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This post was updated Sept. 13, 2023.
One of Warren Buffett’s most famous quotes (which is also credited to Benjamin Graham) is, “Price is what you pay; value is what you get.” It has been a guiding principle for Buffett, one of the greatest investors of all time and one of the wealthiest men on the planet.
This principle is also important when working with clients — in most cases, they are willing to pay commensurate compensation if they believe they are receiving appropriate value. This translates to the commission a seller is willing to pay and whether a buyer might insist on a rebate from your commission.
What’s the difference between price and value?
At its most basic, the “price” is the amount the market is willing to pay for your services, while the “value” is determined by how effective you were in securing the best possible financial outcome for your client. In most parts of the country, “price” is set by local practices, whereas “value” can be completely arbitrary, based on the level of services provided, the skill of the agent involved and the state of the current market.
It is important, therefore, to be able to demonstrate the value you would be providing for your potential client. The more the perceived value, the better.
There is an important caveat here, however: The value provided needs to resonate with the client’s perceived needs, not the agent’s. This means that a significant part of the first meeting with any potential client is dedicated to discovering what value looks like for them. Instead of popping open a canned listing presentation and downloading information, the first part of the meeting should be dedicated to asking questions and listening.
Some buyers feel they need the discount
Unfortunately, there are some for whom price is the only factor worth considering. Getting a “deal” is the bottom line, regardless of the long-term implications. In contrast to Buffett’s philosophy come the words of Oscar Wilde, “The cynic knows the price of everything and the value of nothing.”
As an example, a friend of mine always bought the cheapest tool he could find. No matter that it either did not work properly or broke after three uses; for him, the only criterion was the fact that he secured the tool at a bargain-basement price.
This mindset also enters the homebuying arena. A buyer I worked with for an extended time had very specific criteria for the home of his dreams. When I finally located a property that was perfect in every way, though he loved the home, he refused to pay the amount required to secure it.
When I questioned him about his decision, he said, “I have to live with my family. If they do not think I bought at a discounted price, I will never hear the end of it. They will consider me to be foolish.”
When I suggested that the value of the home would increase over time and the amount he would have to pay to secure his dream home would ultimately look like a bargain, he clarified, “My family is only interested in me getting a deal today. They do not take long-term value into account. As much as I love the home and know that I may never have this opportunity again, ultimately, I have to live with my family.”
Keeping up with the …
I have seen this same logic when dealing with sellers: Because a friend or family member of theirs managed to negotiate a discounted commission when they sold their home, the current seller will not pay a full commission regardless of the level of service provided. For them, not even the potential selling price is the fundamental number; the only important sum is the discounted commission.
When they hear that their friends managed to get a rebate from their agent’s commission, some buyers refuse to work with any buyer’s agent who will not provide a kickback. Ironically, it’s frequently low-volume or rookie agents who are most willing to provide the rebate, which effectively means that in return for a credit from their agent, they end up dealing with inexperienced agents who, due to their lack of experience, may end up costing the buyers more in the long run.
I will never forget a transaction in which buyers purchased one of our listings using an agent from a discount brokerage that featured a 1 percent rebate. Instead of calling, discussing the seller’s expectations and asking how many offers we had received, their agent simply wrote an offer and sent it in. It was a competitive market and so they wrote the offer at $300,000 over asking.
As it happened, theirs was the only offer. That agent’s lack of experience and due diligence needlessly cost the buyers, after their rebate of approximately $19,000, over a quarter of a million dollars. Just stop a moment, and let that sink in.
For others, value is more important than price. For this group, the initial price tag is not the qualifier, it’s the anticipation of a projected outcome. Instead of seeing a real estate commission as a penalty, they see it as an investment; they are willing to pay more upfront in anticipation that their “investment” will reap long-term rewards. In their minds, the value is in the additional effort the listing agent will bring to bear on the sale of their home, resulting in a better experience and hopefully a higher price.
For buyers, it means they will not ask for a part of their agent’s commission, understanding that the agent, getting full compensation, will work diligently on their buyer’s behalf to secure the best possible property at the best price and terms. It also means that they understand the value of experience: They know that when the inevitable issues arise in escrow, the agents with the best track record and years of experience are the ones most likely to successfully navigate the quagmire.
As already mentioned, when it comes to compensating real estate agents, the “price” is what the client ends up paying for the service provided. In most cases, the price is the commission we charge for servicing a listing or receive for working with a buyer. Value, on the other hand, is more difficult to measure. Perceived value changes from client to client and is often based as much on personality as the actual services provided.
This is made even more difficult to interpret since any given number of Realtors in any market provide almost identical levels of service. So much so, in fact, that many buyers and sellers no longer look at Realtors as service providers, we are viewed instead as a commodity. And like other commodities, most consumers will look to get the lowest price possible.
Establishing value vs. price
There are four key factors in differentiating between price and value:
Determine your bias
First, determine what type of agent you are: Are you willing to discount your “price” to attract clients, or are you more focused on providing exceptional “value”? Does price drive your initial client appointments or does value?
Many agents, while insisting they are “full service” agents, will frequently fold under pressure from potential clients and discount their services in some way to land the relationship. While seeing themselves as full-service, full-commission agents, they frequently fall into the role of discount agents.
