Would you buy a house or a condo from a Realtor solely because that Realtor will give you cash back?
What works for a credit card company just may not work for a successful Realtor…
I was in the bank the other day, and the teller tried to pitch me on a new credit card.
The credit card offered 1.0% cash back, with every purchase, paid each month either by cash deposited to your bank account, or paid against your balance.
I told the teller that I was fine with an exceptional card that I’d been using for the past decade – the TD Travel Platinum, whereby you get 1.5% of all purchases in travel money.
He said to me, “But sir, you get this money BACK! Into your pocket!”
I told him, “The key here is to get the highest amount, no matter in what form. If there was a 2.5% “Gum Card” and I thought I’d spend a thousand bucks on gum next year, then I’d take that. We all travel, right? So eventually, you’ll spend that money. So take the 1.5% instead of the 1%, and then apply it to your travel cost.”
I felt like I had just told a child that there was no Santa Claus.
It’s true, if there was a credit card that offered 2.5% on all purchases, used towards, say, the purchase of groceries, why wouldn’t I switch? Everybody needs groceries, right?
My point to this story (actually come to think of it, I’d LOVE to explore today’s credit card companies and subsequent exploitation of the low-brow consumer in a blog post…), is that I had a conversation with a gentleman last week, who said that he wanted to buy a property through a brokerage that offers “cash back.” His reasoning was that, “You get cash back when you use a credit card, so why shouldn’t you get cash back when you use a Realtor?”
I didn’t know where to start.
Comparing a credit card company to a Realtor is somewhat flawed. What does one have to do with the other? They’re both services, okay. But you don’t ask your mechanic for cash back, or your drycleaner. Even still, the comparison between a Realtor and a credit card company wasn’t my major issue.
My issue is this: how GOOD could a Realtor truly be, if he or she is offering part of their pay back, in order to use their services?
Look, I know that there’s segment of the general population that doesn’t see the value in a Realtor, and if you fall into that category, then I perhaps can’t convince you otherwise.
But what does it say about a person – no matter what they do for a living, if they give you part of their salary, pay, commission, bonus, or other?
I’ve made this argument about listing agents as well.
Consider going for laser-eye surgery, which costs $10,000, and asking the supposedly qualified person who is going to do something that affects you for the rest of your life, if he can do the procedure for $4,000 instead. If he said, “Sure, no problem,” how would that make you feel? Would you wonder why he’s so quick to act? Is he really as good as he says? Is he qualified? Is he going to do the same job and take the same care as he would if he were getting his full rate?
That’s how I look at a broker who walks in to your living room and says his rate is 5.0%, but then has no problem jumping at 3.5% when you ask him to do so.
Is he really that bad at negotiating? How is he going to negotiate for you if he can’t negotiate for himself? If he’s that quick to take money out of his own pocket, how will he act when it’s time to look after you?
But the flip side of the equation – buyer agents giving “cash back” to the buyer, is just utterly insane to me.
A buyer doesn’t pay commission, although some might argue that they effectively pay commission since the seller is taking 5% of the sale proceeds off the top. So why would a buyer agent feel the need to pay back part of his or her earnings?
Would you hire a plumber solely because that plumber said, “My company charges $200, and I get $80 of that, but if you promise to hire me, I’ll give you $7.50 back”?
I understand in the concept of something being on sale, but when it comes to professional services, in an industry that is competitive, the cheapest doesn’t mean the best, and doesn’t mean it has value.
If somebody said, “I usually charge $200 to shoot you in the head, but I’ll do it for $80 for you,” does that necessarily mean that being shot in the head is a good thing?
This is the point I’m trying to make: using a Realtor who is so desperate for business that he or she gives part of their salary back to you, does not necessarily make their services worthwhile. It could very well be that their services are a detriment to you. Right?
If a buyer agent is only interested in getting paid, and getting whatever percentage is left before you’ve been given your “cash back,” then what guarantee do you have that this person is going to do a good job? Maybe he or she will push you into a property that isn’t right for you, is a bad investment, or – as is often the case, is the very first one you express interest in?
That’s my fear, no doubt about it.
