Charlie,

Isn't discounting a form of differentiation?

Does the consumer perceive differentiation?  In most cases with most agents I don't believe they do which is why 80% of agents are out of the business inside of their first three years in the business.

Also there are other ways to differentiate.  I was able to personally differentiate myself early in the business selling 17 properties my first 8 months in the biz (2002) and a little over $7.3 my first full year in the business.  By 2006 I was the #1 agent with KW in Washington State and #49 nationally (out of 73,000+ agents) before starting my own firm in 2007.

That being said, a couple of questions:

Are there agents in the marketplace who charge a lower commission in order to get listings?  Of course there are.

Is it unethical to do so? Of course not

Could it be part of a longer term business plan? Yes

Could it be successful? In some cases yes, and in some cases no.

My last comment is that it should be done as a deliberate part of a longer term business plan not because one craters in a listing presentation.

Brian,

  Again I'm talking new agent who is developing a specific strategy to enter the marketplace.

  Great points though.  The firm should give you some intial tools and systems and maybe even a bit of a reputation.  In some cases and in some markets the perceived top firms are also picky about who they will take on as an agent.  If you don't make the grade and are forced to work for a "perceived" lesser shop then again you'll have to look at your business plan to see how you are going to compete and generate the business.

  A team is a great option as well since you'll often be able to take in your Team Leader on listing presentations and learn the scripts and dialogs and learn the systems necessary to be able to go out on your own later.

Glenn

Ross,

There is an assumption that one would get paid either way.  Without a listing quite often an agent doesn't even have a job.  Gary Keller suggests that a well marketed listing will yield an additional listing and two buyers in the Millionaire Real Estate Agent book.  First you need a listing.  If I had to take a loss on a listing to get started in the business but that listing leveraged me into another listing (which I didn't have to discount) and a couple of buyers who I help to find a home, how is this cutting your pay.  Ultimately aren't you now making money because you went in and bought your first couple of listings by negotiating a lower commission?

I think there is a fundemental flaw in the logic that taking a discounted listing or reduced commission listing is somehow a bad move.  I think it can be a strategic move if done properly.

Glenn

Wayne,

  Obviously there are also plenty of times that we as agents are asked to contribute or need to contribute to a transaction to get it to close so on a long term basis reducing commissions on the list side may not make sense.  Again this was one way to look at commissions strategically as a way to get established in a market.  Certainly its completely within the realm of the free enterprise system that we have.

  In many businesses in order to get established companies will offer discounts, loss leaders or even give things away to get the attention of consumers.  For most real estate agents this won't make a lot of sense because they may not have much in the way of reserves of monies necessary to get established in the business, however it is within the realm of business planning as a new agent.

Glenn

Ross,

  So what if they tell their friend that I gave them a deal on the commission.  Now I got another listing I probably wouldn't have got if I wouldn't have got the first listing.  In terms of the beginning agent that's awesome, more people get to see my signs and hopefully I get some unsolicited requests for a listing presentation and if done right I now have two buyers per listing that I am putting into a property as well.

  Let's put this in real terms:

$300,000 property (Listing side commission 3%) = $9000 (Actual expenses ($1300) with office split of 30% $4000) = Net $5000.

20 % of time a brand new agent would get the listing at 3% when competing against established agents

Now discount the listing to 1% on the Listing side (for illustratin purposes)

1% = $3000 (Actual expenses ($1300) with office split of 30%) Net = $800

50% of time a brand new agent would get listing when competing against established agents

Assume the math of 1 Listing will get 1 new listing and 2 buyers and using the SWAG of 20% success vs 50% success of getting the listing.  Also lets assume that new listing and new buyers are in the same price range.

New Business Dollars: $300,000 (Buyer 1) + $300,000 (Buyer 2) + $300,000 (Listing 2)

Commission Dollars = $9000 (Buyer 1) + $9000 (Buyer 2) + $9000 (Listing 2)

Total Commission $ 27,000

Expenses on Buyers: Auto Expenses of driving client around, some paper and ink printing out listings.

$200 / buyer

Listing Expenses (same as above $1300)

$27,000
-     200
-     200
-  1,300
-  8,100 (Split to Office)
------------
$17,200

By discounting or taking a reduced commission and getting the first listing 50% of the time vs 20% of the time I increased the likihood that I would pick-up a second listing and a couple of buyers by 150%.

So what does discounting cost me in reality?  Nothing, because if I wouldn't get the initial listing to begin with, I would only pick up a new listing 20% of the time It would take me on average 2 1/2 times as long to get into the business based on the percentages above which are just numbers but used to illustrate the point.

