One thing that I have learned from travelling Australia and educating real estate business owners and managers on fees, is that every marketplace has an agency that has decided to charge unsustainably low fees. There always seems to be some business owner out there who feels that they will eventually get the biggest rent roll faster by charging the cheapest fees in town.
Even though we may not make that same mistake and think ‘well at least we are not the cheapest’, what we charge could still be unsustainable in achieving the company goals, lacking justification for having a rent roll in the first place.
Quality agents are still getting quality fees!
Yes, prospective landlords these days all seem to be very fee-focused, more than ever before. But we are finding that agencies that charge quality fees are still getting them, as they are competing on service and quality, using effective points of difference to win the business rather than simply dropping their fees and eliminating their business viability.
I have witnessed a number of real problems and pitfalls with the ‘cheap fee’ mindset, and it is my hope that after reading this article that your mindset may be altered enough to want to change your situation!
IMPORTANT- if you know of a real estate business owner or manager that needs to read this article, please forward it on.
The eight big pitfalls to watch out for
Here are problems and pitfalls with charging cheap fees.
1- Under-Valued Business
A big part of the determination of the value of your business and the health of the multiplier rests in the quality of your fees. If your fees are too low, too many ancillary fees are missing or are simply too low for your marketplace, your business will be valued accordingly. This ‘cheap fee mindset’ could cost you a fortune in the price that you could have achieved if your fees were a lot better across the board when it comes to your business exit.
2- Less Desirability from Buyers
Though I am not a qualified business broker, I have had numerous calls from principals calling me for my opinion. They were all looking at a rent roll for sale and seemed to be put off by cheap fees, or the lack of fees being charged. Potential purchasers are all just looking at a spreadsheet of all of your fees property by property, row by row. When all they have to go on is this before deciding to go the next step, cheap fees often put buyers off at this very early stage.
3- Attracting the Wrong Type of Client
When you have cheap fees, you are attracting a type of client that can be deemed ‘bad for business’. In summary, they tend to be unreasonable and over-demanding, take up a lot of your time, want unreasonably high rents, and do not want to spend on repairs. Basically, you get a bad property that just attracts a bad tenant. They can give you two to three times the workload of other properties and in all, are just unprofitable and wear down your staff. And after all that, they still will demand a discount!
4- Inability to Pay Good Property Managers
We all agree that it is getting harder and harder to find good, experienced property managers and as far as I can see, it is only going to get harder! Good property managers are demanding higher salaries and this all needs to be funded by revenue. If your fee income is low and your cost base is increasing, it is easy to see that you have a real problem and could run out of options! I do believe that low fee-charging agencies in the future will need to look at other options as they simply will not be able to attract quality property managers at all!
See Part Two in the next issue for the last 4 pitfalls to charging cheap fees.