As an active Realtor, I see people out there every day that are just trying to sell real estate to pay their rent, or put the proverbial food on the table. There are 36,000 Realtors working in the GTA and (gulp!) some of them aren’t any good!
I don’t think it’s a stretch to suggest that the ones giving part of their salary back in order to attract clients are likely at the lower end of the scale when it comes to skill, knowledge, client retention, client satisfaction – all traits that are a function of one another.
A couple of weeks ago, a reader on my blog emailed me and said that he was looking at a $250,000 condo for investment, and asked if I would give him back 25% of the commission I earned in the form of a “cash back incentive.” I explained that I was a full service agent, and that I wasn’t interested in a quick sale for a quick buck, while also giving him a pretty thorough explanation of my business model, and the style in which I work.
I also added that the $6,250 commission an agent earned for selling such a property would provide for a $1,562.50 “cash back incentive,” and I simply asked, “Do you think that I can do a $1,562.50 better job than the agent you talked to from (Guess The Name Of The Brokerage…)?”
He met me the next day.
Maybe I can get $10,000 more off the purchase price than the agent from (Brokerage), who probably wouldn’t be working there if he or she was skilled and trusted enough to work for a full service brokerage.
Or, maybe the buyer doesn’t purchase that property, but instead, I work with him for six months to find the best property available, and along the way, teach him every thing I know about investment properties, investing, real estate, and everything in between.
Is that worth $1,562.50?
Yeah, it was meant to be a rhetorical question, but some people have their teeth so firmly clenched when they hear the words “real estate agent” that they’re too far gone to converse with.
Just hear me out when I say that just as “a deal that too good to be true, probably is,” there are a lot of Realtors out there with this new “business model” of giving money back to their buyers as an incentive, when it’s really just a reason to use a bad agent.
You know those radio ads for that brokerage (which is failing, FYI…) that advertises, “Up to $2,000 cash back when you use an agent from our stable of top Realtors”? Just answer me this: is using a bottom-feeding agent to buy your $800,000 home REALLY worth $2,000?
If you answer “yes,” then please email me a 2,600 word response, double-spaced, size-10 font, 3-point thesis with attached skeleton plan and references, stapled in the top-left corner, and you will get three sips of tomorrow’s coffee FREE in the form of a “coffee back” incentive.
Happy Monday, folks! 🙂
J
at 8:34 am
We sold a house in a high end neighbourhood last year. We interviewed a few top agents working in the area. Not a single one asked for full commission. I do think that the price of the property affects commission. There’s way more flexibility in a $50,000+ commission than a $5,000 commission.
Jen
at 2:18 pm
That’s the point though: there’s more flexibility at the top than at the bottom. Should an entry level buyer be working with an inferior agent to save $600 on their first investment and residence? Sure, the three-million dollar sellers have their pick of the litter at a variety of prices, and I’m sure that reputable brokerages would do it for 4% on the daily. But to give cash back on the buy side, for entry level or mid tier homes, makes no sense to me. Agree to disagree.
Jul
at 9:01 am
Do you know what I expect from an agent when it comes to commission? Flexibility!! We’ve bought/sold 9 houses. The last few transactions have been with the same agent. One transaction was your typical multiple offer scenario where the house was listed and sold above asking within a one week period. We gave our agent a bonus. One transaction ended up dragging on for a couple of months and the house sold well below asking. The agent offered to cut commission significantly to help soften the blow. It wasn’t her fault of course that the market tanked at that particular time in that particular segment of real estate, but we were in this together and all worked together to come up with what we felt was a fair deal for all involved, given the circumstances. I felt our agent was invested and had our backs by being flexible. I would be turned off by an agent who said they wanted their 2.5%, end of story.
Joe Q.
at 9:32 am
Too … many … Realtors!
Seriously though — seems to me that the cost of Realtor services is going to be controlled by supply and demand, just as the cost of houses is controlled by supply and demand. Right now the supply of Realtors seems to be greater than the demand for their services. There will always be people who are willing to pay top dollar for a superior product (service) and others who are willing to sacrifice to save money.
Huuk
at 10:08 am
No question, the standard 2.5% per side will be GONE very soon. 1.5% makes more sense. I wouldn’t be surprised to see it go to 1%. Fixed price would make alot more sense for the industry to adopt based on the value of the house/condo being bought/sold.
