The future of commission-based real estate
This morning, the message was sent out via Twitter that Inman News in February will be examining the future of commission-based real estate.
And to that, all I can say is that it’s about time. If ever there is a (non) topic that routinely has been twisted to suit the purposes of whatever particular axe someone wants to grind, it’s the concept of real estate commissions. Knowing the higher standard to which Inman News holds itself, I have every confidence that this won’t be the same years-old rehash that agents make too much money, etc. Not only wouldn’t that be news, it would be a gross mischaracterization of the real estate industry.
Seven Basic Truths
Any objective analysis of real estate commissions undoubtedly will uncover these basic truths:
1) There is no set compensation structure in real estate. Some agents and brokerages work on a commission basis. Others charge only a flat fee (and in some cases, no fee) for entering listings in the MLS. Sellers are free to select the brokerage that most closely aligns with their own perception of value and have the right to negotiate with any agent on any fee. The worst that will happen, as is the case in any negotiation, is one side or the other says no and the seller moves on to the next brokerage down the line.
2) Compensation for buyers’ agents is negotiable. There are many agents and brokerages that negotiate the compensation they will receive at the very beginning of their relationship with a new buyer. So if a buyer has an issue with their agent accepting the compensation offered through the MLS, this can be addressed at the very beginning. And, again, if the two sides can’t come to an agreement there are many alternatives from which the buyer can choose.
3) Commission checks are not pure profit. Let’s say an agent receives a $3,000 check on a $100,000 sale. From that $3,000 the agent then needs to pay a split to their broker, national income tax, state income tax (depending on the state), local income tax (depending on the municipality), fixed costs such as gasoline and automobile payments and maintenance and other operating expenses (office staff, etc.) Whatever is left after all that is paid is what eventually goes toward groceries.
4) Fixed costs accrue regardless of whether a transaction results. Marketing of listings in many cases is paid out of pocket by the listing agent with no up-front fee charged to the seller. When working with buyers, the fixed costs accrue and time is spent whether the buyer purchases or not. Every agent has experienced a situation (if not many situations) where hours and hours have been invested with someone who doesn’t buy a home.
Which is okay, because we knew that side of the bargain when we started working with the person and presumably our own personal business model accounts for that … just as the prices you pay in a store account for expenses such as breakage, which are passed down to the consumers who do purchase.
5) There’s no barrier to entry for alternative models, save for the public’s willingness to embrace them. As has been proven by Redfin, any company can enter the real estate game with an alternative model. To coin a poker phrase, all you need is a chip (if not millions of chips in venture capital) and a chair and you’re in the game. As also has been proven by the various iterations of Redfin’s model for working with buyers, market forces will determine whether any particular model is successful.
This is the very nature of entrepeneurship. A new idea is developed and it fails or succeeds on its own merit, unless we’re talking about the WNBA. Those that fail almost universally complain that The Man held them back or there was some sort of competitive disadvantage (damn McDonald’s and those Golden Arches), but the reality is an idea with sufficient public support – financial support – will succeed.
For instance, as a solution for those buyers who look and look and look and never buy, I could offer a fee structure where I’m compensated either hourly or by the home. Accounts would be settled at the end of the day, my fixed costs would get covered and the buyer would appreciate that there’s a cost associated with the search for a home (not even getting into the actual negotiations.)
What prevents me from doing this? Certainly not an edict from the National Association of REALTORS, whose leadership is too busy planning their next parade float to pay attention to what one member decides to do. No, the reason I don’t adopt that model is I don’t believe there’s a market for it.
We can argue whether there should be but it’s almost as pointless as arguing that there doesn’t need to be an episode of the CSI franchise on television 24 hours a day on one station or another. The public demands CSI and so it’s there. The public isn’t demanding the ability to pay up front for their real estate agent’s time so that niche doesn’t exist.
6) Commissions are more negotiable than many other fees consumers pay. Talk to many real estate agents and you’ll discover that there are many variables in what many charge for their services. Fees are negotiable.
Take this same approach with a different industry … say subscription-based online real estate journalism. I invite you to take a moment and call the folks at Inman News to negotiate what you’re willing to pay to become a premium member. For some, the amount Inman charges has sufficient value to justify the cost. For others, there’s little to be found at Inman News that can’t be found in a hundred other places on the web absolutely free.
