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It's Ironic that a friend of mine sent me this post form Seth Godin prior to me reading it through my feed PCPF (preemptive consciousness post forwarding) . Of the 200 some feeds I read, Seth's is one I always look forward to eagerly. The 7% Solution? So you know know what it's about..commissions.
I had the pleasure of seeing Seth at the 2007 Inman connect in New York and was impressed with his cunning wit and sharp intellect.
What if a real estate broker HAD to charge 7% as a fee for services? Seth asks "What would you do? How could you make it worth it?" You mean it wasn't worth it already? So What would you do different in a world where people are charging 6% or 5% or less? Now quit reading and think about that...what would you really DO!
"Now, just imagine what would happen if you did that at 6% or even 5%? You'd be unstoppable." says Seth. So true. So True.
Long before it was acceptable (it's still not acceptable to most) to be discount...I was, I guess, discount, but never looked at it as discount. Because as the post states...we offered more for 4.9 than most ever imagined at 7. My USP dates around 1990...'Mark Sold Mine at 4.9'. Of course as the post states, traditional practitioners were not pleased at all. In my peak years 1998 to 2002 I was doing anywhere between 150 to 240 transactions a year. Most of the traditionalists thought my success was because of the lower fee. However it was really the services, staffing, support, technology, etc. that truly pleased the people. The fee reduction was added value.
In an industry where the average broker now does less than 3 transactions per year (Denver Metro Stats), everyone needs every dime they can squeeze out of every single deal. I am lucky. I work with a franchise that only collects a flat $80 a month, Metro Brokers. This is the whole entire, fee or TAX as I call it. My fees I charged to the seller were based on actual business costs. I worked backwards on a P/L and costs associated for each piece of business and what was left over for profit.
Seth's simple 7% solution is not so simple, for some, in an industry that has been built around cooperate bureaucracy and inefficiencies. In fact whether the major brands want to admit it or not, they feed on the blood of new brokers that complete 3 or less transactions and LEAVE the business. WOW, what a model. But it is the model. Add to this, once an associate becomes successful, they leave the organization based on too high of fees (taxes).
Two huge obstacles stand in the way of any true solution in the industry.
1. Franchise fees "as percentages" are passed through to Brokers and Associates based on the percentages that they charge and in turn the consumer pays. These franchise fees (as with any type of TAX) do not guarantee any type of increased value, service or success to the consumer.
In other words, the 50 year old base model of collecting 50% of the associates earnings is still alive and well. Of course, they mask this today with annual CAPs on some of the fees, knowing that most will never hit the CAP.
This concept is not limited to the traditionalist "old guard" companies...in some cases it is worse with what I call the new Socialist-Traditionalist model. Thats where percentages of percentages are not only sent to the Franchise bureaucracy but are also collected to redistribute upstream. Some companies even claim you can build a retirement from this? As with any type MLM, those first in and on top win and everyone else struggles.
I always ask, how will they succeed when there are no co-ops to collect their percentages from? What will happen when Realtor.com is NOT the preferred portal? I have always stated, Zillow has no spot for COOP!
The large existing corporate franchise organizations, just like a Government Bureaucracy, have become dependent, addicted, on their monthly cash infusions. These cash infusions are based on percentages of percentages. Any movement to reduce fees or rates based on the practice that they take percentages of the percentages will not be supported.
2. The income from new brokers is critical to the survival of most traditionalists. They know that the barrier to entry is low and the probability of success is even lower. However, there is one known factor, they will produce 2-3 transactions prior to exiting the business. If they can retain 30%-50% or more of that commission income of 1, 2 or 3 transactions...the model lives on. Just keep the recruitment machine flowing.
Of course there are many of you that will state, any sales commission based job is difficult and very few survive, regardless of the product being sold...and I say , I agree. But , unlike selling say pre-paid legal or newspaper advertising...or cars for that matter, most do not involve about $18,000 dollars on the table! Assuming the past $300,000 house at a 3% fee to both sales person's company. So 6% at 300K is $18,000. This is not chump change.
There my friends is the crux of the problem. For over 50 years the industry is just plain accustomed to those type of figures. They have built the foundation of their franchise-industry houses on these type of numbers. Add to this the National Association Of Realtors with its 1.3 M DUES PAYING members (TAX) and you have a situation that only a revolution can change.
The revolution is well underway. The transparency of the web is making associates, brokers and consumers realize that the model will change. That change will be customer driven and will force brokers and companies to change their business models.
Fewer Brokers, fewer real estate companies and value (lower) based fees.
If listing brokers did not have to pay selling brokers a "fee" and could concentrate on providing pure performance based services for their seller client then the seller and the listing agent both win. If buyers could negotiate with their buyer agent, on paper, before the transaction and agreed upon fee that could be financed in their loan (as it is now anyway), the buyer and the agent win. If associates and brokers paid flat fee or fixed franchise fees...they could retain more of their earning, and they win.
Who would lose? NAR, with fewer dues paying members. The large franchise machines needing the higher percentages of percentages to run their machines. Who would win? The consumer, with higher levels of professionalism, more services, more accountability and realistic fees to pay. Also, the innovative real estate professional will have less competition, and while working with lower fees and have higher net returns based on effectiveness and services of the web and fewer "taxes" being paid to higher ups.
So 7%? Can a real estate broker still get 7.0%...yep! Well, if i don't have top pay someone half (Coop), we are down to 3.5%. From the 3.5, if I am not paying the 30% to the Franchise machine I am still at no loss with 2.4%. Now lets say that instead of 1.3M Realtors there are only 800,000 Realtors and combine that with the fact that a large percentage of marketing is low to no cost on the web and you can take the 2.4% down to 1.75%. Now 1.75% listing fee on a sale price of $300K is still $5,000. Hardly chump change. So if you are doing 3 listings a year....keep your day job. But for an effective, efficient, progressive business entrepreneur, 100 listings a year at $5000 a pop is a great income even AFTER paying a support staff.
The 7% Solution is very simple from the bottom up..keep the money with the people it effects the most. The consumer and the producing agent in the trenches.
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