Last weekend I posted a blog that generated lots of impassioned comments (I love it when that happens).
The topic du weekend was the sacred cow of real estate - our compensation structure that pays us based on the price of the product we sell.
My firm belief is that there is very little correlation between the price of the product and the value of our service. In other words, my efforts on a $1M property are not worth 10 times more than my efforts on a $100,000 property (or conversely worth 1/10th on the lower-priced property). In fact, sometimes that $1M transaction is far easier than the $100,000 one... and sometimes... it's harder. But the degree of difficulty of the transaction is not simply a matter of the price; many other factors are involved.
Some of my readers called me on my stance with an implied "Okay, Miss Smarty-Pantz, if you don't like the way it's done now, what's YOUR solution?"
Well, thanks for asking! I'm happy to share my thoughts on the matter (Really?)
First, let's talk about the difference between a Commission and Contingent Fee (they aren't the same thing!). A Contingent Fee is paid only if the outcome is successful, as defined by the parties to the transaction. That Contingent Fee could be a flat $1 or $10 or $10,000, OR it could be a percentage based on the price of the product; e.g. 1%, 2%, 7%, 15%, whatever (and usually called a "Commission").
Therefore, in the real estate industry, our compensation is traditionally Contingent Commission-based - that is - we don't get paid unless we are successful AND that pay is based on the price of the property we sell.
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Commission = Compensation based on the price of the property
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Contingent = Compensation NOT necessarily based on the price of the product, but not paid unless there is a closing.
So, as real estate agents, we could work on a Contingent (non-commissioned) basis - that is - we set a price for our service that we feel fairly compensates us for our time, expertise, effort and risk, and collect that fee if and only if we are successful. That fee will vary by client; some home-buying or -selling scenarios are potentially more difficult, more risky, more costly or more labor-intensive than others, and as professional real estate agents, we should be able to identify which projects merit a higher (or lower) Contingent Fee (I'll talk more about this in a future blog).
At the other extreme, we can also charge by the hour, project or service, upfront, and eliminate all risk of "working for free" (which will usually result in a lower per-transaction fee due to the lower risk absorbed, but possibly a higher overall income.).
Of course, there are hybrid plans where the agent charges an upfront fee as part of his compensation, with the remainder being paid on a Contingent basis - that is - when the property closes. (This was my business model for years - loved it!)
Or, there's Mollie Wasserman's consulting (ACRE) model where you offer the client a choice of paying 100% upfront or 100% contingent, or somewhere in between, depending upon the situation and as agreed-upon by both parties. (While I'm an ACRE, I probably just did a lousy job explaining the ACRE philosophy - for more information go here: http://www.theconsultingtimes.com/)
There's absolutely nothing sacred (or even sensical) about charging our real estate clients based on the price of the product they're buying or selling, regardless of whether it's at the low end or high end. At the low end, you probably aren't paid enough and at the high end, the pay is probably in excess of the value provided.
But just because you don't get paid on Commission doesn't mean you can't make a heck of a good living selling real estate. It'll just make more SENSE!
RELATED BLOGS:
"No I Won't Reduce My Commission - Do You Expect Me to Work for FREE?"
"Why Should I Work for FREE? You DON'T!"
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21 Comments on Real Estate Compensation - Alternatives to the Commission-Based Model (and yes, we still make a good living!)
HI Jen, I agree, and have started working on Mollie's ACRE program when I heard about it on your webinar a month or so ago. The problem is that I don't see any buyer's paying us when they can get another Realtor to do all the leg work for free.
Here's an example: In our area, we don't get paid a commission for rentals, but get a small showing fee- usually $50-$150. So that equals big risk, little reward. A coworker and I came up with a plan to charger renters a fee of $300 to show them all rentals, as we had so many renters calling and saying no one will show them homes. Guess what? NO ONE wants to pay even that small amount! They think they can do it themselves for free, or get someone else to help them. This of course will take a lot of their time and wasted energy, but I guess it's not worth the money to them.
Interesting blog; suggested to read more comments. I like it from the perspective that we get something to compensate us for out of pocket and time at the beginning...because we all know we will experience some %age of unsuccessful listings. Practically though...never work. Sellers are too engrained in only paying when it benefits them i.e. sale of the house.
I look at my commission in the same way an insurance company works...commissions are paid "uniformly" and spread out over all the transactions balance out...yes, a higher priced listing might subsidize a lower priced listing...but that is the insurance model that has been around for years....
Cindy in Indy
Jennifer, you didn't do such a bad job in describing ACRE but let me add some thoughts:
At ACRE, we define consulting not as a rigid payment structure but rather a model that provides choices in the services the consumer can receive as well as how they can be paid for. It's a CHOICE and doesn't preclude offering commissions as one of the options. As such, when you work as a trained consultant (and I mean trained - not just calling yourself a real estate consultant because it sounds better), you do not have to worry about losing business because commissions are one of the options you offer.
Increasingly, ACRE grads are proving what I always found in my consulting business: providing choices gets you MORE business, not less and you make MORE income, not less than sticking to the same-old, same-old structure. For those consumers who are more comfortable paying by commission as Rob and Cindy mentioned, they can continue to do so, with you as their agent but they will often choose you over the competition because you provided them choices. Plus, offering choices will greatly guard you against the dreaded commission-ectomy, because if they choose a commission, they understand that high risk must be paired with high reward - if they want you to carry the risk, compensation to you will be higher.
