Phraseology
VAR’s sometimes-wacky special counsel (you know, the one who utters the words Kama Sutra in a webcast about the ethics of short sales) is fond of talking about agent commissions and offers of compensation in terms of chickens. 200 chickens to the buyer agent and so forth. For the purposes of this post, I’m borrowing his phraseology. Thanks, Lem.
Seriously: What’s the deal with downward pressure on commissions? Especially in this market. Sure, I understand that market forces are at play, there are competing agents to beat out, limited service brokers offering a low flat fee, etc. Still, I think REALTORS® undervalue themselves. Over beers one recent evening, I talked with two top-drawer REALTORS® who I admire tremendously. They both flat out said the work they do for a client isn’t worth 300 chickens. Their argument was that the time they spent on the deal didn’t justify all that poultry. That may be true, if you assume that the amount of money you earn should be proportional to the amount of time you spend on a deal.
Drawing a Parallel
Is drawing a parallel between the amount of time you spend on the deal and the amount of money you earn the right way to think about your compensation? I’m not convinced. People pay more for extraordinary expertise and results. They also will pay for a quick and painless transaction. If cost were the determining factor in buying decisions, there would be no Ritz Carlton, Lexus, Jiffy Lube, or Nordstrom’s. We’d only have Red Roof Inn, Yugo, Hank’s horseless carriage repair shop, and K-Mart.
Why don’t we see more value-based fees in real estate? REALTORS®: Why not set your fee based on your expertise? Because we’ve always done it that way? I realize there are MLS rules to grapple with, but are they insurmountable?
A Natural Way to Price Services
With so many REALTORS® promoting their services as real estate consultants these days, a value-based fee seems like a natural way to price services. Think about it this way: Your value isn’t based on how much time you spend selling a property or showing homes. It’s based on your knowledge. In fact, if you can make the intellectual leap that your expertise is more valuable than your time, you should be able to justify 600 chickens for a sale that, for example, takes less time than the average. Paradoxically, the more you understand how valuable your time is, you’ll increasingly realize that your expertise is even more valuable.
Yeah, there are factors beyond your control that might inhibit the potential of your expertise to deliver extraordinary results. Is that holding you back from a value based fee structure? It doesn’t have to, in my view.
Lotsa Chickens
A friend of mine started his consulting firm on the guiding principle that he would never charge by the hour, only by the job. He understood that his expertise was more valuable than his time. He stands firm on this principle and does just fine. Dude makes a retarded amount of chickens. He has inspired me to do some freelance writing, public speaking and consulting work on the side while I’m not slaving over a hot CPU at VAR. My most profitable freelance gigs have been those that are based on the sharing of my knowledge, not how many words I wrote or how many minutes I spoke. So I go looking for consulting jobs, not speaking or writing gigs.
Freelance consulting is different, certainly. But is there anything to be borrowed? There must be. And… I’d love to hear examples of agents charging value based or other alternative fees based on something other than time or a straight commission.
Maureen Francis
May 22, 2008 at 5:54 pm
I have been personally asking for more chickens for the last few years. More challenging market = my services are worth more to my seller clients. If they want to pay less, I am not the agent for them, which is quite easy for me to say. I’d rather get that out of the way the first day.
The only fee that I charge that is not commission based is for short sales, but I hesitate to discuss how or what I charge due to antitrust considerations.
Matthew Rathbun
May 22, 2008 at 6:44 pm
Even in terms of chickens is dicey to chat about fees for services. I struggle with this issue from time to time based on what I see as the “Norm” of agents. I think the top notch agents who are worth their fees carry the perceived value of lesser capable agents.
The factors that aren’t considered are the ongoing fees to stay in business, training and travel all of which are needed to properly represent the client, but are only indirectly related to the actual transaction.
Agents need to be more relevant than they have had to be in years. All the work that is done is useless if it isn’t being relayed to the client, and they are shown the value.
Scott P. Rogers
May 22, 2008 at 10:28 pm
Approached differently, I have always found it odd that in most cases, agents providing the least service (quality and/or quantity) are often compensated at just about the same rate as those providing the most service.
Team Benya
May 22, 2008 at 10:43 pm
Any agent that thinks they aren’t worth their fees is approaching this concept form the wrong angle. Top producing agents are paid for “WHAT THEY KNOW” every bit as much as they are paid for “WHAT THEY DO”. It’s why so many people don’t like to work with green agents when they can hire an experienced pro.
I don’t want to take a “gilded cage” attitude, but it’s like so many other industries: You could trade stocks at $7/trade on scottrade dot com, or you can spend the extra money and hire an investment consulting firm to guide you through. You aren’t paying that advisor for making the trades; you’re paying him for what he knows about his market.
Scott P. Rogers
May 22, 2008 at 11:25 pm
But consumers do work with green agents, inexperienced agents, and agents who provide low levels of service — and consumers usually pay these agents just as much as they pay top producing agents. This doesn’t seem appropriate — why does it happen!?
