UPFRONT Real Estate Fee Versus Pay for Performance... I'm torn...

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Education & Training with Sell with Soul

I've been a real estate agent for twelve years. The entire twelve years, I've worked the traditional model... I get paid when the house closes. Sometimes I get paid BIG time, which sometimes doesn't seem proportionate (in a seller's eyes) to the amount of work I actually did.np

But a significant part of why we make the money we do is that we agree to work on contingency - if we don't get our buyer or seller to a closing, we don't get paid, regardless of how hard we worked or how smart we worked. If we don't perform... we are not compensated.

Not many industries work under these conditions.

That's not really the point of this blog today, however. After all the fun a few weeks ago debating the value of our services, I got to thinking. Maybe I could offer a third fee option (I currently offer two; click here to read about them) - How about an upfront fee that is non-refundable, but significantly less than the seller would pay under a traditional commission structure?

Let's say, illustratively, the seller pays me $3,000 at the time of listing instead of, say, 3% at the closing. If my average sales price is $300,000, this saves the seller about $6,000. ($300,000 x 3% = $9,000 - $3000 = $6,000)

So, I was thinking I was pretty smart. I get paid upfront and in a world where a For Sale sign in the yard is certainly no guarantee of a paycheck in the bank, I might come out ahead. I was all ready to talk to my broker to make sure he was okay with it.

But... whoa, Jennifer, slam on the brakes.

I know how I feel when I pay upfront for something and don't get the results I expect. I'm mad, I'm disappointed, I'm frustrated. I'm certainly not feeling warm and fuzzy toward the person or company I paid upfront.

I don't want my clients to feel that way about me. If I take their $3,000 and then can't sell their home... do you think they'll be philosophical about it and happily refer me to all their friends? Probably not. They'll resent me and the fact that I took their money and didn't perform. Is this fair? Probably not, but it's how we human beings are wired.

So... I dunno. I'm kind of used to the idea of Pay for Performance and I feel good about it for myself and my business. I may not mess with something that's working...

 

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Rainmaker
747,125
Robert Rauf
HomeBridge Financial Services (NJ) - Toms River, NJ

Jennifer, I like the lower upfront fee idea... it gives the agent some cashflow to market the house, the Seller has a buy in and motivation to listen to the agent and they are "buying" a lower overall commission...  Not a bad idea at all....

Brilliant minds think alike!  ;)

Jul 30, 2008 02:46 AM #17
Rainmaker
1,026,935
Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

Hmmmm....my first thought was, "well, if I get paid upfront, there will be someone unmotivated...me!"  LOL 

It makes for an interesting option, though, and DOES perhaps get the client thinking about how we are paid (or not) and helps them see the risks we take and the expenses we incur, every day, without compensation or any guarantee of compensation.  From that standpoint, I like the idea...because I would imagine the majority of clients' reaction would be, "wait a minute.  I'm going to pay you thousands UPFRONT to sell my house with no guarantee it will sell?"  Well, we take listings all the time with no guarantee they will sell, yet we pour money and time into them, regardless.  The shoe is now on the other foot.

I do believe the average person is risk-averse, though, at least when it comes to risking THEIR money. And when they do risk their money, they want guaranteed results or they want someone else to bail them out.  ;-)

Jul 30, 2008 03:47 AM #18
Rainer
26,172
Joshua & Kathy Schmidt
ERA Henley Real Estate - Cabot, AR

Jennifer,

     The lower upfront fee is a good idea, but I have to agree with you that if it didn't sale you could have some very upset clients.  And if you re-list are you going to charge the fee again?  That is probably unlikely but I was just asking.  But like you said it is just another option you could offer.  Who knows it could be a good thing.

Jul 30, 2008 03:55 AM #19
Rainer
138,285
Melody Botting
Broker Associate PenFed Realty - San Antonio, TX
You Deserve The Best

You bring up a very interesting take on this.  However, I think getting paid after closing is the best way it should be handled.  It can be tough getting an agent to return your call when inquiring about a listing.  (Not that I wouldn't enjoy the upfront payment).

Jul 30, 2008 03:59 AM #21
Rainmaker
484,157
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Melody & Susan - I wonder myself if being paid upfront would lessen my motivation? I really don't think it would because, while I like my paycheck as much as the next guy, I really have internalized the mantra that "I sell real estate every day. Sometimes I even get paid for it!" So it's hard to imagine myself slacking just because I've already been paid. But I'm sure it would be a objection to overcome if I wanted to push this approach.

