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131 Comments on How many other professionals work on contingency ALL THE TIME? A sincere look at the real estate business model
I'm not an agent but have worked as an assistant for our real estate brokerage 6 years and I see the frustration involved investing time and money out of pocket with little or no return on that investment. I have also seen a greater share of Associates who don't advertise, other than on the MLS, who close transactions quickly and earn my entire salary in one check. All on a standard commission split.
My thoughts on this... From a consumer stand-point, if someone is scrimping & saving to buy a home, they most likely will NOT pay any sort of retainer up front if they can find someone else who does not charge. It is the perception that they are saving money if they search themselves, driving around, using the internet and ads. Consumers have so many resources at their disposal to educate (or mis-inform) themselves between the media, friends, family, websites, etc., that they truly must be sold on you and the value you provide before they would consider any sort of retainer fee. Even if 95% of all Agents charged an upfront fee, the remaining 5% who don't require any skin in the game would probably see a huge upsurge in business from these do-it-yourselfers.
I could agree with Sellers paying a non-refundable transaction fee, which can be taken out at closing, to cover paperwork, coordination and even a pre-approved marketing plan, but if the listing period is drawn out, the Agent may have continued expenses over & above. Also, how would this apply to a distressed home? If the seller has made it to this stage, I imagine they would balk at any request for additional up-front fees. Anyone in that situation is bound to feel so much negativity and a request for $ they don't have might be just the thing to say the heck with it and let it go to foreclosure- thus losing the agent a potential sale and future referrals. And, if the property sells quickly, the seller may want those monies applied towards the commission or even refunded.
As for brokerage cuts, it goes back to the agents to ask themselves if they see the value that their current brokerage provides. Besides the standard tools, do they have confidence in the brand they are associating themselves with? What kind of umbrella of protection are they under? Education? Training? Support system? Not to be rude but really anyone licensed could practice just about anywhere- But, what works better for your clients and you- (Extreme Visual here) working from the trunk of your car like a 2 bit vacuum salesperson or having a professional office, tools & staff, legal protection, reduced liability, training/education for today/future issues, backed with a respected and well-known presence? Ask a client to compare the two images. Everyone needs to earn a living and stretch a penny into a dollar but beware of coming off as a cheap-skate money-grubbing (GASP) car-salesperson! Yes, I know I just threw down an insult. Just to illustrate a point so no harm, no foul, please.
Bottom line, the negative comments towards your brokerage fees, well, that's how clients will feel about YOU when you ask for those up-front fees. You don't like paying them and are trying to find discounts, short-cuts or a new commission structure. That same approach will wind up being applied towards you!
Okay, I read through those responses and all this was covered but I still felt the need to comment anyway... I hope that this just offers another perspective and someone can counter it with a great logical answer.
Just a quick comment on the health insurance comments - as someone who left the health insurance industry in pretty highly regulated states, I have some knowledge about the perils and pitfalls of Association Health Plans (of the type proposed by some of the bloggers here). There are associations that get insurance as a group today - they have the following characteristics:
1) Their members have discernable, common characteristics
2) Not everyone can join - you need to work for companies that fall into the classifications of the group
3) The group will take on a measure of risk through the premiums they pay, or in some states, they are willing to be self-insured.
The NAR, or other realtor groups, would appear to fail the first and second tests - the members are as diverse as the population at large and (most importantly) anyone with a real estate license can join. In the insurance industry, this association would be known as a group of "air breathers" - very difficult to define the risk profile and come up with a rate. In addition, they would be open to people with less than stellar health, which may ultimately make the premiums very high. Insurers have lost millions on association health plans and thus shy away from associations that have less cohesive profiles.
I appreciate the tendency of some to declare this some sort of political battle (Dems v Reps) but in fact it is all about risk management. And sorry to muck up this really interesting blog on compensation with dull insurance stuff!