It’s absolutely irrelevant what fixed costs Inman News may have, after all. That’s Brad’s problem, not yours. Decide what value you receive from peeking behind the subscription firewall and make your offer based on that amount. Surely they won’t take the same route as the inflexible agents that have been mocked in prior years’ news stories and tell you “this is what we charge, take it or leave it.” That would be hypocritical.
7) What my buyers and/or sellers elect to pay their real estate agent isn’t anyone else’s business. One of the most beautiful things about real estate is the ancillary jobs that have been created that have next to nothing to do with real estate.
For instance, take Inman’s vice president of content and community manager positions (both of which are filled more than capably by friends of mine.) As a member of the general public who may or may not use the Inman product, do you believe that you should have a say in the salaries they receive?
Of course not. Which is why I find it curious that so many people believe that the general public, who may or may not use the services of a real estate professional – any real estate professional – should have a say in the compensation said professional receives from a buyer or seller. If a buyer and seller agrees to compensate an agent in a certain manner, if they’re comfortable in doing so, why is this anyone else’s concern?
Real estate agents aren’t receiving tax dollars … most of us aren’t even receiving the vast quantities of venture capital that have kept some of our competition afloat. So why is it our 1099s are the subject of debate when the W-2’s of others vaguely connected to this industry are not?
Go back to point number 5 (it’s in Chapter 3 of this admittedly lengthy post.) If you don’t believe in any particular compensation model, come up with something different and see if it floats. It’s that simple.
Is there an agenda here?
This has been a rather lengthy post but I believe it’s a mere pittance compared to the length of an objective month-long investigation of the many myths that surround real estate commissions. No doubt, all of the above points not only will be made but will be supported by a number of published articles, or at least enough to offset those that would perpetuate the myths to support their own business model.
Because the basic reality surrounding this entire topic is everyone has an agenda that they’re trying to push, even if it’s simply to push a business model that the free market hasn’t chosen to embrace…
… or if they’re attempting to co-opt a conversation rarely if ever heard outside the online world of real estate journalism and blogging in the name of increased subscription and convention sales. (Though you’d have to think, if at any point the real estate populace gets the feeling that the host of a conference is trying to make a buck by slamming the entity know as “real estate professionals,” maybe they’d finally stop shelling out the dough.)
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Well done Mr. Dalton…
I often ask potential clients to test my negotiating skills before any agreements are signed. Most won’t engage. To me it proves right then and there why they need real estate related services.
Todd – Most people think they’re excellent negotiators. They also tend to think that they can sing and have a great sense of humor.
I think there is a market for fee based services, but that it’s not around because most agents and brokers are afraid to be the first ones to dip their toes in that pool.
A fee-based service model would help solve a lot of issues currently surrounding the real estate industry.
And, incorporating your message, each agent and broker would be free to charge as little or as much per-hour or per-service as they wanted. It would then be up to the consumer to decide whether paying that amount for that agent/broker is worth it.
Excellent and well said. You are correct in that commissions are negotiable but I think that we are getting hosed by the banks by lowering our commissions for listing thier dumpy repos. Why should we take a loss so that they can minimize thiers. We just gave them billions and we get to take it in the shorts on our income? Just food for thought.
So here’s the follow-up question, Danilo … why are they afraid to be the first? If a person is absolutely convinced that’s the right way and that the public will support the model, why not be the first adopted and be ahead of the curve?
Shaun – but that’s our choice, isn’t it? If you’re the listing agent, you chose to accept the listing at that commission rate. If you are the buyers’ agent, you either resigned yourself to the co-broke or negotiated a different fee with the buyer.
Something I’ve had to remind myself of as I am showing $30,000 homes where my final profit might cover gas for a month – I’m the one who accepted the assignment.
The same reason the real estate industry fails to do a lot of things that are right and that the public will support.
I’ve been testing things out by offering both the traditional “pay me when the deal closes” and a fee-based service structure to my clients and a hybrid of the two.
So far, most buyers are still leaning towards the traditional “commission-at-the-end” way of paying me; most sellers and some buyers prefer are choosing the hybrid version; and some are choosing the completely fee-based service fee structure.
