Real Estate Compensation: Does a Full Commission MINUS Referral Fee MINUS a Buyer Rebate EQUAL a Too-Small Payday? It Depends!

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Education & Training with Sell with Soul

I've been a little absent from Active Rain for awhile now - no real good reason, just had to triage my time and blogging took a backburner. Happily, for me anyway, Loreena Yeo's featured blog yesterday "It Costs $$$ to Do Business inspired me to jump back in and spout some opinions!

In case you missed it, Loreena's blog was about how there are some deals NOT worth doing - and she referenced one in particular where both a referral fee was due and a buyer rebate requested. When Loreena did the math, she decided that the net paycheck simply wasn't enough to cover her cost of doing business, and therefore respectfully declined to represent the buyer.

As her blogs always are, it was well-written, insightful and thought-provoking. Neato Frito.Math

However, I must respectfully disagree with the blanket conclusion that an agent's full commission MINUS referral fee MINUS buyer rebate EQUALS not-enough-payday. Perhaps it does, perhaps it doesn't; it really depends on the situation and the dollars involved. There certainly IS a cost of doing business, but that cost doesn't change significantly depending on the price of the home being bought or sold. If a $500,000 transaction MINUS referral fee MINUS buyer rebate does not lead to an acceptable payday, does that mean the agent should turn down business in the $150,000 - $200,000 range which would lead to the exact same payday?

I'm not saying that we should (or should not) offer buyer rebates - I have no strong opinion on the matter. Nor am I saying that we should (or should not) work with lower-end buyers or sellers. Those are personal business decisions every agent (and his or her broker) can make for themselves.

What I am saying (as I've said many times before) is that our traditional compensation model where we are paid based on the price of the home we help our clients buy or sell is seriously flawed. And unless someone can give me a compelling argument (aside from "that's the way it's done") as to WHY it makes sense to pay us twice as much on a $500,000 transaction than we're paid on a $250,000 one, or, conversely, half as much on a $250,000 sale than on a $500,000 one... then I'll probably continue to dance on this soapbox (in fact, I have two more blogs fired up and ready to go!).

The thing is - there ARE alternatives to this model; alternatives that make sense both for us, the real estate practitioner and more importantly, the real estate consumer. 

More to follow (it feels good to be back in the Rain!)

RELATED BLOGS
"No I Won't Reduce My Commission, Do You Expect Me to Work for FREE?"
Alternatives to the Commission-Based Model - and yes, we still make a good living

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Loreena and Michael Yeo 07/07/2011 04:47 AM
Topic:
Real Estate Sales and Marketing
Groups:
Real Estate Rookie
Selling Soulfully
Silent Majority
The Ninety-ninth Percentile
Real Estate Professionals
Tags:
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Rainmaker
368,590
Miriam Bernstein, CRS
Rochester, NY

There are many reasons that explain the the higher commission on a higher priced house.  The first is the marketing that is done to a target audience that is quite different than the target audience on lower priced homes.  It costs us more to sell a higher priced home.  There are other reasons and will do a post to explain my view.

Jul 07, 2011 01:33 AM #1
Rainmaker
99,808
Mollie Wasserman
Your Move Made Simple - Framingham, MA

Jennifer, well said as usual.

I think we, as agents, get caught up in the feeling that everyone is in our pocket (which they often are!) and get incensed, but as you said, the math is the math. Instead of taking the contingent commission structure as a given, which pays us on the value of the property, how much smarter if we start to look at compensation based on the value of our services!

So many practices in real estate are based on a commission system that has little relation to what work we are actually doing on that transaction. Would 25-30-35% referral fees be even viable if we were paid for the actual services rendered? Of course not! There wouldn't be any "fat" to cut.

And if we were paid fairly (and in fact well) for our services rather than a convoluted percentage of the sale, there wouldn't be a call for rebates. Buyers demand rebates because they believe that they are being overcharged in the first place (and YES, buyers do pay for real estate services, despite what we tell them. They bring the money to the table and pay interest on commissions in their mortgage).

How refreshing if we offered the consumer transparent compensation options that paid us for the work performed and the time invested. If they ultimately chose to go with the traditional commission system, they would do so understanding that commissions are expensive and have to be as they mitigate risk on their part. But, we wouldn't be commissionectomied!

Great post Jennifer.

Jul 07, 2011 01:36 AM #2
Rainer
393,469
Dan Hopper
Keller Williams Realty Downtown LLC - Denver, CO
Denver Realtor / Author / Advocate/Short Sale

Jennifer, however you want to set up your business model should rest entirely up to you.  Whether you want to define a "full commission" as 5% or up to 10%, is how comfortable you are in running a business.  If you have employess helping you run your business then there's more overhead.  Referral fees and rebates can be handled in different manners.  I prefer not to call them rebates.  I believe if there is a referral fee, then I expect to get what I have defined as a full commission, in order to pay the referring broker.  If a buyer expects a rebate, I have probably not done a good job of defining my expertise, knowledge, and the value I bring to their real estate purchasing experience.

