Selling a home can be an emotional process. A home is an intimate and personal asset and leaving behind all the memories within its walls can be hard.
That being said, real estate is often a huge store of wealth for American families and there is a lot at stake when divesting of it. Selling real estate can be financially devastating, a needed windfall, or somewhere in between depending on the selling strategy employed.
Home sellers should put on their small business, entrepreneurial hats and put emotion aside for the best outcomes in their real estate transactions. When selling a home, try thinking of yourself as CEO of a small business with one large immovable product to sell.
Think about it. Selling 10,000 widgets has a few things in common with selling one home.
A sellable widget needs to be useful, attractively packaged, priced competitively and marketed aggressively. Similarly, a house needs to be in a desirable location, in great condition, clean and staged well. If these conditions are lacking, it will be reflected by how the market reacts. Widgets sit on shelves and don’t get re-ordered. Real estate will have lackluster showing activity and poor feedback.
Skimping on marketing is perhaps the most dangerous AND the most tempting budget item for a CEO seeking out cost savings, but successful businesses know to avoid this pitfall. Fortune 500 companies know you must spend money to make money and a booming Madison Avenue is a testament to this truth.
In fact, a joint study between the Wall Street Journal and Duke University’s Fuqua School of Business shows that across major industries, marketing budgets range between 4% – 24% of overall budget, 11% being the average marketing spend. You have to spend money to make money.
A 5% – 7% range in real estate commissions doesn’t seem half bad in those terms, but hold on. About half of that commission package goes to the buyer’s agent and is more of an expense to the seller than part of a marketing budget. Consider that even if you don’t use a listing agent to market your home, most buyers will use a buyer’s agent.
It is expected and common for the seller to pay the buyer’s agent, so why wouldn’t buyers use one? It might not seem fair to sellers, but it is practical. Here’s why: Many buyers are already coming out of pocket for a down payment, closing costs and inspections. To expect your buyer to pay their own agent puts you at a 2.4-3% disadvantage vs competing houses, and that 3% has to be cash savings out of the buyer’s pocket. They can’t simply roll agent commission into their loan, because lenders want to finance the collateral real estate only.
So sellers should consider buyer agent commission a simple expense of the sale, NOT part of the marketing budget.
Across major industries, marketing budgets range between 4%-24% of overall budget, with 11% being average marketing spend. –Wall Street Journal and Duke University’s Fuqua School of Business
That leaves the listing side a marketing budget of just 3%-3.6%. Remember: Marketing budgets for other industries is 11%. Just keeping up with average business practices SHOULD put real estate commissions at 14%!
But competitive real estate firms aren’t asking that. Instead they are desperately and actively seeking out business models that can ask MUCH less than 14% and still survive. Market forces are always at play squeezing margins tighter and tighter but nowadays, around 6% seems to be the sweet spot where real estate firms can do a good enough job to stay in business, while still being competitive with each other.
Occasionally new companies pop up that test out ultra low commissions, but they don’t last. Sellers still expect the same sorts of services but cut rate real estate firms have to drastically cut somewhere to stay afloat. When sellers realize that critical marketing functions have been omitted, and/or that they use very green, inexperienced agents who cannot command higher compensation, or the ones that use better agents overwhelm them with too many files to do a good job, they become very upset and quickly fire up ratings sites and destroy the single most valuable element to a real estate firm’s viability – past client loyalty and referrals. These cut-commission companies end up burning bridges and eventually run out of one-off clients to do business with.
Start-up cut rate firms are shifting their business models after learning this hard lesson. They started off convinced they could attack the “greedy” real estate world with innovative cost savings and a streamlined process, but instead are shifting their business model to look more and more like established real estate firms. Re-inventing the wheel is not working so well. Sellers simply expect a level of service and results. Those don’t generally materialize out of thin air.
The truth is selling real estate requires business skills, market expertise, sales experience, industry focused education, creativity, strategy, legal knowledge, and good old-fashioned blood sweat and tears. Sellers circumnavigate that reality at their own peril. In fact, in spite of all the “For Sale By Owner” signs you may see around town, only 9% of homes successfully sell with no listing agent, and of those sales, they sell for an average of 16% less than agent assisted home sales. What are you really saving?
When you sell by owner, you have to be present for showings, arrange them yourself, find out what paperwork you need and fill it out correctly, negotiate competently with an experienced adversarial agent, get through inspections, repairs and closing all while keeping yourself out of court. These are all functions your agent ALSO assists you with IN ADDITION TO marketing your home.
If we went back to all those Fortune 500 companies and asked them what portion of their budget they spend on employees who perform those corollary functions, it’s a miracle you’re not paying upwards of 25% for your realtor!
And here’s the kicker: You’re not even paying them UNTIL they successfully sell your product!
Honestly, Wall Street would KILL to get a deal like that!
So be kind to your Realtor, and understand how much they really do to sell your home for so much less than the going rates in other industries.
I am your marketing department, your compliance department, your PR firm, your personal assistant, your event coordinator, your business coach, your very own motivational speaker and yes, at times, your marriage counsellor. I LOVE LOVE LOVE working with you and helping you move on to the next stage of life, BUT …I am a bargain at thrice the price!