The problem I run into is that a fee-based service that a consumer pays upfront or “as they go” isn’t always an option for those that are strapped for cash to begin with (first time home buyers, those going FHA because of the low down payment, etc). Those folks can’t afford to pay upfront or as they go because they need that money to purchase the home in the first place.
On the other hand, those that are buying their 2nd, 3rd, 4th+ home usually have a lot of cash to put down on a property and can afford to pay for those services up-front or “as they go”.
As far as the hybrid model goes….An agent could charge a non-refundable flat-fee that covers their fixed up-front expenses and charge a smaller commission fee on the back-end. That way, if the listing doesn’t sell or they don’t end up buying a home, the agent’s fixed costs are covered.
There are some legal and monetary issues with that brokers may have with that that fee structure and may be one of the reasons why it hasn’t taken off…
If I just order the sign, have it installed, take photos and upload the property onto a listing site, that’s different than negotiating a sales contract, advising on price, etc.
Could I technically use a consulting agreement for the former and get paid directly rather than the client paying the broker?
If the fixed costs are cut out of the “commission piece” then the amount the broker makes from the split is decreased – not something most brokers want to happen.
“For example…let’s say my normal listing commission is “X” percent, but I split it up so that the seller pays me an up-front fee of 1000 “chickens” to cover my fixed-costs and I only charge them “X minus 30 percent” at the time of actual settlement (hybrid model).
The broker would make 30 percent less on that deal with the hybrid model versus the “X commission-at-the-end” model.
Multiply that 30 percent loss of revenue by however many agents in the office use that commission model times the number of deals they do each year and you can see how brokers would be against it.”
So if you believe that’s the right way to do business, Danilo, and your current broker doesn’t support it then you need to either find another broker or hang your own shingle.
There’s nothing industry-related that is preventing you from doing either – you are making the choice not to do so.
If the public supports the idea then you’ll succeed. If it doesn’t support the idea then you would need to reconsider.
I agree with your point regarding fees and first-time home buyers but that’s not the driving force behind discussing the real estate commission structure.
In fact, that’s one of the areas that’s never addressed when we talk about whether to divorce commissions. I’ve only seen one person address this and that’s Joe Ferrara with the idea of pro-bono work akin to what attorneys do.
But whatever model you choose, I maintain that is your decision to make and your clients’ decision to hire you. It’s no more a public debate than is anyone else’s compensation.
I never said my broker doesn’t support it. In fact, my broker has a fee-structure that allows agents and associate brokers to charge whatever they see fit as long as the brokerage firm get’s it agreed upon amount. That’s why I switched companies at the end of 2007.
There are industry-related issues that would immediately arise if the majority of agents started to jump ship. That comes from knowledge of how things work and what would happen in the DC metro area, but I doubt it’s geographically isolated. You’d be suprised at the workings and ability of those in control to make things go away if they wanted them to…
Divorcing commissions (and getting rid of Dual Agency) would be lovely – in a perfect world. But it’s not perfect and all we can do it continue to try to change what’s wrong and broken. Most of us are here to just make money and feed our families, but I know many who are in this for more than just that.
Actually what I have been doing lately is writing into my additional provisions that the buyers agent shall be paid “x” commission. This is of course not what the listing agent is offering and does not make them very happy that I am asking them to make less money so that I can make more. My reply is that thier acceptance of a lower commission from thier seller is not my problem. I do not operate on volume like most of the lender owned listors who have exclusive business arrangements with these banks. I show just as many homes to my clients regardless if they are bank owned or not. I have noticed that many agents who list these bank owned homes “throw” them into the MLS with little or no info, pics, or directions and then expect to split a commission with thier counterpart. I am not trying to be a jerk about this, I just think it is wrong that agents are getting the shaft just to save the banks a buck.
I’ve never understood why we can’t charge for services rendered, just as attorneys, doctors, accountants do. We know that when we make an appointment with or call a lawyer, that the clock will start ticking. We pay for their out-of-pocket expenses and for their time. Ca-ching!
Lawyers are free to set their own fees for each type of service. An easy, basic will costs less than a tough divorce settlement. The better the attorney is, the more they charge. People can use the good lawyers or the cheaper “Lawyers-R-Us” firms.
Why should the real estate industry be any different?
Great Post!
