Although I wrote this article several years ago, it is still applicable today.
Our local business journal, which is a monthly supplement to the local paper, came out this week and the theme or focus was real estate. Among the many articles written, one article clearly stood out as a simple- minded contradiction to reality. The article was a piece about a brokerage firm in our area and dissussed both the history of the firm and their success in the marketplace. Honorable. But....
At a time in our history when our commissions are under attack, this broker's explanation of commission justfication was simply wrong. "People think that we don't earn our money, but we do. We may have an easy house to sell, but we have a lot more harder ones to make up for them" She stated. When one publicly tells the consumer that the reason for the size of their commission is to cover all your "other work that didn't pay," well this costs our entire industry one giant step backward. This is not the stock market and we don't perform dollar-cost-averaging with our listings sales!
In the eyes of the consumer we are sales people who happen to work on a contingent-on-sale commission basis. If you have ever had to explain to a consumer what exactly they're paying for when they pay by commission, you may have struggled with an answer that makes sense.
Here's the scoop: Commissions have little to do with compensating an agent for time and services. Commissions are all about mitigating risk. As an industry we should learn to call a commission what it is and, unless we do so, we will continue to see our compensation erode and our value undermined. When a person pays for real estate services by commission, they are in fact paying a premium for a specific outcome and the "insurance" that if they don't achieve the desired outcome, they pay nothing. In other words, this is Economics 101: High risk must be paired with high reward.
The article was summarized and she provided advice to people that may be new in the real estate industry: "Do not try to reinvent the wheel..."
In an industry that has undergone tremendous change in the last 5 years, economically and technologically, none of us should be still inside that box! That's the old way.
Thanks to Mollie Wasserman for commission analogies.