Why agent commissions are falling – Martin Grunstein

Martin Grunstein – world renowned customer service expert – tells us why real estate agents commissions are falling and how, if you are looking to make your agent more accountable, you can ask them to do one simple thing.  If they refuse, or can’t do it, then question why you would even employ them.
Kevin:  Well, without doubt, there would be few industries in the world that have suffered the erosion of margin suffered by the real estate industry. Agent commissions have fallen from around 3% 15 years ago to around 2% today. That’s according to Martin Grunstein, who is one of the world’s best experts on customer service. He joins me to talk about this.
G’day, Martin. How are you doing?
Martin:  I’m well, Kevin. Nice to talk to you.
Kevin:  Why is that so? Why have they fallen so much?
Martin:  It’s been a commoditization of the industry by the agents. It’s not unique to real estate; it’s happened in a lot of other industries. The car industry, which used to produce millionaires in the 1970s and 1980s has almost no profit in it today. I was at one car conferences and they said dealer profitability nationally is 0.5%. They only make money on finance and aftermarket.
What has happened is a commoditization. Just like the car industry, when all the advertisers will get the cheapest price and then whatever. Holden is competitive. It used to be Ford. Now, it’s another Holden dealer offering the same car at a cheaper price. And a lot of that has happened in the real estate industry.
Kevin:  Just on that point about car dealers, there’s a great listening here for real estate agents too I think. But with car dealers, they were quite happy – talking to some of them several years ago – to not have much of a margin on the sale and know that they could pick it up on the service. But do you think where the problem lies is they took their focus off what should have been the main source of income?
Martin:  Yes, absolutely. Where is the law that says you can’t make a profit on a $40,000 car and they have to make it out of service and finance? Goodness me. Why can’t they make it out of service, finance, and the car? The reason is if you look at advertising in the car industry, all you see, they all echo “We’ll never be undersold. You find any price and we’ll match it.” What they’ve done is they’ve taken all the margin out of their own industry.
I believe that’s happening in the real estate industry as well – maybe not so much on a formalized basis, but you are having agents out there virtually matching price with other agents to get the listing, and it’s almost become the norm that these guys will negotiate their fee. It’s hard to have sympathy for the agents who have commoditized their own industry.
Kevin:  We’ve actually put a blog article that you wrote, Martin. It’s actually on both of our websites, Real Estate Uncut and Real Estate Talk. It’s a really interesting read. You make a point in there. Let’s talk about real estate now and forget about the car industry just for a moment. The point of stress: if you ask a seller, what do they find difficult about the transaction, it’s actually the amount of stress.
Do you think I just do enough to earn their fee to help overcome that stress management?
Martin:  Look, the very top ones do but the overwhelming majority don’t. When I’m doing customer service workshops in the industry, I get people to tell stories of crappy customer service. I hear a lot about real estate. But the one that upsets them most is just like a communication during the sales process. It is a very stressful experience for a lot of vendors in that area.
What they complain about is unreturned phone calls, unreturned e-mails, and people not communicating them and giving them peace mind when they’re going through something very stressful. And that’s the same today as it was 30 years ago.
Kevin:  It’s interesting, isn’t it, because I’ve heard agents and we’ve trained agents to talk about getting top fee by saying “I’m a good negotiator. If I can’t negotiate my own fee, how can I negotiate it for you?” Does that resonate with sellers?
Martin:  I tell you, it is laughed at. Look. I don’t think the consumer believes the lies any more. The stuff that used to be the clichéd stuff years ago, “I’ll get the best price for your property” well, these days, everyone has the market what your property is worth not some real estate agent. Also, “We’ve got [3:58 inaudible] buyers and we’ve got a unique marketing program.” If there was unique marketing program, it would be used by everybody. These are myths.
And this “I’m an expert negotiator,” that’s a classic one. When I’m at conferences, you talk to these real estate agents and they say “I’m an expert negotiator,” and if you say, “Will you reduce your fee?” “Certainly.” This is the rubbish that is going on.
What the consumer wants, what the vendor wants is take the stress out of this.
Kevin:  Okay. How can an agent do that?
Martin:  Firstly, by not making promises they can’t keep and not talking a lot of rhetoric. One example I’ve used when I was doing stuff – it must have been maybe 15 years ago – with Elders in Western Australia. We had about 16 offices, and we found out the number one thing people hated was unreturned phone calls.
What we got the agents to say was “Look, anyone can sell your property. It’s a great property. The difference is how much stress you want to go to in the process. If I fail to return your phone calls during the sales period, if I fail to return your phone calls within three business hours, please deduct $200 from my fees every time I let you down. You keep score. Because if anything goes wrong during this or I’m not communicating with you or I don’t turn up on time to a meeting, I should suffer for that not you the customer.”
Now back then, they were getting 3% or whatever – 3% plus. Say for example, the Elders guys had a guy from Hooker saying “I’ll do it for 2.5%,” what we trained the Elders guys to say was “Go back to the guy from Hooker and ask him to give you $200 back if he doesn’t return your phone calls, which he won’t.” Then we got them to say “Why would you believe anything else he says?”
I got a letter a year later saying their earnings went up 25% in a flat market selling peace of mind and credibility to a low-credibility marketplace. I think that’s just as powerful today as it was 15 years ago.
Kevin:  What’s the harm in a consumer asking whether an agent would actually do that?
Martin:  Well, I don’t think it should be an initiative coming from the consumer. The agent is the one who’s selling his or her services, and they should be giving the reasons to list with them. I believe stress management is just as important a reason in who gets the listing as marketing and all these other things that the agents talk about there.
In fact, for the consumer, it’s the only one they can relate to in terms of how you make me feel, how efficient are you, do you keep your promises, all of those sorts of things. I want to know that you keep your promises. The trouble is even the agents who don’t keep their promises still promise. So, until I eventually give you the listing, I don’t know whether you’re good or not.
Kevin:  Very thought-provoking. Always great talking to you, Martin Grunstein. You make a lot of sense. You can go to Martin’s website, MartinGrunstein.com.au. Go and have a look at the blog on our website, and all his details are in there.
Martin, great talking to you, mate. We’ll catch you again soon.
Martin:  All the best to the team. Thanks, mate.

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