Who wants to be a spectator at the ‘Discounted Fees vs Quality Service’ match? If you’re expecting it to be a showdown between two stubborn old rivals, it’s actually a case of simple maths – one which you can demonstrate easily to prospective clients.
Most service and sales based industries will at one time or another face the dreaded fee or price objection from a potential client or customer. In the current economic climate consumers are pulling the purse strings tighter than ever before. Thankfully in the property industry we have a little relief with substantial decreases in interest rates. Regardless of market conditions and the economy, sooner or later most of us face the dreaded ‘fee objection’.
In my experience I have found that this is the most difficult area to negotiate particularly in my last place of employment where our commission rates were set at least four per cent higher than the industry average. Recently in my career I experienced a much lower conversion rate (present to list ratio) and surveys indicated that it was mostly due to the difference in fees. I found it more and more difficult to sell our points of difference and secure the listing at the point of presentation. I knew we provided a much higher level of service but sometimes clients find it had to see past the fee. I wondered how our competitors could discount so low and still make a profit. It was time to do some serious research and find out what I was up against in the market place.
Have you ever had a client call and open with “I’m just shopping around to compare fees at this stage, I don’t want to give out any personal information”? I am sure everyone reading this article has had this type of call. It’s a real tough one… do you give out the fees straight up so that the client doesn’t think you have something to hide? Or do you decline to give the information until you have the personal information and risk offending them? I always struggled with that one.
Then it clicked! I would contact all of my close competitors and compare commission structures! Obviously my competitors were not about to give that information to me personally so I had to be a little creative to get the information needed. I then prepared an Excel spread sheet and calculated each agent’s fees over a twelve month period, in this situation I surveyed ten offices. I calculated the costs using an average rent at the time. It was the most interesting exercise in secret shopping I have so far encountered! After factoring every ‘extra’ fee down to the dollar the results were fascinating. Even though our commission rate was the highest by up to four per cent, in comparison our annual fees were average.
Now I was in a position to handle the fee objection. When I get that call, I can save the clients the hassle of calling around to compare fees, I can now provide them with a detailed twelve month comparison with ten different agencies in our area. I was now in a position to move forward and make the appointment. The response from prospective clients was amazing, they were so happy they no longer needed to go to the hassle of the ‘ring around’. I related the process to cheap air fares… “Beware of cheap flights; they will get you with the extra baggage!” I would explain the importance of choosing an agent that can maxmise income with a proactive approach to management. And how an experienced property manager will maximise the return on the investment and save you time and money.
A little bit of research can go a very long way when negotiating and combating objections. Think about how you can handle these objections in the most effective way. Try wherever possible not to deliver your fees or service offering over the phone unless you are dealing with a client interstate or oversees. Most importantly try and find out what is really important to the client. Ask questions like, “Have you had any experience renting or as a landlord in the past?” “What is most important to you, the highest rent or reduced vacancy and long term tenants?” “What are your main concerns about renting your property?” Get them talking about what they need and they will soon relate to you and feel more relaxed. This is the most important first step. In reality the commission is irrelevant if you don’t consider the service behind the fees. More often than not, the service will outweigh the difference in commission.
Here is an example that I provide to prospective clients to demonstrate the difference between cheap fees and value for money.
Discounted fees vs quality service example
Property Agent One
Profile: An experienced property manager spent an hour explaining the services and points of difference (value adding services), refused to discount the fees, offered a written guarantee to reduce vacancy periods, provided an accurate rental appraisal based on comparable properties and demonstrated proactive marketing strategies. They offered a ‘no risk guarantee’. If they selected the wrong tenant or failed to mitigate all loss in relation to rent or damage, the agency would pay the loss back to the owner. They conducted six monthly rent reviews, contacted the tenant two months in advance to offer lease renewals and had no limit on inspections to provide the landlord with peace of mind. They offered information on how to maximise the capital value of the investment and good advice on landlord insurance products to ensure their income was protected in the event of a tenancy issue.
Property Agent One
Fees:
12 month management review
Management fee 13%
Rent appraisal $300 per week (based on actual comparable properties in the market place)
No vacancy (proactive marketing – tenant source via in-house data base)
Increased the rent to $320 within six months (in line with comparative market analysis)
Three inspections conducted (First inspection reported shower leaking, repaired within seven days)
Regular upkeep of the property (maintain capital growth)
Tenant renewed the agreement as they were happy with the property and the agent (reducing a vacancy period and lost rent)
Income:
$15,600 + $520 (rent increase income)
Total Income $16,120
Expenses:
Management fees $2095.60
Let fee $300
Repairs: $250.00
Net Income:
$13,474.40
Property Agent Two
Profile: Friendly, however, obviously inexperienced. Discussed fees immediately offering a 2% discount without negotiating. The property manager promised to inspect the property every three months, seemed to offer a similar service on face value. They have a lot of properties for rent on the Internet (big brand). The only difference in the written material seems to be the fees and no guarantee, but surely if you pay for a service the agent should be accountable for the service anyway. The rent quoted was $50 per week more than Agent One. Comments on the rental market were, “Lots of people looking to rent, we should achieve a high rent”.
Property Agent Two
Fees:
12 month management review
Management fee 8%
Appraised the property at $350 per week – but rented at $300 per week (agent inflated the rent to secure the business)
The property was vacant for six weeks (due to poor marketing strategies and inflated rent)
Extra advertising cost were paid by the owner (offered additional classified advertising at the owner’s expense as an extra to appear active in securing a tenant)
No rent increase undertaken within the twelve months (poor systems and poor negotiation skills)
Only one inspection in twelve months, which was upon the owner’s request. The first inspection was delayed by six months and the agent failed to detect or notice that the shower was leaking.
Tenant vacated at the end of the tenancy due to maintenance issues and poor communication from the agent and caused damage to the property to the value of $1000 over bond held.
Income:
$15,600
Expenses:
Management fees $1248
Let Fee $300
Extra Advertising $250
Replace rotting floor in bathroom due to water damage $1500
Damage $1000.00
Net Income:
$11,302
Do the sums. In this example the difference in commission between Agents One and Two is 5% @ $300 per week over 52 weeks, $780.00 commission. The difference in return – Agent One achieved an increased income of $2172.40 even though the commission was 5% higher. (You may feel these examples are a little inflated but even if you halve the outcome it demonstrates how easily your return can be affected due to poor investment management and systems.)
My advice to prospective clients is to select a Property Manager based on skills, systems, reputation and service. Ask questions like, “How do you intend to maximise the return on my investment?” Ensure that all promises are backed up in writing with a meaningful guarantee. Invest in a Property Manager that will give you the best return!