At the same time, for those consumers who would rather pay for the services rendered rather than a convoluted percentage of the sale price, you can accommodate them (I strongly disagree with Cindy - more and more consumers ARE opting for new options as proven by our ACRE grads). And this is just buyers and sellers. Consulting also opens up a wealth of new business with folks such as homeowners and investors who aren't necessarily buying or selling or not doing so right now. Our industry has lost a FORTUNE over the years because we didn't have the structure to work with consumers who weren't involved with a transaction.
To those in our industry who say that real estate has always been a sales profession paid by contingent commissions, I would remind you that history is replete with examples of those who could not envision the future and ended up missing the boat. I point out tons of examples in the video Intro to Consulting for Real Estate Professionals.
Thank you, Mollie- you said that WAY better than I could! So, yeah, what Mollie said.
As I incorporate more choices in my real estate business it continues to grow. Not every seller (my main focus) needs the same level of service. I'm also not a FSBO basher which I think can hurt agents who publically say to a FSBO you will never sell your home on your own. I'm working on my second FSBO transaction right now where the owner wanted to sell to their tenant but had no idea about the pricing, contracts and settlement. I've been paid a fee for the CMA, an hourly fee billed for services to date and because the owner is out of the area will get an additional fee to attend settlement. 95% of what I've done is from the comfort of my home office so I'm saving gas and the homeowner the worry of not getting it done correctly.
This is such a good topic to be be discussing on ActiveRain..Give Yourself a Gift of Education..Consider Real Estate Consulting!
Margaret
Very interseting post - thanks for sharing it with all of us in the Rain - Suggested!
I think this is a great concept and I believe that businesses need to be open to changes made to business models to adapt with the times. I, for one with be open to the idea. But I would just say at least to just park the thought.
I think Canada had a variable commission structure. I'm not sure its still in practice but inthe under $300k market, it was around a 7% commission. I think it eventually went down to a 3% model. However, in the uppertier of the luxury market, 4% is common. Of course, all commissions are negotiable and there is no set standards.
Very few people including so called real estate professionals will not buy the milk if they have a cow in the barn. Many client's do not have money to pay us and most agents can't explain the entirety of a P&S, buyer broker or a listing contract let alone a good concept as this and one with which I agree.
Ya had to mention the pay by the hour method. How would that work? I am a great agent, have a fantastic web presence, and sell your home in 6 days for top dollar. The agent down the street has a Twitter account and a website, but doesn't know how to use either. He sits open houses each weekend, but does nothing other than an A-board to announce his open house. Doesn't invite neighbors, nothing.
Finally, mercifully, he sells his home 3 months and 2 price reductions later. On the pay by the hour method, he should get paid a LOT more than I did because he spent lots of hours on open houses and designing fliers for the flier box on Publisher, and all I did was put up a rider with an automatically generated QR code that went straight to a single property site designed by Realbird.
He probably worked 50 more hours than I did. I got my clients more money in less time, but he deserves more?
Matt - the scenario you present is interesting! And of course, not a reasonable compensation structure. But we're smart people ;-] - so there's an answer that works that doesn't involve being paid based on the sales price of the home. Maybe part hourly, part contingent? Based on the overall project, therefore motivating the agent to get the house sold quickly to avoid investing more hours than necessary? The point is that there are alternatives to a system that doesn't make sense - in fact, the scenario you describe makes about as much sense as the one we have now! LOL
JA, Great topic? Lots of great comments. I am not sure where I stand on the issue. I do not like low priced listings because you are right they are usually more work for a lot less money. Maybe we need a system that pays higher % commission on lower priced listings and gradually reduces the % as the price goes up.
Matt,
Good response. I had an experience in the mid-1990's when we were in another recession. I had just listed a home- that had been previously listed for the past 18 months by two different brokerages-and within 1 week I received a full priced offer. At that point, the Seller expected me to rebate a portion of commission back to him. The offer came as a result of my marketing agents on all my listings, a more intensive process before email blasts etc.
I explained to the Seller that the commission was paid for a result, not time invested. I further pointed out that the other agents had likely spent thoudands of dollars with no compensation for their time and monies invested.
We could embrace Denmark's compensation. The commission is 7%, the clients pay for all advertsing except a web site. No dual agency is permitted, and buyers hire their own agent/lawyer for representation.
Hi Jennifer..another Great post. Consumers have been asking for Choices for some time. Why not give then some Choices and be a true professional.
Cheers
Hi Jennifer, I just finished your first book and OMG, if only I had read it when I first became a Realtor. I am now starting your second book and can't hardly wait for the third. Keep writing girlfriend. I LOVE it!
I came back here because I'm in the growth phase of my business that opening my heart and head to this idea is not a bad one. One can only do so much. If it's not in "people" ie by sponsoring agents, I may need to consider this.
In prayers about this right now.
Loreena - I think a consulting model would be perfect for you... absolutely perfect. Let me know your thoughts when you're ready!
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