The Six Percent, Part One
Question: If you have a $500,000 house, should it cost you $30,000 to sell it? Set aside everything you know or think you know about real estate, and just answer this question with common sense. Please.
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Do you know the old story about the guy with the very expensive foreign car? Well his automobile was not running quite right, so he took it to the dealer. Hmm, says the master mechanic, let’s have a look. And with the owner standing right there, the mechanic opened the hood and turned a screw half a turn counter-clockwise. To the owner’s genuine amazement, the car was back to its high-performance self. Then the mechanic says: That’ll be $500. And the owner says, $500?! All you did was turn a screw. And the mechanic says, yeah you’re right, that part of the job is five dollars. The other $495 is for knowing what screw to turn and how much to turn it.
Right? Yes, it’s an old story and maybe you’ve heard it or some version of it. But what makes that story so good is the truth of it.
So is there anything comparable in real estate brokerage? Well look, there is art and science in this business of conveying real property. And I assure you, the knowledge and experience and expertise of a competent real estate broker is very valuable indeed.
Now of course some brokers are worth more than others. Of course they are. And full service business models are certainly worth more than limited service models. But what about the six percent?
Well if you have a $100,000 townhouse, I personally think six percent is fair. Or, close to fair. Maybe if you have some ultra-unique white elephant, six percent (or more) is appropriate. In fact, if you have a property with any unique set of challenges, six percent may well be fine. These might included deferred maintenance issues, a size that does not match the neighborhood, awkward layouts, etc.
But the question at the top of this chapter is: If you have a $500,000 house, should it cost you $30,000 to sell it? Let me add the word typical, as in a typical $500,000 house, in a typical $500,000 neighborhood. I think to ask the question is to answer it.
Instead let me ask a follow-up question: If you have a $500,000 house, what makes it $6,000 more expensive to sell over a $400,000 house? $12,000 more than a $300,000 house? Really?
Now I’m practical. I know that an oil change costs more on an expensive foreign model than on a Chevy. So sure, we all expect higher transaction costs for a $500,000 house than we do for a $400,000 house. I am not disputing this. But the question is worth thinking about. And I would add this: Just because we expect it, that does not make it necessarily so. Just ask former stock brokers.
What I would like to see in our business is more rational pricing, more thoughtful pricing, and certainly more diverse pricing. And more competition based on price rather than solely on who supposedly offers the best service.
What I really want to see is more competition based on value. Yes, yes, sure, everyone does. But have you ever really considered the definition of value?
Value = Service / Price
Increase Service, value goes up
Decrease Service, value goes down
Increase Price, value goes down
Decrease Price, value goes up
Therefore, like both Nordstrom and Walmart, value can be found at any price point and at any service-level. And it is up to the consumer to decide if he or she values the service/price proposition of Nordstrom or the service/price proposition of Walmart. Or, maybe she values both for different particular needs, right?
I know, it’s not a difficult concept. But in the world of real estate brokerage, this is like a foreign language.
Now yes, in the last fifteen years or so, the business has indeed moved in this direction. But even today, there are more Nordstrom brokers than Walmart brokers. This seems backwards to me. And what’s worse, many of those Nordstrom brokers offer the subpar competence we have talked about. So really, they are only offering the illusion of high service.
Somewhere in the distance, I can faintly hear Glen Campbell: Like a rhinestone cowboy….