Now, if you want to reduce your full commission on property values that are high end, to me that is a different issue than the referral fees and rebates.  In your business model, you know what your time is worth and the business overhead.  If charging a lesser fee on the listing commission or when working with a buyer you choose to take part of your commission to pay some of the buyer's closing costs (vs calling it a rebate), due to knowing what the value of each transaction works for running your business, nothing wrong with that.

Too often, brokers use the buyer rebate or the discount listing commission as a marketing tool, and that is their only value in obtaining business.  Maybe that approach is not the best.

Jul 07, 2011 01:40 AM #3
Rainer
97,429
Glenn Freezman
Nucazza LLP & Home Buying Evolution, & Family Abstract, Inc - Fort Washington, PA

Jennifer, great post, i hit the suggest button.  I suggest people actually read your post and understand its meaning.  Miriam, are you actually suggesting that when you sell a $500,000 home and there is 15K per side in commission that you have spent as much money and time commensurate with the time and money spent on a $100,000 home to clearly state that you have earned the additional $12K per side?

Jul 07, 2011 02:50 AM #4
Rainmaker
484,007
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Miriam - thank you for your comment and while I tend to side more with Glenn that, especially today, marketing higher-priced homes doesn't automatically demand higher expenses (especially when we're talking about a $200,000 home versus a $400,000 one), the situation described in the blog more specifically relates to buyers, for whom there is no marketing expense (unless you're spending buckets of money on advertising to GET those buyers). Any thoughts?

Glenn - Thank you for the suggest! I thought you'd like this post ;-]

Dan - I agree 100% that every agent should run his or her business as he or she sees fit. And my blog was not about reducing (or increasing!) commissions; it's about the inherent flaw in the reasoning that our value is determined by the price of the "product" we help our buyers and sellers buy or sell. So, I think we are in agreement that the subject under debate is NOT rebates and referral fees, but rather how we as real estate agents determine and communicate our value.

Mollie - thank you (as always) for sharing your thoughts so coherently!!! Yeah, what she said. I'll see you next week!

Jul 07, 2011 03:11 AM #5
Rainmaker
592,740
Than Maynard
Coldwell Banker Heart of Oklahoma - Purcell, OK
Broker - Licensed to List & Sell - 405-990-8862

Fortunately buyer rebates are illegal in here. You enough people trying to cut our pay without the buyer asking for a rebate.

Jul 07, 2011 03:58 AM #6
Ambassador
1,363,524
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

I see your point in work done to a higher and/or lower priced home versus the value of services paid. In the same token, then would a consumer's argument about selling the house in 1 day is less work than 100 days on the market?

You have made me aware of other alternatives in real estate business models. If consumers can catch on that we are either paid on contigency (that's why we charge higher) or we are paid as a consultant (whether the house sells or not or you pay me for my time showing houses whether you buy a house or not), we'll see the whole game change. I for one, would hope to witness it.

In the end, we run a business and business has a bottom line. Consumers either have to pay a contigency (the more expensive transactions make up for the less expensive ones) or you pay me by the hour or actual work perform, it has to meet the minimum business expense + profit. Otherwise, we are just better off staying at home, twirlling our thumbs.

Jul 07, 2011 04:41 AM #7
Ambassador
1,363,524
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

I'm looking forward to your post about Fairness. You bet I'll have one too.

Jul 07, 2011 04:42 AM #8
Rainmaker
725,584
Robert Rauf
HomeBridge Financial Services (NJ) - Toms River, NJ

We all have had deals where we got paid pennies an hour, So I can certainly see both sides of this debate... For me: I dont look at the pay check on a per deal basis, I look more at the relationship that that deal leads too, many of my low pay day deals turn into raving fans that refer business.... so in my eyes, it is about the client, not the pay day.

On another subject, If you dont like the people, JUST SAY NO!  Life is too short to work with people or business partners you do not like!

Jul 07, 2011 05:35 AM #9
Rainmaker
484,007
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Loreena - I was actually planning to post my blog about Being Fair to our clients today, but got all excited about your post and my response... so it will have to wait til tomorrow. Looking forward to yours!

Jul 07, 2011 05:39 AM #10
Rainer
129,004
Ron Brown NMLS #270845
NMLS ID: 40831 - Federal Way, WA

It all comes down to Dollars per hour, and what an individual is willing to accept.  If your "worst case scenario" is not something you're comfortable with, probably a good idea to decline.  Pretty similar to taking a listing at what the Seller believes the home is worth versus what the true market price is.