Should a $1 mil house really net a realtor $25,000? Was $25,000 worth of work hours really performed to achieve that compensation? I would wager its very rare in a in demand market for that to be the case with an average DOM of less than 2 weeks. When product starts to sit on the market for 60 days+, then the hours of work start to add up.
I purchased my house, and every realtor I spoke to offered a discount to go with them.
Supply and Demand of Realtors is even more out of balance than Supply and Demand of new condos in the GTA!
Oscar Vidal-Calvet
at 4:42 pm
I am a realtor with more than 20 years as a full timer; and I dare to say what I was told at the very beginning of my career: “20% of realtors, make 80% of the business”.
I will mention only 3 reasons why.
= First reason is that 20% of realtors provide “professional services” to his/her clients.
= Second is that this 20% of realtors are constantly being updated in the “current real estate market and its trend,” norms and legalities to assist properly his/her clients.
= Third is that this 20% is dedicated full time to the business of real estate.
Therefore we may understand why the 20% is making over $100,000.00 per year and the other 80% is barely making over $6,200.00 per year.
(estimated 40,000 realtors as of 2015)
(estimated 95,000 properties sold in GTA)
(estimated sold price of $420,000.00 for all sort of properties)
(estimated commission is 2.5% per side)
Joel
at 10:15 am
I think that a great comparison to an agent would be a mortgage broker. I can’t imagine that you would recommend that your clients take the first rate that the broker offers them and not try to get a better rate. In doing so the broker is taking less money in commission/fees to get the sale. I don’t think that anyone would say that they are a “bottom feeding” broker because they have can be flexible to make a sale.
There are agencies that offer extras, such as design services. With the number of agents that are in the GTA right now every realtor needs to offer something extra. You have your blog which you spend time writing. Others may find it more beneficial to deduct half a percent from their commission.
GF
at 10:27 am
This is one of the very few posts I’m not sure I agree with. We interviewed 3 agents when we sold. We ended up going with the full fee agent, but she did agree to give us 0.5% back when we bought a year later. We did not like the 3.5% agent at all, but it was tough to go with the one we chose over someone offering 4.5%. For our agent, it was her way of making sure she kept our business. Seemed like a good practice to me.
FroJo
at 11:17 am
David,
If my income were a percentage of the proceeds of the sale of an asset growing in value at a pace far, far outstripping inflation / wage hikes … then, yeah, I would have not problem giving some “cash back” as an inducement / differentiation. It’s just marketing. If the market were tanking and the cash back promotion was taking food off my table, well that’s just desperation. But the market isn’t tanking, right? Right?
Ed
at 11:40 am
David,
Let’s say you walking into a jewelry store to buy your fiance a ring.
You select this very beautiful diamond ring that is priced at $10,000.
Now the sales rep, who is also the shop owner, does a great sales job and really knows what he is talking about and is educating you in the process.
But you are also a wise consumer who knows that there is incredible mark up in diamonds and you demand a discount. So instead of paying $10,000 you only pay $7,000.
Please explain to me how you or the shop owner did not benefit from this transaction?
No one said he had to sell the ring at a discount. And I’m sure that if he did not make a reasonable amount of profit then no deal would be done.
And lastly, your supposed to spend TWO MONTHS pay on an engagement ring, so stop being so cheap.
Ed
at 11:49 am
Another thing.
Let’s say I’m selling my $200,000 house in Niagara. Am I going to ask for a discounted rate from my realtor. No.
Let’s say I’m selling my $800,000 in Toronto, a much hotter market by the way. Am I going to ask for a discount. Yeah.
In my opinion the commission model has to change. Maybe something like 7% on the first $200,000 and then 2% on anything up and above.
AP
at 12:29 pm
David, let me first say that I agree with you wholeheartedly, but I also see why majority of people reading this will not. I’d like to outline why.
I work for one of the largest pension funds in Canada, and we routinely purchase high-dollar assets, upwards of $2 Billion. If we were to purchase an asset of $900 Million, for example, it’s in our best interest to pay a consulting fee, be it to an engineering firm, an investment bank, or what have you, of often 6-8% of the asset’s price. I see the parallell here to real estate, but your readers may not.
