they don't, we're in the wrong business.  Not everyone has this approach.  But not everyone has the "quick sale" approach either.

Ms. Taylor illustrates her point with a tale of her own home sale with multiple competing offers.  Apparently after sending offers back and allowing agents to keep coming in with altered bids, her agent  "accepted" an offer without sending them back for one last go-round.  She insisted on that last effort and it worked.  She believes the agent wanted to accept an offer because the extra round would make him little money, it was Saturday night, and the home couch was beckoning.

This little story hides a nest of issues.  I can pick out several reasons to criticise the agent, but I seriously doubt the implied motivation.  If the representative has spent days or weeks aiding the client and marketing the home and managing the offer review process, why would they not spend the last few minutes if it got the client a bunch more money plus a little for themselves?

The bigger question is how they got themselves into the extended back and forth in the first place.  You achieve multiple offers with good marketing, including the tactic of pricing somewhere below market value. (Pricing hugely below is another issue that drives me nuts, but is a talk for another day).  Generally, getting multiple offers ensures that you will see (at least) fair market value and are likely to sell your home without many conditions and without an extended stressful negotiation.

We encourage sellers to agree and put in writing that they will accept the best acceptable offer unless there is less than a specified (small) dollar-equivalent difference between two or more of the best offers.  This makes the process clear to all parties and encourages the best offer with the initial offer.

An uncertain process, and repeatedly "sending back" offers for improvement makes people suspicious that they are being used, makes them angry, makes them go away (as one did in Ms Taylor's case), makes the process drag out stressfully.  It may work, it may appear to work, it may not.

Our process is not intended to get us home early.  It is intended to get our clients the best deal.

"Myth: You Get What You Pay For"  The first part of this section of the article jumps on the "commissions are too high" and tries to decide whether the "right" commission should be 1% or 3% rather than the 5% which she correctly assumes is pretty normal (in Toronto).  The theory is that there are full-service discounters providing equivalent service; that price increases mean agents are making tons more money; and that technology has made the job much easier.  For the most part that theory is wrong, wrong and wrong.

An agent providing quality full service at a large discount is either seriously under-valuing their skills or working for a brokerage that will shortly be out of business.  In either case, they are soon going to be working in another industry or for another brokerage.  If we are only earning, say 2% on a listing, and handing half of that to the agent who brings the buyer, then we are either in the wrong business or we need to change our focus (see deal-focus vs. client-focus above ... and, by the way, the deal-focused gang aren't doing 2% listings).

The top agents are making more money, true.  Some areas use a graduated commission where a higher rate is paid on the first few hundred-thousand in price.  But also note that not that many years ago the full commission was "normally" 6% and more.  Don't forget that your listing broker sees half or less of the total commission.

So an "old" agent who used to earn 3% for their "end" now gets 2.5%.  If they get to sell you something as well, or give you a repeat/loyalty discount, they may be taking only 2%.  I'm not suggesting a tag day, but that is one-third of their income from the old days and/or a 25% discount for your loyalty.  25% "coupons" are generally considered pretty good deals.  Also note that in a "hot" market there is a lot more competition which means less business and/or more marketing to distinguish oneself from the crowd -- I know you don't care about that agent problem, but it remains a fact.

Technology has made the job easier? Hey, it's nice not to need a bag of quarters to return/make calls and to have all the listings on the computer.  And there is lots of tech that we are using to do the best possible job.  But instead of writing a listing, photocopying it for the house, maybe placing a small ad in the paper and waiting, we are now much more on-call and instantly-responsive while dealing with photoshoots, video tours, high-tech print material design and production, websites,  internet inquiries and lead generation, facebook, twitter, craigslist, kijiji, and on and on.  The pace of technology has beaten some agents and made the job bigger for most of us.  Again, go back some years and quite a few agents were, stereotypically but literally, part-time realtor-housewives.  You pretty much can't do it that way anymore.

NO NO NO NO! The takeaway point here included a suggestion to write in a doubling or tripling of the agent commission if they exceed the list price by 10%.  DON'T DO IT.  If you think that will motivate your agent to work harder for you, you are wrong and/or have the wrong agent.  That might (I still doubt) work if you could somehow guarantee that the list price is the true market value.  Two things: first, listing right at market value is probably not your best strategy in this market.  Second, who do you think has the best skillset and knowledge to accurately determine market value -- you, or a good agent?  Your bonus is just an incentive to undervalue the house.  (Did you "jump" to this point?  See -- good advice! So now go back to the top and read the whole darned too-long post)

"How the Realty Industry Operates" This last piece of the article has some of the best advice and some of the most incorrect information and perspective.  Some of the good bits include:
. An agent with "too much" business may not be able to provide you with the best personal service and results.
." The cheapest agent is not necessarily the best..."

The rest of that last tip is "...and neither is the most expensive one".  That may be true if an agent is suggesting 7% for some unique marketing plan or service.  I haven't seen that fee or that service in Toronto -- ever -- but I guess it's worth a warning.

But the related suggestion is that you should find an agent with a broker who isn't a big-name firm with big fees.  The bigger brokerages, however, are able to offer more services, better enforce standards, and can actually spread their costs more efficiently by operating larger offices.

Yes, they take a cut in order to operate the office and provide those services.  But the brokerage business is not a high-margin business.  Small, independant brokerages without a unique niche are disappearing because the owners can't make a decent living.  There is a wide array of "compensation packages" for agents.  Monthly desk fees plus deal fees, percentage of deals, etc.  You want a good, experienced, trusted agent who is with a "big-enough" established broker with a good reputation.  Within that group, the agent may get his/her compensation any number of ways, but the commissions charged to you are likely to be very similar.

So there.  The article made some good points and gives a lot to consider.  I hope my post does the same thing and helps you to come up with a balanced and effective plan for choosing an agent.

We would love to hear your comments and opinions.


EastYorkHomefinder said...

Great response Gord. I read the article and couldn't believe what I was reading and where I was reading it!

The more unsettling part was the onslaught of negative, malicious comments. Realtors, like any sales person, are easy prey but the fact so many felt it's a simple and overpaid job. I guess that's why Toronto has over 30,000 agents a more joining every day!

Regardless, great response!

GordandLee Martin said...

Thanks. I also posted a comment to the online article; which took some bravery as I generally avoid reading online comments. I suggested that some of the comments saddened me but I understood how some of our peers may have earned the negativity. But I also thought the stereotypical bias and naivete about the business demonstrated clearly why they might need professional help (the Real Estate kind of course!)

Guided_by_Voices said...

Thank you for the post it was an informative read. I do have a question. I herd that hiring a agent through a big firm like remax or royal lepage means there is no negotiating on the commission %. Is this true? what if you are using the same agent for buying anew home ans selling your current?

GordandLee Martin said...

Guided_by_Voices: Thanks for the comment. Commissions are always negotiatble and the size of the brokerage will have virtually no correlation to what you pay.
I guess LePage, Re/Max etc tend to emphasize full-service and for that reason are less likely to be home to discounters, but there is no "policy" or "set rate".
We will generally reduce our commission on selling your house by 1/2% if you are also buying with us. Many other agents do the same. Note that 1/2% may not sound like much, but on our typical 2.5% (half the total commission, the other half goes to the agent who brings the buyer) that is a 25% discount and for you (selling a $500,000 home for example) it is $2,500+HST.