How to measure the value of real estate agents

The real estate industry has been flooded in recent years by flat-fee FSBO companies, discount brokerages and growing questions about agent commissions. What is the value of the single real estate agent and how does one measure it?

Over the years, the industry has seen many changes. There was once a time all agents worked on the sellers' behalf, whether they were perceived to be representing the buyer or not. This was likely due to agent commissions historically being negotiated between seller and listing agent/office. Still to this day the buyer typically doesn't pay out a commission.

Since buyers agency was established by the Washington State Legislature in the early 1990's, it has been made clear who is representing who. However, the question of commission continues to crop up.

Years ago it was a customary percentage of the first $100,000 and then bonuses on top of that. Then it became a bit more standardized/customary for 6% which was divided equally between the listing agent and buyers or selling agent.

In the last real estate market boom, many flat fee services began to spring up that would install a sign, lockbox and post listing information to the MLS. Additionally, discount brokerages began springing up. It was an incredible sellers market, and homes often had offers walk through the door before the sign was even in the ground.

The market has changed, but the questions around the value of real estate agents continues to crop up with sellers. Why pay 3%?

Foremost, I'd like to dispell some myths. Most agents do not capture their entire share of a commission. Often a large percentage is split with the acting broker where the agent hangs their license. This goes toward operational overhead and of course the broker's salary. Then there are transaction fees, franchise fees for most reputable brand name brokerage houses and of course taxes (federal and local).

Beyond the aforementioned, agents have their own individual costs for doing business. Marketing isn't cheap (e.g., signage, flyers, print and online advertising, etc.). Not to mention an agent spends hours of upfront time providing skilled, professional consulation about the marketplace to clients. Agents don't become skilled overnight. They put in many hours in continuing education, which they have to pay for out-of-pocket. Then there's mileage and equipment and the list goes on. At the end of the day the single real estate agent is lucky to have a 25% profit margin.

When it comes to selling one's home, there are many things to consider. Primairly, the first question that comes to mind is whether to work with a licensed real estate agent or to sell by owner. Here are the different types of selling scenarios/agents and a little bit about each one.

FOR SALE BY OWNER (FSBO): Statistically 80-90% of these "listings" end up conventionally listing with an agent. Clearly that must be an indication that real estate agents do provide some value add.

FLAT FEE LISTING SERVICE: These companies on average $500 to put a sign in the yard, a keybox on the door, print off some flyers and input your listing info. into the MLS. That's all they do, and they don't thrive in buyers markets.

DISCOUNT BROKERAGES: These companies charge around 1% for the listing side or about 4% in total. This undercuts the industry and is a business model built on high volume sales and not by referral. It wouldn't make sense for such companies to be in business otherwise. At the end of the day to they have the seller's best interest at heart? Or is it just about turning deals? Sometimes the answers are in the questions.

COLD CALL AGENTS: These are 3% commission agents that work more like the discount brokerages. They prey on sellers who really need to offload their property. They are only looking to work with motivated (a.k.a. desperate) sellers. They want to make a quick deal, and they are slick. They've learned how to overcome all the objections in the book. Are these agents looking after a seller's best interest? Maybe, maybe not.

BY REFERRAL/WORD-OF-MOUTH AGENTS: Then there are 3% commission agents that work on a referral-based business model. These agents spend their time working for their clients vs. chasing down the next several leads/deals. They are in it to win it with the client by providing such stellar service that the client not only becomes a client for life but also is inclined to refer their agent to friends and family.

So sellers, you have some thinking to do about what matters most to you in the end. Obviously bottom line is a concern. Is knowing and trusting who you're dealing with also important? Are you certain a discount service or agent is going to serve your needs and hold your hand every step of the way?

Real estate agents by in large have reputations along the same lines as attorneys, etc. Not very favorable. There's a reason for this. There are a lot of seedy, slick agents out there who just want to make a quick buck off of people. Then there are those who are professionals with high integrity who work in the best interest of their clients.

If the industry is going to change for the better, sellers and listing agents alike are going to have to decide where their values reside.

So how do you measure the value of an agent? That truly is in the eye of the beholder, which for the purposes of this column rests with the single seller. My advice to sellers: ask questions, lots of them. Gain a solid understanding of who you're dealing with and what you can expect from their services. Are they going to be prompt/on-time? Are they going to conduct broker and public open houses? Do you trust they know what they're talking about and that they're going to roll up their sleeves and get you the best deal in the most desirable timeframe possible?

Clearly agents hold a value, otherwise we would have disappeared long ago. As to what an agent's actual value is, only time and sellers will tell ...

Your success is my business,

Brad