Three reasons I identify:
1) Buyers in today’s society want a deal on anything and everything. A sale, a discount, a bargain, a groupon; something off the sticker price. Many buyers fail to see the ‘value’ that you provide, when they are consumed with getting a ‘deal’ in their own eyes.
2) The general public may not be as smart as you when it comes to real estate, and I don’t mean that to pad your ego. They don’t work in real estate so they don’t understand just HOW bad some of these agents that you reference truly are. They’re not privy to the water cooler talk about which agent screwed what client, or who over-sold their buyer, etc. It’s impossible to fully convey this, but you do an admirable job of trying!
3) The supply and demand of Realtors might actually work in the opposite way as what you suggested. You feel that the more crappy, inexperienced Realtors there are, the more you experienced professionals get a chance to show your skills. But if there are nine newbie agents barking at each buyer or seller for every one full service, top Realtor, eventually the buyers and sellers will cave.
I like what you’ve written above, and I respect it. It takes some guts to put something in writing that 7/10 people probably won’t agree with, although I figure that’s probably why you did so.
jeff316
at 9:02 pm
Well said and agreed.
Potato
at 2:35 pm
“what guarantee do you have that this person is going to do a good job?”
What guarantee do you have that a realtor who doesn’t rebate commission is going to do a good job?
And as strange as it seems on the surface, a commission rebate is really the only way to alter pricing, as the seller sets the commission.
Lulu
at 4:23 pm
When I was selling my home. my agent didnt budge from her 2.5% commission. She is one of the top agents in the area. As an incentive, she offered me 1% cash back if I used her to buy new home. You typically upgrade and 1% on new purchase price makes better financial sense.
Back to David’s argument, good agent does play keep role during price negotations and that can save u thousands. I have noticed more than half of house transactions fail just because two agents dont get along.
Lulu
at 4:25 pm
When I was selling my home. my agent didnt budge from her 2.5% commission. She is one of the top agents in the area. As an incentive, she offered me 1% cash back if I used her to buy new home. You typically upgrade and 1% on new purchase price makes better financial sense.
Back to David’s argument, good agent does play key role during price negotations and that can save u thousands.
I have noticed more than half of house transactions fail just because two agents dont get along.
Kudo!
at 5:16 pm
David Kudos to you for putting this in writing. Do you really think another single agent out there would do the same? Your argument is sound, even if people disagree. You have said yourself: there is an agent for everybody, and the guy that has bought and sold nine houses with discounted commissions is not the agent for you. BUT, he reads your blog,and like me he most likely respects your hoensty and the fact that you are stimulating the conversation for those of us who want to talk shop This is my first post on your blog and I just had to put my two cents in.
Atom
at 7:19 pm
when I had my roof re-shingled a few years back, I had quotes of 5500, 6000 and 7300 dollars.. I took the highest, because I felt the best about dealing with that person, and over the 25+ yr life of the roof, an extra 1300 was really not that significant.. no regrets.. I will always choose the professional that I know will do the job right, over a discounter.. It will be the same with a realtor when the time comes..
J
at 8:23 pm
I agree that choosing the cheapest option is not always the best option. However, you seem to be ignoring the fact that many, and I’d dare say most, top agents are also discounting their commission, certainly on higher priced properties. A discounted commission does not equal a bad realtor, nor does a full commission ensure a good one.
RLST8Rocks
at 9:40 am
Sure….we ALL love bargains but do you go to your dentist, mechanic etc and barter with their bottom line?? Most likely not as most of you don’t have the balls to do so but you think you can with a Realtor. Newsflash to all the haters: there has always been more Realtors than you can shake a stick at in a good market. Remember, not all are full-time, experienced or by merely speaking to them have ample finesse or people skills that is necessary to deal with “certain” types of buyers and sellers.
As a Realtor, I believe that you get what you pay for. Cash back to buyers??? On the selling side as much as full-service brokerages deny that they reduce their commissions, it is one major way to win business in addition to showing clients how one provides value. My partner and I have piles of experience (40 yrs plus combined) but given the crap climate that discounters and unscrupulous “game show host” type agents have created, no one cares. We like most have to do more for less despite how much we fight for our money. From time to time, people do recognize our value and trust our judgement and for that we are greatful in spades.