Am I suggesting an agent do this?  Not unless its done strategically.  However everyone makes decisions that in their opinion best serves their own personal needs.  Just because you don't like the idea doesn't mean its not a good idea for someone else.

Ross,

Obviously you can adjust the numbers as needed.  Even in a $100,000 market a deal is a deal and if you can increase the likihood of adding three additional sides to your transaction flow by 150% then there is a model there.  I used $1300 per listing as marketing costs.  I don't know of any agent that spends that sort of money on their listings on an individual basis however it was for illustration.

As for buying a listing by overpricing it:  That one is a bit different because overpricing may be a disservice to the home seller.  We are now getting into the realm of ethics rather then business.

If I tell a homeowner that their home is worth $150,000 when all the comps show the property is worth $110,000 then there is an ethical dilema here.  

If a seller says they will only list it with an agent who will list at their price of $150,000 when the comps show $110,000 and I have as an agent showed that to them then the judgement becomes more business related.  

1 - Will the seller drop his/her price over time?  If so maybe take the listing.  

2 - Will I be able to generate additional business from the listing?  If so then maybe it makes sense to take the listing.  If the property is overpriced however definitely use an IVR system rather then putting flyers in front of the house otherwise you won't get any business.

There may be reasons to take a high profile overpriced listing.  When you are dealing with high end one of a kind properties sometime the list price is more subjective.  So even though it doesn't comp out and maybe you don't agree with the extra $300,000 in valuation that the seller puts on his $1.3 million home taking the overpriced listing and putting together strong marketing to break into the high end market makes more sense then not taking the listing.

Ethics for me are the black and white issue.  Commissions are a business decision and taking an overpriced listing could be either /or / or both business and eithical decisions.

J. Philip:

Rationalization?  Maybe.

Some of the top agents in the country use the perception of discounts as the way to generate a ton of business.  See http://www.nohassellisting.com/.  Russell Shaw sells 100's of homes a year with the simple premise of discounting the listing even though in reality he only discounts based on the outcome.  Zip Realty continues to grow into new markets through discounts and rebates.  In their internal ROI didn't make sense they probably would not be continuing to expand given the state of the market.  Redfin is continuing to expand based on a discount model.  They have had to modify it a few times adapting the model to fit the market but they are now in numerous cities around the country on the same premise, discounting and rebates.  They don't discount as much as when they started, don't advertise and yet they are growing primarily because of Web 2.0 and client aquisition costs are lower because of the web.

Michael

That's great.  I didn't "discount" either though I spent a lot of time trying to get my mentor / oritinal real estate business partner to consider discounting as a strategy to grow our business.  I was unsuccessful and we haven't had to discount and grown our business to in 2007 $73 million in residential home sales (dropped off in 2008 to $58,000,000), however I personally wanted to offer rebates, color televisions, loyalty bonuses and the like when I first got into the business.

Larry

On your first listing I'm guessing that you learned a lot?  Who's property did you learn your lesson on?  Would it have made sense for the seller who was watching you flop around not knowing what you were doing to pay a full commission?  This is part of the premise of the original post.  Do seller's have an issue with a newbie agent getting a full commission when they do a bad job?  

Additional Thoughts:

Why is it that we expect newbie agent's to hold the line on commission?  My basic thought on this is because as established agents we will lose the occassional listing to someone who will provide a similar basket of services at a lower commission.  Maybe we determine that the agent was new and we explain that to the seller and attempt to sell ourselves to get the listing but ultimately we choose not to discount the commission and after a period of time if the property doesn't sell we'll go back in and list it and sell it.  

I've always been a mavarick when it comes to the real estate business which basically means challenge the rules that can be challenged and see if there is a weakness in the system which would allow me and my team to get a larger then our fair share of the market competing honestly and ethically.

To that end I started as an agent on a team for two years, then I started a team, and now I have my own firm with agents in a number of cities and states.  We modify our business plan regularly and if it made sense corporately to offer discounts and rebates inside of our current business model to attract and retain clients we would consider it.  We haven't found a compelling reason to do so, though there is always a little voice inside my head that asks the question, "What if we offer this, or what if we offer that?"

It's all a business decision, and there is no right or wrong decision.  There are simply opportunities and outcomes.  It's impossible to measure the outcome up front and with most agents the outcome of the first listing whether a full fee or a discount fee is probably still going to be challenging at best.  They always are.  You are navigating a significant asset of a seller who is emotional.  You are intimidated by the fact that you now represent this asset which is potentially worth multiples of the most you've ever made in a single year and there is just a lot of nervousness that surrounds all aspects of the transaction.  Because of the emotions involved I can see many agents ultimately saying something to the effect, if I can't make $X on a listing I'm not taking a listing because of all the pitfalls, but as an agent one doesn't know those pitfalls until one is in the game, and once again, we are back to the basic premise that in order to compete, one needs to be able to get into the game and discounting is one strategy that an agent can employ.