Daniel Bates
May 23, 2008 at 5:49 am
I think there is a real misconception from the public about what agents do and how much back ground work goes into a sale, because they only see the work starting from when they hire you (putting up a sign, distribution to websites, creating flyers and other marketing, etc). They don’t see all the time spent learning the nuances of the market to give good pricing advice, posting on your blog and SEO changes to optimize it to get you good buyers, building your company’s integrity through honest dealings, and the list goes on forever. They think we’re all the same because what we do is so simple so they hire their cousin who just got his RE license who should be able to do just as good a job as someone who’s been doing it for 20 years but pay him a few less chickens because he doesn’t deserve more yet.
Considering we most agents get paid based on commission there is one point that levels the playing field. You don’t see too many experienced agents listing cheap homes in bad neighborhoods, maybe they used, but most go for the nicer homes and therefore are getting paid more for what they do (and know), while the greenies (like me) cut their teeth on the leftovers and try to learn from every transaction.
Team Benya
May 23, 2008 at 6:35 am
Interesting point, and I think it falls back to the old addage; 20% of the Realtors do 80% of the business. I also think it’s a big factor in why there is such a high rate of failure in the business among new agents. I’d be curious to see if anyone has done a study to show how much people have paid for service in relation to the amount of experience an agent has?
Frank Jewett
May 23, 2008 at 7:59 am
I know several experienced brokers who have been heavily discounting their services for a number years. I wouldn’t assume the lower portion of the volumes or commissions is based on experience. While I believe in the value of business by referral, you also have to keep adding people to your database or your referral business will dry up over time. Some of the discounters use discounts as part of their model while others simply get beat up by prospects because they don’t have enough in their pipeline to refuse. I frequently read that this downturn is going to rid the business of the unworthy. I know some worthy, former top producers who are struggling as well.
Team Benya
May 23, 2008 at 8:29 am
@Frank I’ve seen quite a few top producers go down the tubes recently as well, and IMHO it begs the question: Were they top producers prior to the market boom, let’s say before 2002? If the business is turning out more than just the bad agents, why are some top producers running well and others starting to sputter?
It’s about marketability, adaptability, and smart financing when it comes to being a successful agent. Unfortunately none of that is taught in the process of getting your license, which is why so many struggle.
Business models based on consumers paying up front rather than at closing will continue to exist, because it is seen as “cheaper”, and the brokerages will continue to exist because they get paid regardless of whether or not the home actually sells.
What I’ll be interested to see is if the concept of absorbing the costs and giving credits @ settlement will be running strong once all is said and done with the down market.
Frank Jewett
May 23, 2008 at 9:20 am
The former top producers that I’m referring to have been in the business for decades, so they have survived previous busts. I’d say the major difference is that some brokers/agents become a little complacent once they have achieved a critical mass of referral business. They don’t want to admit that you can never stop farming. The boom cost them some referrals as family and friends of their clients jumped into the business. The bust cost them more as they started pumping money into lottery ticket listings where the seller thought he might get lucky, Those who are still going strong never stopped farming. That doesn’t mean they papered the valley with brag sheets, it means that they actively engaged their sphere, sought referrals, and regularly added fresh names to their database.
Here in California we have another challenge, which is Prop 13. If you look at our sales numbers over twenty years, remove growth, and smooth out the ups and downs, the trend is clearly downward as empty nesters are far less likely to relocate than they were in the past. I wouldn’t argue that we need to get rid of Proposition 13 solely for the sake of hungry Realtors, but I’m not a fan of the inequity we are seeing where new residents pay two or three times as much taxes as their neighbors. But I’m digressing…
Price is the problem that solves most other problems for sellers. Farming is the problem that solves most other problems for brokers/agents. Some of the old guard got away from farming, waited too long to get back to it, and have fallen for the same get rich quick schemes (“Become a short sale expert in just six hours!”) as the neophytes. Some are even dabbling in commercial real estate.
Jonathan Dalton
May 23, 2008 at 10:03 am
There are full-service providers who charge less, some who charge more and there’s a market for either one. You simply need to decide what you want your model to be, then provide the value that the consumer’s looking for at whatever price point you select.
Kaye Thomas
May 24, 2008 at 7:46 pm
In the last month I’ve had conversations with three people who tried to sell real estate in the last two years. Everyone of them, without exception, said they had no idea how difficult the business was until they actually became agents. They all thought real estate was easy and they would be making a lot of money quickly. Surprise…..
Ken Smith
May 25, 2008 at 10:41 am
IMO the difference in the amount agents charge is largely based on the confidence of an agent. An agent that is confident in their abilities will have no problem selling their services. Without confidence an agent has to rely on discounting or some other gimmick to get listings.
I have talked with agents that at one time always charged one fee then for whatever reason they started questioning their abilities to get a home sold that lowered their commission. They lost confidence and in turn couldn’t justify their own worth to the client or more importantly themselves.
On the flip side I see agents that start off offering low commissions and over time gain more and more confidence in their abilities and they start raising their fees.
Every quality agent deserves to make an above average income for taking the risks of being in real estate. The risk of taking a listing and investing your hard earned money and valuable time deserves more then $XX per hour, there also needs to be a reward for the risk/investment you have made.