J&K - Yeah, it's hard to imagine a scenario where the house didn't sell... and the clients were actually happy with your efforts.

Robert - The theory of it is beautiful... just unsure if it would go as planned.

My California friends - interesting that somehow it's wrong to pay for a service ahead of time - what a concept!!!

Larry - Bang Bang! Just kidding.

 

Jul 30, 2008 07:18 AM #23
Rainmaker
1,142,050
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Jennifer, My guess is very few sellers would be willing to pay that amount of money upfront. The "pay at closing" plan works because it motivates the salesperson to perform. And we get paid well because we are willing to take all of the risk. In my area there are many companies that are happy to take a listing for an upfront fee of about $500. As a seller I would be concerned about their possible lack of motivation to price the house right. Pricing and selling doesn't make much difference if we get paid upfront.

Jul 30, 2008 09:38 AM #24
Rainmaker
484,157
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Okay, but I gotta be argumentative here for a moment. There are VERY FEW industries who agree to be paid "at closing" yet they offer no guarantee of performance. Doctors, lawyers (those not working on contingency), veterinarians, publicists, copywriters ... how is selling real estate so different? Are we so pathetic at justifying our value that we can't convince anyone to pay us until we actually prove our value?

I have NO PROBLEM with the concept - believe me - I'd rather Pay for Performance all day long. But all these objections to the concept of upfront payment have really made me think about how we ended up being one of the few who work this way.

Jul 30, 2008 09:45 AM #25
Rainer
166,537
Ken Montville
RE/MAX United Real Estate - College Park, MD
The MD Suburbs of DC

If the Seller pays an upfront fee, the motivation for the agent may be referrals since the agent will have to make up, in volume, what they are lacking in commissions per transaction.  However, the prevailing mindset or conventional wisdom is that agents will do an excellent job for referrals anyway.

I have paid for way to much stuff "up front" to really like the idea for real estate sales.  Web site designers and various other marketing marketers, etc.

There's a restaurant vs cafeteria analogy. In a restaurant, you sit down, have a nice meal, get waited on hand and foot and then pay the bill at the end (plus tip!).  In a cafeteria, you select you're food, pay for it (up front) and then eat.  It's still food and you still eat it but the experience is different.

Speaking of restaurants, I actually use a "menu" of sorts. A kind of sliding scale depending on...

Jul 30, 2008 09:56 AM #26
Ambassador
769,886
The Somers Team
The Somers Team at RE/MAX Access - Philadelphia, PA
Real People. Real Dreams. Real Estate.

Jennifer,

I think the concept is fine as it makes sense.  However, to me it would not be if the house sells or not, I think the value (and of course YOUR value) would be much higher than the $3,000.

Personally, I would much rather work on the contingency for the higher payout than to take the money upfront.  $3,000 would not really be worth it somtimes for the tricker and harder properties to sell. 

Something to think about...

Chris

Philadelphia Real Estate

Jul 30, 2008 10:18 AM #27
Rainer
2,338
Fiona Payne
Delano, MN

The boutique firm I worked at prior to my current office rolled out an almost identical option on a companywide level while I was there.  It was $3500 up front + 2.8% (for the selling side) at close.  The catch of it was that it wasn't an agency relationship, it was more of a facilitator thing.  The agent/office did all the property marketing, set showings, and received offers on behalf of the seller so that on the surface it looked like an ordinary full service listing, but behind the scenes there was no fiduciary duty other than confidentiality...the offer went from the agent's hands to an attorney's for review and consultation with the seller, the attorney and the seller decided whether to accept/counter/reject, and the agent forwarded the response to the buyer. (The seller could waive the attorney review at the time of listing and receive a reduction in the upfront fee.)  Considering that the majority of the listings this office handled were lake homes over $500K, there was the opportunity for substantial savings for the seller.  I don't think it ever really got off the ground, though, and I'm not sure why (and on an unrelated note, the company got absorbed by Big Brokerage about a year later).

Jul 30, 2008 11:02 AM #28
Rainmaker
577,444
Dena Stevens Coriz
Rocky Mountain Realty - Canon City, CO
Putting The Real Into Realtor Since 2004

Looks like you have gotten many opinions here. This is something that agents in my market have done, but not all that successfully. They (the agents) seem to disappear after awhile.

 I have to wonder the same thing Fiona does, where is the fiduciary duty? What happens if you bring the buyer? What happens if the listing expires and the house doesn't sell? Is the seller going to call you again?