Jul 07, 2011 06:33 AM #11
Ambassador
902,883
Kathy Schowe
California Lifestyle Realty - La Quinta, CA
La Quinta, California 760-333-8886

I am in a situation right now like that--- low priced home, referral fee due, high maintenance buyer.... hmmm.  But, it is a slow time of year-- and they are not taking me away from a more rewarding deal-- and I want to continue to get referral from this very cool AR agent who sent them to me!  And,  you never know what business may come in the future from a deal you make today.  I am grateful for the business. ( Now, I want to write a post about this as well!)  :-)  Kathy 

Jul 07, 2011 12:52 PM #12
Rainer
139,667
Jeanne M. Gavish
Jeanne Gavish, Keller Williams Realty Elite Partners - Spring Hill, FL
Keller Williams Realty Elite Partners - CIPS,GRI,S

I so agree with Robert #9.  It is about the relationship and not about the deal.  Two totally different mental structures about how to do business.  Chase the deal and what is in it or build the relationship and build your business because they are grateful.  Maybe I don't understand because buyer rebates don't exist in my market.

Jul 07, 2011 04:00 PM #13
Ambassador
852,833
Brenda Mullen
RE/MAX Access - Schertz, TX
Your San Antonio TX Real Estate Agent!!

Wow.  Love this conversation and I can see both your's and Loreena's points.  I becamse an ACRE a few months ago and am looking how to best put it into practice.  My issue with a Realtors(r) pay day is the fact that we always seem to have a guilt complex of why or how we charge what we do regardless of what business model we have. 

Jul 08, 2011 03:59 AM #14
Rainmaker
232,679
Ken Barker Realtor® GRI, E-Pro Certified
Dilbeck Real Estate - Burbank, CA

Jennifer - Oh my. I am here from Ruth Maries blog today but I read Loreenas previous, as both of you are mentioned in her blog, and what a great point you have.

I have always run my business model as "I am going to stand proud and firm when it comes to my commission and not give it away". Because as I commented on Loreenas, I do a lot of referral business that really cuts into my bottom line". Whether it is a $900,000 or a $100,000 sale it is the same work, and the same split and money in my pocket.

BUT, I work for a large corporation. If I go below my allowed percent commish they still charge me on the same amount with our minimum threshold. Another words if I go to 1% or 2% I still get hit on their number they set if and's or but's about it.

The answer to all of this is even though I work for the large corporation, I am my own boss as I are an independent contractor for my business. Therefore what I do is what I do.

Jul 12, 2011 05:41 AM #15
Rainmaker
715,933
Ruthmarie Hicks
Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605 - White Plains, NY

Ok - I was not around until the DOJ created havoc with the ownership of listing data.  I have to ask were the referrals this crazy out of line before this.  I just think that 25-40% is extortion.  And this seems to be driving up the cost to everyone - including buyers and sellers.  Right now you've got people in the middle of the man in the middle! YIKES!!! This was supposed to help trim costs - it seems to be doing the opposite in the long run.  But maybe I'm wrong because I wasn't there prior to the tail end of 2005.

Jul 12, 2011 11:10 AM #16
Ambassador
769,836
The Somers Team
The Somers Team at RE/MAX Access - Philadelphia, PA
Real People. Real Dreams. Real Estate.

Great conversation here.  It is tough out there in this market, really tough.  So when you have that hard deal go to a settlement and you forget "oh by the way" there is a 25 percent referral, you have that "oh man" feeling !  And if there is some sort of rebate on top of touch... ouch.   But at the end of the day, you would not have had that client unless you received the referral in the first place.

I do agree with Jennifer that it does depend.  One can make a business decision if it is worth their time on not depending on the sales price, etc.  The unkown of course is will the buyers see 3 properties or 30.  Submit 1 offer or 5 ?  If it is a seller referral, will it sell in one week or 6 months ?

Either way, I do like the idea of building that client base for potential referrals.  It just depends on the situation : )   ~ Chris

Jul 13, 2011 12:19 AM #17
Rainer
118,683
Karen Salmon
Royal LePage Benchmark - Okotoks, AB
Okotoks Real Estate Agent

Ooooh, glad I stumbled upon this one as I am dealing with this right now with a potential listing. My marketing costs are all up front and whether the house is worth 400 or 800k, my costs are pretty much the same. Whatever we charge, we must be profitable OVERALL. Some sales we make more than others and some we feel we're working for minimum wage. I have learned that there is no such thing as a typical transaction!

Oct 21, 2011 02:33 AM #18
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Jennifer Allan-Hagedorn

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