I am actually surprised to see how many comments agree with you that the current model needs to be changed. With this much support a change should be easy. Maybe we need to ask ourselves what is really holding us back? Is it the big brokerages who have very little invested in each agent yet reep huge rewards?
i have often wondered about the industry esp having to be members of an assoc (to have access to MLS) which amounts to being in a union without the benefits of a union... naughty word, that. naughtier still to have nothing more in return than a huge lobby group.
now that less sales make it painful to keep up with membership, lockbox key fees, annual fees, plus the cost of actual business - advertising, insurance, gas, etc... perhaps realtors can unite.
what i did was move over to a small brokerage that allowed the things that major brokers don't... like reduced fees and breaking up services.
as an individual, you make those choices. as an industry, you have too many big cheeses to deal with, unless you pool together with stuff like some of you suggest.
gotta go pass an exam now for my new life as a returning college student. i'll sit this crisis out.
rgb
Nobody can argue that there are not many sides to this issue. As a relatively new agent, I for one, have had many of the same questions as others who have posted - how can a consumer really trust your guidance if his decisions impact your compensation, why should agents have to join an association to have full access to inventory, why shouldn't buyers and sellers who aren't serious use the services of an agent when it's free?
Real estate is a career with a relatively low cost of entry. There is nothing wrong with this, but it doesn't mean that it should be easy to get a license. Quite honestly, the licensing test is a joke in so many ways as is the continuing ed that is required. Until this changes, I don't see the compensation model changing.
I am currently trying to decide the business model I will be using going forward and will be checking out the ACRE info. Personally, I would like to see real estate agencies operating more along the lines of attorney's offices with partners than the pimp/prostitute model that we currently have where the more agents there are in the stable, the better for the pimp broker. I'm not saying all brokers are like that, so please don't take offense if you operate differently.
Changes are needed, and I believe changes are coming. It will take years for them to be implemented successfully across the board. I encourage you all to make your voice heard in your local market and perhaps be a vanguard/pioneer in the effort.
Thanks, Jason, for the food for thought.
Frankly it seems to me that doctors & lawyers spend a lot more time in school than do real estate agents & probably, even though we would hate to admit it have a much higher level of public perception as true professionals. I mean it's really rather easy & fast to sit through a few classes & have a real estate licence. To me this seems to muddy the waters with an oversupply of agents that are constantly comming & going. The vast majority of agants at any given time are fairly new to the business. Lets face it, real estate has a very high turn over rate that does not translate to a high level of public perception of value. I grant you that many of us who have been in the business for many years may have obtained a level of knowlege that would qualify us to be called true professionals. But as far as the public is concerned, how do they know, when practically every agent out their is proclaiming to be the best, #1, etc. etc. even if they just got their licence last month. This is the hurdle we are faced with. And it leaves us in a position to earn that perception from those we work with. Unless the entry qualifications to aquire a lic. are made significantly more difficult, like in some parts of Europe, I think we will be faced with the system we have. One thing that is good about it is that in a way it is pure capitalism, you make what you really earn, at least most of the time. Observed from over 20 years in the trenches.
Interesting that you bring this up, but I'm so glad you did! I've been thinking about it for the past 11 years. Fear of clients not wanting to work with me is the primary reason why I have never attempted to charged an up front fee. Especially when Realtors EVERYWHERE advertise that services are FREE. Buyer Agency Services are FREE, CMA'a are FREE. Absolutely EVERYTHING is FREE. It's insane!!! I don't know of any other "Professionals" that work for FREE and advertise it in BIG BOLD RED LETTERS. There has been a lot of mumbling about this topic for quite some time now and I think it's time we stop mumbling and start testing the waters.
My first year in Real Estate... actually my first client taught me a lesson I will never forget. The sad thing is I never did anything to change it. I worked with this particular buyer client for about 3 months. We became kinda sorta like friends. I can't even count the number of houses I showed her. Long story short, after being under contract for about 3 weeks, she made up with her estranged boyfriend and decided to move in with him. She was a nurse and going to school for a Masters Degree. I have no idea who gave her this information but what she did was quite clever. Being that she was in school full-time, her student loans were in deferment. To get out of the contract, she dropped out of school, called the student loan company to inform them so her payments would come out of deferment then notified the lender that her debt ratio was too high because of the student loan payment. The lender wrote her one of those nice loan denial letters and she backed out of the contract. I was blown away. Then she had the nerve to demand that I fight for the return of her earnest money deposit because of the finance contingency. This was going to be my first sale and was going so well, so I thought. During this time, I began to think a lot about how Realtors are compensated and why we work for FREE. Being new, I was pretty down about it and everyone including my broker told me..."Welcome to Real Estate". It happens, get used to it, don't take it personal and a host of other condolences. Now 11 years later after having had a pretty success and profitable career, I never stopped thinking about this client. Wondering if and when the way we are compensated will ever change.