I can’t change people’s misguided opinions about the value of Realtors, although David has some pretty solid arguments that are difficult to dispute! You get what you pay for in the end and as a client if you are not happy with the level of service you are FREE to go to any discounter and leave your greatest asset in the hands of a Larry the Liquidator-type agency.
Peace out:)
Jonathan C
at 10:33 am
It’s all about supply and demand, both on the buyer and seller side.
For potential sellers, entry level houses in demand neighbourhoods are in short supply right now. Agents are always trolling for listings, offering freebies such as free staging, professional photos, repainting, pre-sale renovation consulting, and so on. Discounted commission is just another form of incentive for a seller to list with you over the dozens of other agents fighting over the same business. Unless you can demonstrate that you sell listings for more money (not just as a percentage of list, since we all know list prices are not fair market value) you will lose out on listings to agents who offer value-added services or lower commission.
On the buyer side, again it’s a question of supply and demand. David, are you 100% busy right now? If not, it could be in your best interest to practice a little price discrimination/differentiation. Don’t offer discounted commission off the bat, but if the prospect asks and will walk without a discount, then you’re better off taking their business than having no business at all.
Joe
at 8:47 pm
Really Ed? 7% on the first 200k? Lol.
Rhoda
at 3:24 pm
I have to say you just sound a tad angry about the fact that some agents can give their commission to the buyer/seller with out compromising their service to the client. There is absolutely no compromise in service to the client whatsoever, if anything these people are happy grateful for the money back. No matter whether you are selling a 100k or a 1 million dollar home. I’ve done many, and get a lot of business this way. It was said to me from a very smart real estate guru (who is also on TV) that its ok to give a form of an incentive to the client, and shouldn’t be looked at as a bad thing. Only reason most other real estate agents get upset is because their split is so high they cant afford to give anything back. However, if you are an agent who receives 100% commission than it can and will be done. Your better off taking the business than no business at all, no matter what. I’ve been in the business for 10+ yrs and believe in incentives just as builders do them, we can too.
Jim
at 4:49 pm
A realtor just facilitates the transaction. I don’t care how much value you think the realtor is adding, they are just charging a transaction fee on the deal. I’m fine to pay the realtor 200$ to process the paperwork, but why should they earn 10000$ for closing a 400K$ transaction or 40000$ for a $1.6M transaction for the same effort? Since they make that ridiculous sum of money from YOU spending YOUR money, it only makes sense for them to rebate you part of it. Either that or lower their fee.
And no you don’t ask a plumber to give you 7.50$ back after they charge you 200$ because they probably did work that was worth 200$. A realtor does work worth 200$ and charges 10s of thousands of dollars. That’s the difference.
Mark
at 1:00 pm
Private sells/buys and Cashback incentives by agents are growing trends largely due to technology.
What is the true role of today’s full-service agent?
How much time/money do most agents (discounted and full-service) spend on marketing? Searching for clients? Blogging? Creating youtube videos and social media campaigns? Staying in touch with previous clients to win future business and referrals? What if brokers didn’t have to waste time/money searching for business but could focus 100% of their time advising clients, negotiating and transacting real estate instead?
Technology today allows the public to do their own research on websites such as Realtor.ca and Google maps. What if I do my own research online and find the house I want to buy myself? What if I only want a full-service agent to show it to me and negotiate the best deal? Have I not saved the agent hours finding this property for me? Shouldn’t I be compensated for my time and efforts as well? Cashback is a growing trend the industry can no longer resist. Agents must learn to embrace it and adapt or get left behind.
In reality, wasting time misleading the public (ie buyers don’t pay commission using an agent, you get what you pay for, etc) and speaking ill of competitors is simply more fake news which empowers no one.
JamesH
at 4:21 pm
No offence but the amount of money a real estate agent makes has no bearing on the skillset. When there are more realtors, some realtors will do a good job and give you a cash back.
I think doing a good job has to do with personality and attitude, cash back is a marketing strategy. I know agents who are top agents are so busy that they give little attention to you because they are being pulled in so many different different directions and are in the verge of a panic attack.