Danilo – you’re right, I would be surprised. I’ve seen what NAR has tried in the past regarding VOWs and it was ineffectual.
And I apologize … I meant the “you” more generally. But in general, if someone is working for a broker who isn’t aligned with their personal business philosophy, they ought to move on.
Shaun – not sure how that would fly here as commissions aren’t supposed to be written into the contract. But it’s not unheard of.
Elaine – nothing to stop it, assuming there is a significant enough segment who’s willing to pay it. And that seems to be the biggest obstacle.
JD, you covered it pretty well. The Inman piece will simply be a hit piece where they’ll get the agents foolish enough to read their drivel to pull the trigger and shoot one another.
Keep in mind this is from Brad Inman, who once said that the Internet woulkd be the death of the agent, then decided to start a lead gen biz to sell to these very same agents. The same Inman who brought in Barry Diller who said he was going to put us all out of business.
Inman with an agenda? You think?
Jonathan,
I am shocked (that is right, Jonathan, SHOCKED!) that you would suggest Brad Inman has an agenda with his special, “the future of commission-based real estate” report.
Aren’t all agents just waiting for the next special report so we can all find out what the future really holds for us?
Brad – and others – have been working on this “special problem” for some time. It must be a very important issue. They know it is an important and hot issue. And do you want to know *how* they know it is important? THEY’RE WORKING ON IT. No way would they spend their time frittering it away on silly nonsense. No. How much you and I make and charge each of our customers is perhaps one of the most vital and significant issues of our times.
To show those efforts have not been in vain: many Realtors now find it something to “work on” with them. This is sort of like someone saying, “I am hoping to commit suicide somewhat slowly. I can see someone trying to do me in but they aren’t very effective. I think I will give them a hand.”
I grew up in South Dakota so I’ll just follow Tom Daschle’s lead with #3. Hope the IRS doesn’t read these comments.
Danilo wrote: “If the property sold for $200K and I were on a 70/30 split with my broker, the broker would make $600 less on that deal with the hybrid fee structure versus the traditional “commission-at-the-end” model.”
Sure, on that ONE deal. But if your model brought in more closed transactions, the broker would make more.
Clearly there are short-sighted brokers out there looking only at the bottom line of one single deal. But the smart ones will look at the profit margins of the business as a whole.
Personally, (and this isn’t directed at Danilo in particular, rather it’s a general statement) I grow weary of the “but the broker will . . . [insert whatever complaint about the broker here]” arguments.
If someone doesn’t like what their broker does, or doesn’t like some brokerage policy, the solution is simple. Either 1) find another broker; or 2) start your own brokerage.
Shaun wrote: “Actually what I have been doing lately is writing into my additional provisions that the buyers agent shall be paid “x” commission. This is of course not what the listing agent is offering. . .”
Interesting approach. And can not be done in the State of Arizona. Honestly, I’m surprised it’s allowed anywhere. The contract should be between the buyer and seller, not the listing and buyers agents.
Does your state not have buyer broker agreements?
As a licensed agent I can’t discuss commissions with other agents. That leaves me out of the conversation.
Danilo, the last part of your first comment here… the consumer has always had a choice on how much they were willing to pay for services.
Jay, as always excellent. The buyer/broker document is my absolute favorite document in this biz.
You also forgot to mention Health Care/Dental costs. For those of us who are sole providers for our families, that eats up a big portion of that “income” right off the bat. And those bills don’t get any smaller just because times are lean.
Thanks for the perspective.
Teresa-
I think you can talk in theoretical terms about commissions. What we cannot do is talk in actual terms about what we are currently doing, and what we want other people to do, with regard to commissions. Some of this discussion is right on the edge of that line.
My guess is that Shaun is in NJ. You will hear the craziest stories about how RE is done if you talk to agents from NJ…
Sure you can talk about commissions. What you can’t do is collaborate to fix commission rates or violate other portions of the Sherman Antitrust Act, or supplemental acts such as the Clayton Antitrust Act or Robinson-Patman Act.
It’s perfectly legal to proclaim loud and proud, “I charge 3% commission (or 1% or 47%, whatever it is that you charge). You can also say, “I think percentage based commissions suck and the industry should move to a flat rate”.