We have an MLS disclosure that says you are offering limited services and you must disclose which services you are providing. When I see this I know I'm in for alot of work on both sides. Just today I saw new listings for 2 houses. The only thing the "listing agent" did was put it on the MLS. The sellers phone number was included.

Jul 30, 2008 11:14 AM #29
Rainer
78,168
David Slavin
Keller Williams Premier - Katy, TX
CDPE, ABR, SRES Keller Williams Premier

This would work in only a specific price range. The $250,000 and under would have a hard time coming up with funds to pay upfront.  From my experience, in this range the sellers are using the equity in their house to pay commissions, title fees, closing costs & down payment on their next house.  If they are like most Americans, they don't have much in the checking account. 

Jul 30, 2008 12:30 PM #30
Rainmaker
95,714
Michael Sahlman
www.HomesForVIPs.com - Keller Williams Realty - Miami Beach, FL
e-PRO - Miami Beach Florida Luxury Homes

Interesting post. I would have t say it would be best to get paid at closing but charge for some services like print advertising that we wll credit to them at closing.

Jul 30, 2008 04:42 PM #31
Rainmaker
332,313
Kim Peasley-Parker
AgentOwned Realty, Heritage Group, Inc. - Sumter, SC

Jennifer- I like the two options that you offer all ready.  I have to agree with you about the upfront fees. Some clients could take this as owning you and dictating your services.  Best of luck and let us know what happens.

Aug 04, 2008 06:46 AM #32
Rainer
1,218
na na
Ponca City, OK

Interesting concept, but I'll stick with the traditional way of compensation.  My average commission to date is 9%.

Aug 04, 2008 10:08 AM #33
Rainmaker
203,118
Margaret Mitchell
Coldwell Banker Yorke Realty - York, ME
Seacoast Maine & NH Real Estate

There is another issue besides how the Seller will feel if it doesn't sell:  How will you feel??  I'm guessing that it will bother you.  You will offer to renew the contract at: full $3,000 fee again???  I think not.  Reduced fee?  Maybe to bring it up to original commission of 6%? 

A reduced fee second time around means that you haven't fully transferred the risk to the Seller.  So taking a smaller flat commission, without full risk transference, may not make sense.

For most people, this is not a good business model.  Yes, YOU would do your utmost to sell the house.  Perhaps work harder as a point of pride or because you feel obligated.  But many (most) people do what they are incentivized to do and there will be less incentive when you have been paid BEFORE performance.

Lastly, no matter what you do, even if you execute a flawless marketing plan, if the house does not sell, the Seller will think that you are out working harder on new & other listings, and not his listing.  This is in spite of what you may do or say - his feelings are human nature and not within your control.  And this is a performance risk that you retain.  It is a significant performance risk that will affect future business.  All for less commission.

It doesn't work for me.  The only way that it would work for me is if the entire industry went that way.

 

Aug 04, 2008 11:53 PM #34
Rainer
123,477
Michael Cole
CPG Tours - Orange, CA

Hi Jennifer,

Hmmm... as a seller, I guess my first question would be, "What exactly am I paying for?" Would this be an actual 'fee-for-service' type of arrangement, with an itemized list of services to be performed? Or, is it just a reduced flat fee, if I pay it all upfront.

If it's the later, I would most likely decline that option. Even if I knew the agent extremely well, and trusted them completely, I still don't know that I would do it. If, for whatever reason, the home didn't sell, there would always be that 'coulda-shoulda-woulda' thing going on. And it could definitely put a strain on the relationship, if the agent was also a friend.

Just my first reaction.

Aug 05, 2008 12:35 AM #35
Ambassador
1,366,564
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

I've done both ways. Paid after it closes and paid with a small upfront fee and smaller commission after it closes. This has nothing to do with "business" but those properties that I had charged an upfront fee end up not selling. I just decided to do away with this "policy" since my job is to make that change for my sellers, I feel that doing this upfront fee- just in case it doesnt sell policy is setting myself and my seller up for failure. Just bad omen I wont repeat.

Aug 05, 2008 03:27 PM #36
Anonymous
Fuk Bin

It sounds good at first, but it appears to be a useful tool for weak agents.  The good ones have faith in their ability to perform.

Sep 12, 2008 11:57 PM #37
Rainmaker
484,157
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Yep - I agree 100% - great way to put it, RpR!

Mar 11, 2009 09:27 AM #41
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