Well… once again, I am setting myself up to be a rebel in the Real Estate community. From the headline alone, I expect to receive tons of messages in objection, and looks of disgust from fellow Real Estate agents. I spent enough years in Corporate America to know that the “old guard” protects the sanctions that safeguard their own interests.
The public opinion and perception of Real Estate agents and the affiliate of organizations and related services, is well… unflattering to me. There are various and sundry reasons that contribute to this overall opinion, however, most painful among them, lies in the apparent belief that Real Estate professionals do not provide value.
Generally speaking, value is a form of consideration when someone else accomplishes something for us, that we are otherwise unable to, or do not want to do ourselves. A physician who heals us when we cannot treat our ailments, or an attorney who defends us in a complicated judicial system, when the understanding of which is beyond our capabilities, or even an electrician who repairs a potential hazardous situation and keeps our family from being hurt, all seem to represent ideals of value. And yet, when it comes to buying or selling a home, most people resist the idea to pay for services, and further do not respect its value.
I think, this resentment to pay a service commission to Real Estate agents, comes from personal disappointment. Many people feel a strong emotional attachment to their home, and, the equity appreciation that has accrued over the years. So, as a result, to pay someone else to do what they think they are capable to do, leads to a perception of being cheated. Human nature being what it is, sellers will necessarily lower their listing price by thousands of dollars, yet will bark at paying a 6% commission to an agent who has worked hard, using their knowledge and resources to get the house sold.
Interestingly, a compensation Lawyer will often receive a 33% commission (ooops they call it a contingency fee) of any damages recovered, a Head Hunter will often receive an average contingency of say 25% of a first year’s salary for candidate placement, and a Real Estate brokerage firm receives about 6% (only if they have survived the beating by the seller to lower the commission rate). In the first example, people are receiving something they previously did not own and therefore willing to give away a percentage. In the second example, people are receiving talent that will help them to solve their problems, and therefore willingly give away a percentage. Whereas in the third case people seem reluctant to give away 6% of something they already possess. Interesting!
Regardless, in my search for answers, I have spent a lot of time trying to survey the opinions of the public. I conduct this research because I believe every business owner should step aside periodically and re-assess the value of their products or services. As I refresh my understanding of what represents value to my client’s, I expect I will then be able to re-align my services so that I, in-fact, deliver that value. In a more recent survey I sent out over 1,000 emails to my networking contacts on the LinkedIn Internet site, a website dedicated to business professionals. I received many responses from people who expressed their dislike for Real Estate agents – however amidst and among all of the comments was one single outrage – confirmation that the public sampled in my survey, does not equate value from the services of Real Estate agents.
Now, I am among the first to believe that the public also does not understand nor fully appreciate all the work and effort required to get the client what they want. The world sees it this way – each Real Estate agent gives a pre-printed glossy company brochure at a listing presentation, influences the client to sign a contract, lists the house on the Multiple Listing Service and then returns several months later to collect a 6% commission check. Not bad – I mean any dummy can sell 12 houses a year – and if each has a $1,000,000 price tag, that is a nice gross commission of $720,000+. At least, this is the perception among many who criticize Real Estate agents. Little does the public know that the agent is lucky to receive only ¼ of that commission after splits, and far less after deducting the direct marketing expenses such as to advertise the property, franchise fees to the broker, and transaction processing fees, and far less yet, after deducting indirect operating costs to run their business.
Apparently, my purpose for being in this business has been all wrong. I thought that we delivered value by getting the client what they wanted – simple as that. And yes, there are those once-in-a-lifetime deals that everyone remembers when an agent listed a house in the morning and it was sold by the afternoon. But, for every one of those, there are a hundred, if not a thousand when the agent earns far less on an hourly basis, than does a Merry Maid, a Stanley Steemer carpet cleaner, some hair stylists, and even some waiters in nicer restaurants. And… gosh, what about all those listings that either did not sell, or the owner decided to take the house off of the market without any regard to the agent’s loss from out-of-pocket marketing costs. And here’s a kick-in-the-ass. Real Estate agents often give their clients a gift in appreciation for the business once the transaction has closed escrow, whereas, it works the opposite in certain other service-based professions (No! Then why are there tip jars at Starbucks?)
So, where does my thought process go from here? Well… I think a new economy is beginning to emerge, and I hope the Real Estate industry chooses to champion some changes. The new economy is going to force us to rethink the way we charge for delivering value. In order to respond, and survive, in this new economy, we may have to consider transitioning from the traditional percentage commission to another, or perhaps hybrid methods. The following 4 proposals come to mind; (1) a fee-based model for selective services, (2) a shared revenue model for cafeteria plans, (3) a sliding scale incentive commission, or even (4) a commission split between seller and buyer.