The confusing thing is, there has been a section in the Buyer Agency agreement for retainer fees since forever. Zero has been placed on this line so often, it's like it's not even there. Apparently at some point in time, it seemed like such a good idea it was placed on the form. Oddly enough, several years ago, when I decided to try it out, my broker wouldn't allow it. She said it would be bad for the firm for the word to get out that we charge buyers an upfront fee.
Now an independent broker working on my own, I've been considering trying it again. After reading this posts, I definitely will. It's worth a try, what's the worst that could happen. Timing is everything and with the state of the market and the economy, I think it has greater potential to work in our favor. Buyers are more savvy these days. I truly believe they will "get it". Perhaps embrace it and respect me for it. It's always been confusing to me how consumers ever respected us in the first place or trusted us to assist them with the largest purchase of their lives all for free. Think about it... if we are not confident enough in ourselves to ask for compensation for our services how could we be power negotiators that we advertise ourselves to be. Not knocking any ones abilities. But honestly, we work way too hard not to be compensated for our work. I know my post is long. This topic excites me so much I'm about to burst. I'll let you know how it goes collecting retainer fees.
These posts really have been enlightening.....the last one I read prompted this follow up to my message yesterday.
For those who are ready willing and able to charge that upfront/retainer fee, I am on board in virtually every way....but it obviously has to be a consistent practice.
I am curious how you plan to handle it if the Buyer client who simply does not have those extra funds laying around to pay up front, and then another Buyer who does have the ability IS charged.....I see potential problems if you are not 100% consistent.....even though not every buyer is financially equally able....??? I also fear that if one is not able to come up with the retainer and you do not choose to work with them (for any reason), I smell a discrimination lawsuit waiting in the wings.
Edith Schreiber - Coldwell Banker APEX - North Texas
Excellent point about possible Fair Housing violations. I'll have to research that. However, remember, there are no "standard or fixed" fees in real estate. If we did that, we'll get accused of price fixing. I believe the fee can be negotiated just as commission. I can charge one seller 5 percent and one 4 and one 3. Actually a variation of fees is supposedly required in our area.
If we are truly independent contractors, what is to keep the average broker from changing his/her individual business models? In my opinion, there are two things to prevent this from happening on a broad scale - fear of change and fear of repercussions from our colleagues.
Jason....this is probably the biggest reason. but then as many people have said in the comments, it's how people perceive us. I'm all for it being harder for people to get a license. Think about it....this is one of the biggest purchases people make, and we can help them with just 75 hours of education? Hmmmm.
And then again, letting people know how we are compensated, and what our expenses are is very important. With all the education out there, many buyers still don't understand that we work for "free" till the closing table...and then...we ARE the last people at the closing table to get a check, and even then, it's not made out to us!
Well, I can see charging variable fees with a seller, depending on the level of marketing & services you provide and they want.....that makes sense.
With a Buyer, you really cannot vary the amount of services provided, once they have entered into an exclusive representation agreement with you.
I, too, am going to look into the ACRE® designation. Sounds like something I & my clients would benefit from.
The more I read, the more cans of worms are opened. I'm getting dizzy.....but I really do appreciate everyone sharing their thoughts. :0)
Happy Selling!
Edith
I wish I had the time to read more than the 20 plus comments I was able to get to. I have an agent in the office who has from time to time charged an upfront retainer for listings. Also - what most consumers don't understand when they complain about "how much" money agents make is that their fee at closing helps pay for our expenses on the homes that don't close. If we could get that message communicated we would have an easier time changing the way agents and brokers are compensated.
Jason,
I believe that charging a modest up-front fee and giving it BACK to the buyers at closing would separate the..."Lookieloos" from the serious buyers......
It is something I am going to be seriously thinking about.......
=-)
Don't get me started on how agents and loan officers give the farm away with their free advice!
We've trained the public to expect it, making it very difficult to buck the trend.
I have a very specialized niche working with innkeepers, owners of bed & breakfast inns and people who want to enter the industry. I've been doing it for 16 years. So, between time committed and experience gained, a name that's recognized in the innkeeping industry, and a very narrow specialty, I'm able to charge for just about EVERYTHING.
We charge to do a marketability assessment. We charge to take a listing (non-refundable retainer). We collect a commission (less retainer) when there's a sale. We collect retainers and consulting fees from buyers who need advice. We charge consulting fees for a myriad of jobs and services we do for our clients whether or not they are selling or buying.
