Real Estate Management and Maintenance Tips

The Salary Vs. Commission Decision

by Marvin Levin

Before computers became so affordable, sales of Encyclopedia Britannica were a major source of income for many college students. The reader probably knows that in a crew of 10 Encyclopedia salespeople, the top one or two performers would sell at least half of the volume. It is still true in life insurance agencies. Approximately the top 10% of the performers will consistently sell half or more of the business of an entire agency. However, I don’t think that the reality of how sales results are distributed is understood in the real estate industry as well as it might be.

The first time I started keeping records on this difference was with the Valley West Apartments on Tully Road in San Jose, California. The project had 496 units and a 50% vacancy the day we acquired it in 1972. Three women were assigned the job of renting units. They took turns greeting walk-in prospects. . Two of the rental aids consistently signed up about 15% of their prospects. The third rental aid was Eleanor Brown.

My colleague, who was in charge of property management, met Eleanor at a cosmetic counter at a San Jose department store. He was overwhelmed by her personality and persistence, and casually suggested that she should investigate apartment rentals in order to make a better income. He had in mind that a woman like this should be at the Valley West Apartments working on straight commission. My colleague was pleased that her response was positive, and a couple of weeks later, she was working as one of the three rental aids on the property.

• Compared to the 15% closing ratio experienced by the other two aids, Eleanor consistently had no less than 65% closing ratio!!

It took us approximately six months to fill the project, and that was largely due to Eleanor’s efforts. As a control, the building across the street from Valley West also had a 50% vacancy, and that vacancy remained until it was foreclosed by the lender.

It wasn’t that I didn’t know that there were high producing salespeople and low producing salespeople. Rather, it was the first time that I saw the principle applied so dramatically to real estate income projects. Well, Eleanor worked on straight commission. Not only was she responsible for filling the Valley West property, but she also became the “four-minute miler” among a large group of rental aids. In 1949, as I was graduating from high school on my way to U.C. Berkeley, Lee Cox, my track coach, informed the team that one record that would never be broken in track was the four-minute mile barrier. Then, in 1954, Roger Bannister, a British medical student, broke the four-minute mile. Within six months, six other milers also broke the four-minute mile. Therefore, when we could say to a rental aid in Denver that Eleanor Brown, a middle-aged woman in California, has experienced a continuous 65% closing ratio, it tended to inspire that Denver rental aid that he/she could do the same.

The way that Eleanor got to 65% was that she had somewhere between 20% and 25% on the first pass, and then persistently and aggressively called back those prospects who “wanted to think about it.” Eleanor was a real pro when it came to answering objections.

Although this happened more than 30 years ago, I can still remember many of her conversations on her callback. For example, I remember one prospect saying to her that he simply could not afford the $600 monthly rent, but absolutely loved the project. He said that his budget allowed for only about $540. Eleanor said to him: “Suppose for a moment you were living at Valley West and paying the $600. Then, I come to you and say that I’ve got a place you can move to for $540 and thereby save $60 a month. Joe, would you move?” Joe said that he would not. Eleanor said: “Joe, I think you’ve just made one of the better decisions of your life. Can I arrange some physical help for you to make the move painless?” I can remember to this day Joe hesitating and then saying: “Okay, I’ll do it.”

I remember a very humorous experience with Equitable Life. One of their executives on the investment side visited me to do a “performance audit” of our management company. So, he did what any good auditor would do. . .he traveled from Oakland down to San Jose and posed as a prospective tenant at the Valley West Apartments. It was our good luck (and his bad luck) that he ran into Eleanor Brown. Of course, he gave us a terrific recommendation based on this wonderful salesperson that he met. Then, about two months later, he called me and asked me if I would call Eleanor Brown and tell her to stop calling him. For the past two months she had been calling him every week to see if he had made up his mind whether or not to move into the property.

So, what is the idea here? It is probably more an observation than an idea. The observation is that the top 10% of all salespeople out there can produce more than 50% of the business. You might do well to review your compensation plan for salespeople. If you have a pure commission plan, it sort of controls your sales personnel automatically. Now, sometimes it is correct that a salary plan produces a better long-term result, particularly if you are concerned about repeat purchases and public relations with your customer base. However, sometimes a salary plan is just a giant rationalization for not creating the most highly productive sales force.

Of course, there is also a big financial consequence between substantial or total vacancy at the beginning of a project and managing the turnover that follows substantially full occupancy. The level of proficiency that the project can afford certainly will differ between the early and later stages, and the resources that can be rationally devoted will, therefore, change.

I love vacant projects that seem unrentable. . . So, if you know of that sort of project, please contact me.