What I can’t do is hook up with Steve in Phoenix and “fix” our commission rate or form a cartel. Brokers can’t huddle up and say, “Let’s all charge everyone x%”. Nor can we collaborate to exclude others based on their price-model (ie: you can’t “boycott” a “discount broker”).
What Genius Jay said.
This is very interesting and I am curious to see how this new commission structure will be integrated into the payroll system. This should shake things up – we will just have to wait and see if it is for the better or worse.
Realtor – which new commission structure? The whole point here is there is no one structure in place, that any structure the public will support will work.
Jay, Steve, Mrs. B – I can discuss what I charge all day long. I can put it on my website if I so choose. That’s called advertising and many, many, many agents and brokerages do this very thing.
I’m not telling anyone what they ought to charge or what their business model ought to be. In fact, I’m saying that it’s none of anyone else’s business how you choose to run your business or how you make your money.
Personally, I find much of the conversation to be gauche in the extreme. There’s nothing I can see that justifies what individuals earn being the subject of such endless public debate.
As I said above, if my 1099 is up for debate then those beginning this debate ought to be prepared to defend their own W-2s.
Russell – I was offered the chance to write an opinion piece on Inman News. Needless to say, I instead elected to say my peace here rather than on their platform. It didn’t make sense to write on their website and add my voice to a debate that has no merit and should not even be taking place.
The reasons I was given yesterday for the idea behind this month’s “emphasis” were shocking and more than a little bogus.
“Jay, Steve, Mrs. B – I can discuss what I charge all day long. I can put it on my website if I so choose. That’s called advertising and many, many, many agents and brokerages do this very thing.”
Agreed completely. I think I said that?
Agreed, we can discuss commissions as long as we don’t engage in anti-competitive behavior or violate other portions of the Sherman Antitrust Act.
And let’s make it clear, though commissions across the board are negotiable, it’s perfectly legal for me or my company to charge a commission and state that it is non-negotiable. There is nothing compelling me to negotiate my stated commission.
And as an aside, our Buyer’s Agency Agreement does provide for Buyers Agents to be paid “X” and if the listing fee does not cover that amount, then the Buyer is expected to pick up that excess amount and reimburse the sales agent at closing.
Inman’s perennial “The future of commission-based real estate” issue is the equivalent of Sports Illustrated’s swimsuit issue, an annual event to get the readers all excited.
The arguments are usually the same; that the real estate transaction process is primitive and inefficient, a throwback to earlier evil times when agents controlled the MLS book (blah, blah, transparency, blah), that the rich and powerful are preventing change, and that the good people of this great country of ours are being ripped off by real estate agents.
There will, however, be one difference this year.
Circa 2005, the conclusion was (I’ll simplify here) that most real estate agents are dumber than a box of rocks (except the enlightened who used HomeGain, et al.), that agents are making way too much money for people with their native level of intelligence, and that agents should, therefore, cut their commissions and repent.
This year, the justification will not be, of course, that agents are making too much money.
This year I’m betting the conclusion will be that those poor home sellers are losing money hand over fist so agents should cut their commissions and repent… and buy some kewl software.
Jay – the problem is that if you look at how anti trust is enforced, and what could be construed as a violation it just isn’t all that safe to talk about it. I’ll read but I won’t comment.
Yes you absolutely can and should advertise what you charge that is way different from discussing it. I may be wrong on this but until I get more information from a qualified source I won’t be leaving comments on public web sites.
No problem T, you are of course free to do whatever you are comfortable with and I would never want you or anyone else to compromise that.
In my opinion, discussing commissions is a far cry from anti-trust price fixing and cartel formation. But I am clearly not an attorney, nor do I play one on TV, the radio or Internet.
Which is exactly why I got direct feedback from the Arizona Associations of Realtors attorney on precisely this topic.
I hear “we can’t discuss commissions” all the time from agents and brokers. I’d love to have someone cite a reliable source or case law precedent that says openly discussing commissions violates any rule or regulation. So far, no one I’ve met or talked to has been able to produce such a source. Ever.
We do not use the common approach on discussing commissions with sellers, i.e. either 5% or 6%. We approach commissions from the stand point of a listing commission and a selling commission.