Regina:

I totally agree that if an agent had enough great training that would in fact be the case.  However is great training the norm or the exception in real estate?  I had a great mentor when I got into the business.  I was on his team and we had an interesting relationship because I had run my own business and was entering the real estate business to compete online.  He believed in that vision and helped me bankroll me getting into real estate.  He would do all the listings (I would go with him on listing presentations) and I would work with all the buyers that I generated online.  So I ended up in a great situation and as a result had someone in my corner virtually all the time.

Scott:

Great Point.  What is discounting anyway?  What are we discounting from?  There is an argument to be made that there is no such thing as discounting because that we suggest that there is a standard commission in the real estate industry which is a DOJ hot button issue and an anti-trust issue.  What we charge is what we charge, period.  However the perception from the public and obviously agents is that there is some sort of line in the sand on commissions.

However in order for one to discount, doesn't one have to customarily charge a particular amount of commission?  If a newbie agent hasn't taken a listing before can there in fact be a discount?  Probably not.  Maybe the agent starts at one commission structure when they first get in the business and modify their commission upwards over time as they get better and better at the business, or they go the other way, they determine that reducing what they charge will net them more end of the year net income.

Commissions are the subject of some consumers.  I believe I read that about 20% of consumers in the real estate space are most concerned about commissions then any other part of the process. In other cases it will be another issue, but price can still be made an issue in order to secure a listing.  It may work and it may not, but ultimately its simply one strategy.

Again I haven't had to compete on price, but it helps when one has the top ranked organic website on Google for the market they compete in.

Glenn

Gail:

You and me both even though as mentioned above in one of my comments I seriously considered rebates and low listing fees at different times during my business plan development.  Both of those options are always on the table when I do serious business planning but to date I haven't added those to the mix.

Jennifer,

Though I didn't mention your post earlier today directly, it was your post that got me thinking about this holy grail or sacred cow of real estate called commission.  I remember my first real estate company that I worked for and there were a couple of agents in our market that were listing for 1% on the list side and then providing 2 - 3% on the sell side and agents would get all worked up over that.  Ironically the couple of agents from 6 or 7 years ago that were doing that are still in the business and many of the agents that were bent out of shape over the practice have since left the business.  I think this is primarily because of the "perceived" need to fit in and instead of doing what it takes to get listings and to create a business these agents felt it was more important to "get along" with other agents then it was to develop a defensible business plan for themselves (whether they discounted or otherwise).

I also think that there are many agents who do not run their business like a business, but run between clients like a hamster on a wheel atempting to stay ahead of the expenses by just using hussle.  Hussle does run its course.  This highlights another reason why I think agents leave the business is that they don't want to hussle that much to get ahead of the expenses.  Going back to hourly or the waiter job, or the whatever is more comfortable instead of thinking critically about the business and figuring out way to work on the business rather then just in the business.  Obviously we all start working in the business, but the goal should be to develop a business plan which allows one to work on their business.

Thanks for your post which I used as the spring board for this post.  

Glenn

Kathy:

That's a different issue and certainly one worth discussing, however the seller usually doesn't know this, so again its about getting the experience.

Gene:

I would agree with your general assessment.  High maintenance clients tend to be the ones who ask for a reduced commission, a higher then the market asking price, low ball properties ect...  I'm not suggesting going after high maintenance clients even though often those are the first clients a Rookie would work with anyway.

My thoughts are this: Admit upfront that you are new.  Let the seller know that you have a team behind you in terms of your broker / office etc...  but suggest as part of taking the listing that you are going to deliberately charge less on your first few listings because you are still working out the kinks on your marketing plan ect...  You are still going to do a solid professional listing presentation with price being one of your differentiators for your first few listings.

Learning the listing side of the business is a bit like riding a bike.  You can read everything you can about how to ride a bike, but until you are on one do your really know how to ride a bike? No.  Do you crash your first few times on a bike and shed some blood in the process?  In addition the bike itself is going to take some punishment, just like the first couple of sellers.

I've probably spent more time arguing this commission question in the last 24 hours then most Newbie agents spend on their own business plans, so in reality this probably is more philosophical then practical even though I believe that if an agent is deliberate about his / her business planning they will be successful no matter what strategy they ultimately take with the understanding that the business plan will be continually modified to fit the circumstances of the market.

