October 31, 1997

Builder sweetens Costco dealer for agents

By TOM KELLY
The Real Estate Advisor

Where there's a will . . . there's a commission.

One of Puget Sound's biggest homebuilders has offered a creative solution that could immediately help heal the wounds of some John L. Scott real estate agents who have felt damaged by the company's recent alignment with Costco Wholesale.

Chaffey Homes announced this week that it would reimburse the 35 percent commission - the percent "lost" to Scott agents for being affiliated with Costco - on every Chaffey Home sold to a Costco network customer until June 15, 1998.

"We didn't want agents feeling shortchanged," said Art Whittlesey, vice president of sales and marketing for Chaffey Corporation. "We know that we cannot sell our homes without the efforts of hard working people. This program shows how serious we are about compensating sales people for that hard work."

Lennox Scott, president of John L. Scott who has taken most of the heat from the disgruntled salespersons, looked favorably upon the Chaffey program.

"I think it's a good promotion," Lennox Scott said. "They are creating focus on their homes with our sales associates. They're rewarding the agents for their efforts. It's a good promotion to create an awareness level for the agents for selling their homes."

Chaffey Homes, based in Kirkland, has several neighborhoods under construction in Snohomish and King County.

John L. Scott recently entered into an exclusive referral agreement with the Costco, the international wholesale warehouse chain based in Issaquah. The intent was to save consumers cash at closing while providing real estate agents with numerous new potential customers. In return, Scott agents take a reduced commission - of approximately 35 percent - for the exclusive right to service the huge Costco customer base. There are 15 million Costco customers nationwide - 1.2 million in this state alone.

When the deal was originally announced, some Scott agents were extremely upset. They said giving up about one-third of their commission was too great a price to pay for the Costco referrals. In addition, real estate sales people not affiliated with Scott - those kept out of the referral chain - said they felt pressure of having to soon defend their commission schedules.

Here's how the setup works: If you want to buy a house, you telephone a special Costco number which links you to a Scott agent and to a menu of loans offered by Denver-based AmeriNet. If the home is sold and the loan made through this association, the customer receives a significant discount - perhaps $4,700 on a $200,000 home sale.

Clearly, Lennox Scott was between a rock and a hard place. Should he accept this "affinity" plan for his agents and trust that they could see the enormous potential or let the program slip away to a competitor? Had he let the Costco deal go, he would definitely have been besieged by agents demanding to know why he had handed thousands of referrals to the competition.

Lennox Scott chose to accept the Costco deal and secure exclusive dibbs on the Costco referrals in the Northwest. Washington will get the first shot at the new setup before its rolled out to Oregon, Montana and Idaho.

"This is a new concept and we chose to be proactive rather and reactive," Scott said when the deal was announced. "We are in a transition period now. When our agents see the advantage from the additional referrals, they'll understand why who chose to be proactive."

In reality, Lennox Scott probably did his agents a favor - especially those agents without an established customer base. Like it or not, "affinity" marketing of services is only in its infancy and will definitely be the way most products - including homes - are sold in the future. His mistake was underestimating the preparation, and subsequent damage control, needed for the transition.

"Affinity" marketing is the grouping of companies to present products at one time. I have often used an example of the postcard you receive from a real estate agent explaining services. It usually contains the logo of another industry service - perhaps a title company and an escrow firm. Thus, the three have formed an "affinity" group to market and secure business.

I genuinely believe Costco is trying to save consumers money with its affinity contracts. The dilemma is the company had to choose a referral partner, thereby leaving all other salespersons out of the loop. You can't award a contract to everybody. It's not unlike its relationship with automobile dealers: Costco members must contact specific agencies to receive a member discount. Home buyers and sellers must deal through John L. Scott to receive the discount.

And, creative people have a way of taking a perceived negative and turning it in to a positive. Just ask Chaffey Homes.

Previous columns:

• Should you increase your title insurance coverage?, 10-24-1997
• As interest rates dip, refinancing options abound, 10-10-1997
• Feds clean up Fair Credit Reporting Act, 10-03-1997
• JLS being 'proactive' with Costco deal, 09-26-1997
• Home businesses are changing our homes, 09-19-1997
• Area housing market: how hot is it?, 09-12-1997
• First-time buyers need creativity, 09-05-1997
• Don't expect mortgage rates to move much, 08-15-1997