On the other hand, there are some who bill themselves as discount agents from the outset. Typically, they offer fewer services than those billing themselves as full-service agents. Occasionally, however, we encounter discounters that advertise “full service” at a substantial discount. With the level of service expected in our market (the pricey San Francisco Bay Area), that is simply not possible or sustainable over time in all types of markets.
Although it might be possible for “discount agents” to score spectacular results for their clients in a hot market, history shows us that when the market heads south, sales are harder to achieve and actual skills are required. Discounters seem to vanish into the ether.
Set the stage
Many agents I know show up for a listing presentation and do three key things: Tour the home, spend time talking through their presentation and then try to close. If you do initial buyer presentations, they can look very similar.
If a prospective client is interviewing three agents and they all have the same approach and offer comparable services, the agent who wins is typically the one whose personality resonates the most with the seller or who offers identical services at the lowest price.
If discounting your fees or providing rebates is your modus operandum, then the conversation will always boil down to how much of your commission you are willing to leave on the table and what types of services you will provide for that discounted rate. If, however, your approach is to provide maximum value and receive a full commission, then you need to take an entirely different approach. You need to provide an experience that separates you from the rest of the pack.
Rather than focusing on the house, your service stack or your commission, Priority No. 1 is to focus on the clients. Pull out a pad of paper and say:
“I appreciate the opportunity to meet today. Before we dive into the services we provide, it is important to me that I learn about you: Your needs, your goals, your dreams and any major questions you might have. If it’s OK with you, I’d like to take notes.”
Your goal is to do as little talking as possible at this point and get them to begin to share.
Whereas most agents will be talking about themselves at this point — their accomplishments, awards, services and so on — your goal is to do the opposite and talk about yourself as little as possible. Instead of trying to notch up another sale, you are looking to build a relationship.
As Chris Suarez, co-founder of PLACE has stated, “When you focus on yourself, you are a salesperson. When you focus on them, you are a consultant.” People naturally resist salespersons, but they welcome consultants.
Amada Deibert explained in a recent article, “Asking someone to share their experiences, their insight, or their passions with you causes a connection, and often a fondness, that is a powerful foundation for lasting relationships. It has been surprising and lovely the way that people feel close to me just from the questions I’ve asked. It has led to real friendships and even jobs.”
Open-ended questions are the key. If they are selling, your questions would include the following:
- What are your goals?
- Why are you selling?
- Why did you buy this house in the first place?
- What upgrades have you made?
- What are your favorite features of your home?
- What are some of the favorite memories you generated in this home? Your neighborhood?
- Why are you selling now?
- Where will you be moving to and why?
- What do you hope your new location will provide?
If buying, they would include:
- What are your goals?
- Why are you wanting to buy now?
- What does your dream home look like?
- What types of memories are you hoping to create in your new home?
To get our buyers thinking creatively, we provide a Buyer Info Sheet that they are required to fill out prior to our first meeting. It’s designed to capture critical information that helps us best serve them and much of our discussion when we meet in our buyer consultation is centered around their answers.
In most cases, you will get a good idea of their priorities during this initial segment and will be able to provide clarification as needed further in the interview. In some cases, all that will be needed is affirmation that the services you provide will cover all their stated goals and concerns.
Present your value
Once rapport has been established with sellers, you can then go through the value you provide. In some cases, if there is a strong sense of rapport, you may only need to say:
“If I can assure you that all of your stated goals and concerns will be completely covered by our services, are you willing to sign the listing agreement today?”
You can also use the same script with buyers to have them sign your buyer-broker agreement. If they want to see more, then you can unpack your presentation and answer any additional questions as they arise.
If they insist on calling you back after interviewing other agents or after discussion amongst themselves, always ask:
“Is there anything that another agent may have presented that seems to be missing from the services we provide?”
If they say “No,” you can always ask:
“Based on this, is there anything that would keep you from signing with us today?”
For buyers, developing a value proposition is a bit more difficult. You can quote your experience as a negotiator, number of sales and so on, but other buyer agents will be saying the same things. Access to off-market listings, buyer protection programs, moving assistance, free home warranty or inspections along with other buyer-centric programs will help you differentiate your value.
In fact, some agents across the country use these types of incentives to guarantee a specific commission from the buyers in the event a seller provides a lower commission.
Provide options
Even when rapport is established, some sellers will still want the ability to dictate the level of commission they are willing to pay. To provide an answer to this situation, one of the tools we have in our arsenal is a Listing Commission Menu.
This delineates the range of services we provide at varying levels of compensation. If we determine, during our appointment, that price is going to be the deciding factor, we will then, and only then, pull out the Commission Menu, and go through the options.
For buyers, our team policy is to not provide commission rebates. If they insist that the only way they will work with us is for us to give them a part of our commission, we will then refer them to a local agent who provides rebates and collect a referral fee.
The overall objective is to first establish rapport so they want to work with you, then demonstrate that the value you provide is worth the commission you charge. Failure to build a meaningful connection at the start will mean that, in most cases, you will end up competing on price alone and, far too often, lose the opportunity.
Carl Medford is the CEO of The Medford Team.