The result? In 2008 over 60% of my company's income was from fees of one sort or another. I will NEVER AGAIN work for free. You have to be able to give real value to a client. But if you can, charging for what you know and what you do is a great way to work only with serious, qualified, committed clients.
Have a great day!
Peter Scherman, The B&B Team, Inn Consultants and Brokers
www.bbteam.com www.innkeepersresource.com (blog)
I have often wondered how it came to be that most real estate agents work on contingency. I've been looking, but haven't found anything historical that explains how this business model became the prevalent one.
I for one, feel there would be a lot more customer loyalty if buyers and sellers had to justify paying a fee up front and bear a share of the risk.
I have begun offering a flat fee listing service where the seller's side of the commission is paid in advance. In exchange for paying in advance, the seller pays a reduced commission but also gets upgraded services. I feel I can charge less because I know I will receive compensation on each listing, not just the ones that sell.
Sellers are typically concerned about how this will affect my motivation to sell their home, but I assure them I want their referrals and furthermore, the longer it takes to sell their home, the less money I make as I continue to advertise their property. It seems like a win-win to me.
WOW Jason - you did stir up a hornets nest ;-) but I LOVE it.
I'm a little late to this disussion due to health issues, but after reading ALL 128 POSTS, I noticed a trend I wanted to address. I am an ACRE as well, but started charging upfront fees to buyers AND sellers over 10 yrs ago. Mollie Wasserman and I met through another listserv years ago and realized we had consulting in common.
The trend I'm noticing the most out of all these posts is fear.
I've been a real estate trainer/speaker/salesperson for 30 yrs now, I also actively participate on the ACRE coaching blog, and fear along with rejection are the two biggest reasons people don't want to do something.
I've always walked to the beat of a different drummer ;-) THE FASTEST WAY to get me to do something, is to tell me it can't be done, or I can't do it.
When buyer agency first came out all my agent friends hated it, said it wouldn't work and started reeling off 101 reasons why it wouldn't work. I thought of it as a challenge though, so the next buyer I worked with I got an upfront retainer and a BA signed agreement. The look on my Brokers face was priceless.
So being the same as Jason and loving to stir up a hornets nest, the next thing I did was start charging sellers an up front fee and doing consulting.
This was YEARS ago, before home offices were the norm. I had my first child and not wanting to put him in daycare, I got my own pc, seperate phone line and a fax machine and told my Broker I was not going to be in the office quite as much.
HE WAS HYSTERICAL needless to say, and asked me "what if someone calls for you at the office?" Wellll, I replied - what would you say if I was out getting a listing or showing houses to buyers? I'd give them your pager number was his reply.
GREAT I replied - now you can just give them my business phone and pager ;-)
I still remember all those years ago what he said next....(sit down before reading this)...
Paula Bean - YOU are ALWAYS trying to find a way to make more money by doing less work!
LOL - Now we
have coaches and spend big bucks to learn how to do that.
2 things I'd like to say to all of you who mentioned they were 'thinking about consulting'. I call it the NIKE slogan: JUST DO IT! Hardly any of us were successful right off the bat when we started selling real estate, and you'll just as likely get a few 'no thanks', but you'll get better as time goes on.
That is why the ACRE program is so good, you have the brilliant brains of the many who've gone before you so you don't have to reinvent the wheel.
They also have post cards, scripts and dialogues, Webinars, etc. If you've been thinking of doing this, then just jump in and do it. I use consulting with short sales, loan mods, and I get paid for consulting when it doesn't even involve selling a house. ie: Move or improve? Taxes, cma's to get rid of PMI. Now that is all just gravy that you aren't getting right now.
Disclaimer: I am not being paid for this endorsement
btw - if anyone wants to learn more about consulting, ACRE has a free monthly newsletter. Just go to http://www.TheConsultingTimes.com and sign up.
I'm with you, Jason, and agree on all points. Wouldn't it be nice....
Woot! 131 comments!
I'm even late(r) to the discussion, but appreciate + applaud your transparency + courage to bring this up. I've been serving REALTORS for over 12 years, and have never felt easy about our industry's willingness to work for free. I was delighted when some 8?, 9? years ago NC's Standard Buyer Agency Agreement included a blank for a retainer fee.
"Win some, lose some - it all evens out" is an easy philosophy to get sucked into, though. However, mayhaps we should all get sucked into "work smarter not harder."
Meanwhile, I'll reinforce to the 14,000 agents that are in my sphere that they *are* worth it! =)