The Six Percent, Part Two
There is a firm here in our market that always charges a full six percent commission, nothing less. As buyer's brokers, when we deal with a property listed by that firm, we know we are dealing with an unsophisticated seller. Not savvy and perhaps even irrational. The kind of person who buys shoelaces at Neiman Marcus, because, you know, they're better.
Did you know that Warren Buffett's Berkshire Hathaway is one of the biggest real estate brokers in the country? Why? Because it is very profitable, especially at the six percent level.
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As discussed earlier, I believe that Nordstrom’s offers a particular value proposition. But even in 2020, there are more Nordstrom brokers than Walmart brokers. Why is this?
Well brokers know how profitable the business is, or can be, at the six percent level. It is not that they are all making a lot of money. Not by far. But brokers continue to believe that the path to riches is paved with six percent commissions. The problem for most brokers is that they simply do not do enough transactions to make a decent living, even when charging six percent.
I will admit that the real estate business is not easy. And sometimes we all believe, that even at six percent, we are underpaid. Sometimes. But there are other times when brokers cannot believe how much they are paid for a simple transaction. Again, sometimes.
In most businesses, pricing is an important consideration. Want to increase sales, look at your pricing. Of course, this is more true for commodity type businesses than for businesses differentiated by features or specifications or brand.
And here’s the problem: Brokers like to think of themselves as offering a differentiated product. But differentiated from what? Well, other brokers: I charge six percent because I am worth it. You’d think they were in a L’Oréal commercial. And yes, arguably, a Lexus is worth more than its Toyota cousins. But certainly perception is part of the equation.
However, the Toyota Corporation sells a lot more Toyotas than Lexuses. The problem with the real estate business is that everyone wants to be a Lexus. Or pretends to be a Lexus. And even if they are not working, they maintain their Lexus pricing. This only works as long as the customers allow it…or, don’t understand it.
I will tell you what many brokers will never admit: Many of the services offered are commodities and should be priced as such. And as we have discussed, many brokers offer only the illusion of Lexus-level service. Their value proposition is minimal. This certainly applies to almost all real estate marketing. Heresy, right? But it is true. We’ll come to this in the next section.
Also, and there’s no getting around it, this industry dynamic involves an element of work ethic. Or lack of work ethic. It is easy to get fat and lazy at six percent. If the industry average commission was dramatically reduced, brokers would have to really hustle. There’s a lot more hustle at Walmart selling household goods than there is at Nordstrom selling high-end handbags. Now sure, Nordstrom has luxury offerings and a refined atmosphere and unmatched service. But what you have in the real estate business is Walmart brokers waiting for (and insisting on) handbag shoppers. They need to cut their prices, roll up their sleeves, and get to work. Yes, really.
I also think that reduced commissions would lead to a more professional class of broker across the board. With six percent commissions, what you find is many marginal brokers remain in the business who would otherwise have to find a real job. If we dramatically reduce commissions, these people would be forced to leave the business. Those remaining would be the true professionals.
But the real question posed at the top of this chapter is: Why do sellers continue to hire these brokers? It is, I think, a combination of factors that we’ve discussed. The pretense of competence and authority. The widespread, and often valid, stereotype of brokers. And the illusion of high service.
There is also an element of fear. Some sellers fear that if they hire the wrong broker, the broker might make an expensive mistake that the sellers cannot afford. I get that. But brokers prey on this fear. So many of them are little more than snake oil peddlers preying on the nervous, uninformed, and credulous consumer.
So with this book, I hope to convince you that six percent does not guarantee competence or integrity. In fact, it might even reduce these sought-after qualities. I have mentioned this a couple of times and I will again here: If we want better brokers, the only way we are going to get better brokers, is for consumers to demand better brokers. Please.
Sure, you can find value at six percent. But the real differentiating factor is transactional competence. Insist on it.