Layla,

Congrats on your early success in the business.  How did your first couple of listings go.  I understand that you had scripts that helped you get the listing, however how did getting property advertised, staged, photographed, first open houses ect... go.  Did they go smoothly just like a veteran agent would do or were your learning on your clients dime?  The's one of the points I was arguing.  Did the seller get the same service level on your first couple of listings as you were able to do on your 11th, 12th and 13th listing?  In most cases agents are fumbling with the first listings so IMHO it makes business and reputational sense to go in with a lower list side commission to start which could take the sting out of frustration the seller may have by recognizing one's newness in the biz.  Of course now that you have had a number of listings you should be more comfortable with the process and sellers should be getting their money's worth without the frustration of newbie mistakes.

You were able to do this without discounting or reduced commissions but the strategy still could be valid for the right agent.

Lucien,

I'm suggesting that a new agent admit they are new right up front.  Let's not make them guess and find out they are right.  Make it part of your initial pitch.  We do business with those we like and trust.  One of the fastest ways to build trust in you or in a product that you sell is to point out something that could be construed as a weakness up front.  By doing so the client will trust you and will more likely do business with you.

This whole notion of giving away an agent's own money just makes no sense and is cicularly illogical.  The listing agent has no money if he doesn't have the listing, and the listing agent can't give away money that he hasn't negotiated in the first place.  If I took the listing at 3% and arbitrarily gave 2% back that would make more sense, but if I as a listing agent negotiate the listing at 1%, 1% is the money I have to work with.  Unless of course you are saying that there is a standard commission in real estate that agents have to abide by.

Then the idea of cutting ones commission in order to get the listing.  This happens all the time.  I don't remember who did the study.  I remember it from a KW Mega Camp but I'm not sure it was data was from KW or another study.  In a study of listing side commissions and listing side nets the study basically showed at the average listing side commission was 2.29 or 2.4%.  The study also suggested that many of the agents who were aveaging down the list side commissions were agents who went in looking for 3% (or a total of 6%) but in order to secure the listing had to discount in order to get the listing.  This was in a seller's market however it showed that a high percentage of agents would take less then they originally were negotiating going in.

If you as an agent choose to walk away from a listing because you won't discount then that's a business decision and in many cases a flawed business decision IMHO.

My original mentor in real estate had a phrase he would ask potential clients with listings that may have expired or someone who was for sale by owner.  That phrase was, "What's it going to take for you to allow me to put my sign in your yard?"  Often it was that they wanted to list for 5% or 4%.  Generally speaking he would say fine, I'll be right over.  He would list the property and get it sold.  He was the top agent at the Prudential office he was at 11 of the 13 years that he was there selling by himself between 70 - 90 properties a year.  He was a bit of a workaholic, however he wouldn't let commission stand between himself and getting his advertising in the yard of a client.

He wouldn't overertly discount commissions but he wouldn't say no to a reduced commission either. He netted well in excess of $200,000 per year every year and he did it by not fighting about commission but taking and servicing every listing that came his way.

Jerry and Lyn,

I think the education on how we get paid, is to let homeowners know up front that in many cases the work we do on their listing may result in no sale inside of the listing period.  They do need to understand we are taking a risk with our money, so agreed.  Otherwise I think they have a pretty good idea of how we get paid.  My firm has on occassion taken some fee for service listings, where we are paid a fee up front on a listing (no matter the outcome).  In these cases we took what we would normally want on a commission, calculated in the percentage of time that a listing would sell under our watch and figured out what we would need to make on a fee for service basis.  We added to that a slight premium and charged that fee upfront.  I certainly was an interesting approach (we've only done that about 5 times over two years) and I think it has its place but it was with relatively savvy homeseller's who were also willing to price their home to sell.

Anon,

In my original post and in follow-up comments, charging a lower commission is really a list side reduction, not a sell side reduction.  Just because you are a multi-million dollar producer doesn't make it right or wrong.  Russell Shaw has (and may continue to) sell over 100,000,000 million dollars of real estate in a single year with the consumer perception of getting a better commission rate then is offered by other REALTORS.  Guess what his properties sell to.  He wouldn't be able to continue to do so if he didn't provide great service and I believe the would be the first to agree with the comment that Quality can be affordable.  That's part of his marketing premise I'm sure.

Bobbi,

I think that is a healthy mindset and in my opinion the mindset of a business person rather then a sales person.  By continuing to keep an open mind and to try different approaches (including non-convensional approaches) you should be able (if you haven't already) be able to find a methodology that allows you to grow your business into the business that you are happy to own.