The Science of Pricing

Complicated pricing on a New York taxi door

by Jay Zenner on July 22, 2009

Four Key Questions for Pricing

Pricing a listing can be complicated but the pricing of real estate services could get complicated too. In fact, it probably will.  This will be partly driven by sellers demanding more marketing services and partly driven by agents wanting sellers to share the risk. It will also be driven by growing awareness that the traditional commission structure is not carved in stone,  much less in law or regulation.

My first real estate investment was a townhouse I picked up at a good price to renovate and flip. It was the first real estate transaction I approached as a business person and not a consumer. The commission to my listing agent, who had also been my buyer’s agent, was the largest single out of pocket cost I had other than what I spent to repaint the whole interior that she insisted was necessary to not lose the contract that she had brought me. So I got my real estate license originally not to make money but to save money on my next flip.  As equity contracts, lots of sellers will be thinking this way.

With sales stalled and home prices stagnant or declining the pressure is there to look at this from both sides.  Unfortunately this will be toughest on brokers with high fixed costs who counted on high margins and high volume to be profitable.  On the other hand it is an opportunity for low overhead operations to price their services aggressively to corral business.

So, if the first question is how do you price the listing, the second question is how do you price your service. The traditional commission is one way but there are infinite combinations of commissions, fees, and incentives. The third pricing question is how much. Not what is the commission but what is your targeted net.  The final pricing question might not be pricing as much an expense question.  In most areas there is a tradition of splitting the commission the sellers pay evenly between the listing agent and buyer’s agent. But there is nothing sacred about that, either. The question becomes how much you offer the buyer agent to incent her to show your listing.

If the New York taxi pricing  looks complicated, imagine developing something like this for your next listing:

1% commission to listing agent at closing

.5% commission bonus to listing agent for a home under contract within 30 days that eventually closes

.25% of list price to the listing agent as a monthly retainer during the life of the listing agreement

3% commission to the buyer agent.

Direct charges to the sellers for print advertising, staging, warranties, and an appraisal agree upon in advance.

$2000 offer to buyer for closing costs.

More complicated?  Yes.

Fairer to all parties? Probably.

Greater incentives for all parties to perform? Definitely.

Good marketing?…..hmmm

What’s your opinion?

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