Under a listing commission there are options we can go over with the seller how much service do they want and are willing to pay for. We have charged as high as 4.5% for a lisitng commission where we took complete care of the property and prsented the home to each buyer and/or agent. We have taken less depending on a what the client wants and are they repeat clients, etc.
We discuss selling commissions separatley based upon how the home is priced and other needs of the seller. We have received up to 4% commission on sales including REOs.
There are to many variables in each listing that are different from other listings to set one dollar value or percentage to cover all listing and sales commissions.
Agents aren’t making near as much as the consumer thinks. One of the problems is that the consumer doesn’t understand that the agent usually spits with the Broker.
My solution – get rid of the middle man, get rid of the broker. I don’t see where the broker adds value to the situation. Have ALL agents trained to the broker level. Essentially I am saying get rid of agents and only keep brokers.
I would allow brokers to form an “agency” to combine costs like advertising but the two tiered commission structure makes no sense.
Jay Thompson Wrote:
>Interesting approach. (putting commission in the contract)And can not be done in the State of Arizona. Honestly, I’m surprised it’s allowed anywhere. The contract should be between the buyer and seller, not the listing and buyers agents.
You are darn right Jay, the contract should be between the buyer and the seller. I am a buyer more often than an agent. That is why I don’t want you, the real estate commission, or the state legislature telling ME what can be in MY offer.
If my buyers agent is a terrific guy and I want him to get paid more by the seller I should be able to put that in my offer. And NO ONE should tell me the buyer that I can’t.
When I opened my brokerage 18 months ago, I set out to create a very different set of rules for how we get paid. I do a lot of consulting and work with many business people. I set my fees based on how much work they want me to do. Yes I have a fixed percentage, but if a lawyer client of mine wants to use me to put his property in the MLS and do marketing, but not negotiate/etc why should he pay the same fee? The days of x% or goodbye are gone, or won’t last forever anyway. There is no reason we cannot charge as lawyers or other professionals do. I do it and it works for me. It might not work for all… that’s why we have a free market!
> The days of x% or goodbye are gone, or won’t last forever anyway.
They’ll last as long as there are members of the public willing to support that model and members of the industry who find it to be a viable model for their business.
This was a very good post. I think of the reasons that commission becomes a hot topic is that the public has a perception that 1) if the price of the house is negotiable, so is the commission 2) that the agent listing the house gets all of the commission; you have to explain to them that we coop with other agents, pay broker fees, etc and 3) they perceive our job as fun and easy.
I really have no issue with a client asking me to lower my commission. The answer is a simple no. I have built a business model and marketing plan around generating a certain amount of income. If they don’t see the value I’m bringing, they can shop elsewhere. This isn’t arrogant, it’s called common sense.
Who negotiates with their doctor, CPA, attorney, grocery store?? No one. You have the right to buy from whomever you want. The market determines value not the seller.
I would love to see us go to an hourly model. If my sellers paid me by the hour, I don’t think I’d have listings sitting on the market and overpriced. Buyers tend not to get distracted by this because they don’t “feel the pain” of paying us.
This is all about educating the client. I sit down with every client for 1-2 hours before we agree to work together. We discuss their needs, goals and I make sure they understand how I get paid. If they’re not comfortable and willing to sign an Exclusive Listing/Buyers Agreement, all I’ve spent is a few hours. I can write this time off to good use rather than driving them around, seeing houses and then finding out they don’t want me to get paid.
Real estate is a service business. Every year I accumulate more knowledge, insights, market awareness and invest in better tools. However, my fee does not go up every year. In fact, given the current market, my fees are lower today due to lower prices. Should I add a gasoline surcharge, multiple trip surcharge, checked baggage surcharge like other industries?
I don’t think the market will go for that and I’m not interested in that kind of business model. The next time someone questions your compensation, ask them about theirs. That usually stops the discussion.
Good luck out there.
Fantastic Post Jon. This is a senseless argument that is taking more of the industry’s time then should be allowed.
You’re point about the public not having a say (and rightfully so) in the salary of Inman execs was spot on. To provide ‘Joe the Plumber’ an equal voice in this forum would be ludicrous; and would it not open the door to negotiations for all of America’s goods? Hmmm, maybe that wouldn’t be such a bad thing. When I get home I’m gonna call my electric company and see if I can barter down the utilities bill…