Chris Somers wrote on his blog yesterday about Zip Realty eliminating Buyer's Rebates and he questioned about the Rebate business model. Great thoughts there.
Before I share my thoughts on the subject, I thought I'd make this disclosure: I love CAPITALISM. I love that consumers get to choose the type of businesses they want to engage in and various types of business models to support consumers' desires. I love consumers get to change their oil by themselves, or bringing it to Walmart, Kwik Lube or high-end auto dealerships to get the same thing done.
I do not want to go into questioning the "QUALITY" of such companies. I believe if someone wants to be in business, doing what s/he does best and not wanting to charge at all for the service, that's not my issue.
What I want to touch on is that it costs $$$ to do business in the real world.
When I started my business part-time, it costs me no more than $2,000 per year to stay in business. I worked with friends and family with no marketing to speak of. I considered it a great supplemental income to my corporate job, earning typically $20,000-$30,000 extra per year. All I thought of was, "It sure beats having to stand in Walmart checking out items for so many hours per week!"...
Working real estate full-time, and on top of that, being my own broker and own company, I have much more dues and business expenses to pay for.
Here's just a small fraction of where business expenses go to:
- Errors & Omission insurance
- Long-term disability insurance
- Life insurance
- Marketing for business and promotional items
- Business expenses to maintain websites, blogs
- Listing-related expenses
- Buyer's related expenses
- Auto expenses
- Computer-related expenses
- Office machines & office supplies
- Phone, Internet, Wireless expenses
- Dues & subscriptions to maintain license
- Continuing education costs
- Referral expenses to other licensees
- Taxes (this is HUGE!!!)
Just a few months ago, a real estate agent from the East Coast referred her client to me. Our agreement was for me to pay her a referral fee. After working with the client for several weeks, the client whose budget is about $500K wanted a 1% rebate, saying that a $5,000 cost will help her offset her closing costs.
In an instant, the business relationship was terminated. The math doesn't work out when I had to pay 1/4 of my check as a referral fee, then 1/3 of my check to the client. In the end, who does all the work? The client was not explained why but I mentioned that it's not in my business policy to rebate.
Math had me calculated that once business expenses and taxes are paid on each dollar, only very little is retained and the better part is that I don't split my check with my broker, because I am the broker.
So for those whose math can work out, or even part-time agents like I once was could work the rebate model, good for them. In a rebate model, more than likely, businesses rely on working more transactions to "make up" for the "loss revenue". When I'm working this business part-time and now full-time, it's a world of a difference on expenses.
It's the same concept of owning a $100,000 house versus owning a $1,000,000 house. It just simply costs more to run a bigger, more expensive household. Hence, a bigger, more expensive business. So consumers, when your business owners tell you they can't sell it to you at that price, they may have very well-deserving reasons to accept or decline the business. It goes far beyond just being greedy.
When you live in a $1,000,000 house, you can't accept a $40,000 per year job. When you live in a $100,000 house, perhaps a $40,000 per year salary is sufficient to make ends meet. It has nothing to do with greediness. The math just doesnt work out.
This is to assume that the agents are of similar capabilities, similar experience levels. And we know that's not true.
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It Costs $$$ to Do Business