At BlueMatch, we often write about Real Estate practices that exist in the market which led us to starting our own company. Practices that leave people frustrated and angry at the end of a Real Estate transaction. Today is no different. Like everything we do here at BlueMatch, we will use data and leave anecdotes by the wayside.
We follow many many homes on the MLS with companies using non-traditional and traditional approaches. We do this to identify best practices, best yields, and overall best performances. This all contributes to our secret sauce at BlueMatch. We recently noticed a trend amongst companies/agents that drastically reduce or charge a flat fee Buyer Commission. A Buyer Commission is what a seller offers a Buyer Agent to bring qualified buyers to the negotiation table. You can read more about Buyer Agents here: Buyer Agent Do’s and Don’ts.
But what happens when you drastically reduce that rate in hopes to save a few bucks in commission?
We have been following a home in one of the hottest neighborhoods in Denver. The average days on market for this home’s area and price range ($400K – $600K) is 9 days on market. Based off the photo’s of the home, age, condition, location, square footage, and area comps, we determined the home to sell conservatively for $8,000 more than what it was initially listed for. Listing a home slightly below market is a pretty standard strategy to initiate a bidding war.
The home was listed offering a flat Buyer Agent commission that was around 18% of the market average. Sounds like a pretty stellar deal right? Well let’s do some math and see.
The home is approaching almost 445% OVER the average days on market. This is what we refer to as stale inventory. Stale inventory almost ALWAYS leads to a price reduction which is what recently happened to this particular home. The commission was also recently doubled for the Buyer Agent bringing the new Buyer Agent commission to around 35% of the market average.
When we add the initial 8K loss with the price reduction and factor in the increase in commission, we are now sitting at a total net loss of $27,000!!! Remember, the initial cost to pay what most would consider a fair market commission is between $12,500 and $14,000. But there’s more…….
When agents see “stale” inventory in a market as hot as Denver, they will almost always encourage a lower offer than the list price AND request a fair market commission. As the home approaches the 500% over days on market average, ANY offer starts to look like a good offer. So let’s do some more math.
Let’s say an agent submits an offer for $5,000 less than the marked down price and requests a full commission of 2.8%. This is a very real scenario and this is where we can see the true nightmare of what can result in trying to cut corners. When we add the new commission, price reduction, and initial 8K loss, we are at a whopping $40,400 dollars of net loss!!!!
So why does this happen? Anecdotally we believe agents influence their prospects to look elsewhere when they see unfair commissions, the company representing the seller may not have a good reputation amongst the Real Estate community, or possibly a combination of the two. These are the only variables we can identify that would cause outlier results in this booming market.
The great thing about data is data does not lie. We will continue to follow this home and we will be sure to write a follow with the final numbers.