Just so that everyone remembers, let me mention that all Real Estate agents are independent contractors, earning a commission. That commission, without regard to any out-of-pocket expenses or hours of work vested to sell the house, is contingent, and only payable at the close of escrow. And everything can, and does go wrong up until the close of escrow which jeopardizes the agent’s commission.
Let me offer an idea for the fee-based model. Let’s say a homeowner prefers to sell as a FSBO (For Sale by Owner), however, recognizes that to gain an advantage in the market, their success may be dependent upon some assistance from an agent. They may choose to engage in a consulting contract that allows the agent to provide a specified number of hours to provide, say, a comparative market analysis, inventory and market reviews, profile of market conditions and trends, caricature of current buying patterns and buyer’s mindsets, and a review of the endless legal and disclosure forms required to convey property – in other words to give the seller an advantage by portraying the current market dynamics. This could be modified to include an option-to-list agreement, so if the FSBO decided to abandon their own efforts to sell, then the consulting agreement could convert to a listing agreement, with any fees collected to-date perhaps credited against the final sales commission. This provides the seller with more options and at the same time provides protection of a commission cap. By-the-way, it also allows an agent to showcase themselves, earn some consulting fees in exchange for services rendered, and perhaps later, still get the full contract. This is somewhat akin to a “temp-to-perm” concept in the employment market.
Let’s try another one. More and more, people with excellent skill sets are transitioning into Real Estate. The shared revenue model could work this way. The seller would interview with the broker – not the agent. After which the broker assigns one of among any pre-paired teams that match the skill sets required by the seller. The team might consist of a former accountant having knowledge and expertise in metrics, analytics and finance, another could be former attorney having expertise in law, another in marketing and advertising, and another in client prospecting. This power team might be better qualified to sell the house. Afterwards, the team would share in the commission. Presumably, the team members each get a smaller cut of the individual sales commission but participates in higher client volume than if working independently. The client gets a team of strong skilled individuals rather than one person who is likely strong in one area and weak in others. OK, maybe not the best management scenario for the brokerage, but perhaps a better alternative for the client. And who knows, more value drives higher fees.
The sliding scale approach might start off at a higher commission that incentivizes the agent to focus immediate attention to selling the property and reducing the days on market. This may serve well for the seller who is highly motivated, rather than one who is simply fishing for high offers. In recognition that the longer time on market, the more it costs the seller - this approach emphasizes greater urgency on the part of the agent. During a “buyer’s market”, a plan such as 8% if sold in 30 days, 7% if sold in 60 days, 6% if sold in 90 days or greater, might incentivize the agent to work smarter and harder to earn a higher commission. At the same time the seller accomplishes their goals quicker, and avoids carrying the cost of ownership over an extended period of time.
OK… if there isn’t enough legislation in our lives, I am actually proposing more. While homes are like cars, meaning that everyone who owns one thinks they are an expert on the subject, in realty, housing and all of the related property rights can be very complicated. It concerns me that so many people who know so little, chose to represent themselves in a Real Estate transaction. Unfortunately they may find later that they made a terrible and costly error or omission. And in this country we know what happens … rather than accepting responsibility for our own actions, we remedy the situation by filing legal suit against somebody … anybody... anybody whether dead or alive. Conveying Real Estate is slightly more at-risk then selling an old toaster on E-Bay. To minimize the costly mistakes, and to provide a higher degree of fair representation to buyer and seller, I propose that it be a requirement of law that every buyer and every seller have a contractual agreement of representation with a Real Estate agent. In addition, I think they should each be responsible for paying their own commission, rather than as is the most typical scenario now with the seller paying all.
That’s my ranting and raving for the moment. Send me an email with your ideas or comments. None of these ideas for changes in commissions alters the negotiation or bargaining process, nor do I think it interferes with fair trade. It does potentially provide additional revenue streams for Real Estate agents, potentially reduces the population of agents to those matched to meet the expectations of the public, potentially upgrades levels of integrity, and allows more flexibility in the ways that the public buys and sells Real Estate, and … oh yes … potentially alters the perception of value.
Statement of disclaimer; “these are my personal opinions and not those of Prudential California Realty”
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Charles M. Schevker (CPA)
DRE # 01875556
Broker Associate
Prudential California Realty
1299 Prospect St.
La Jolla, CA. 92037
Main Office: (858) 551-3319
Mobile: (858) 449-8250
DRE # 01875556
Broker Associate
Prudential California Realty
1299 Prospect St.
La Jolla, CA. 92037
Main Office: (858) 551-3319
Mobile: (858) 449-8250
