Here’s how Mike Elsberry, my home inspector, charges for an inspection for one of my clients:
- A sliding-scale price based on square footage
- A sliding scale price based on the age of the home
Bigger homes take somewhat longer and entail somewhat more work to inspect than smaller homes. Older homes may have more wear and tear, also resulting in a longer, more arduous inspection. Mike has a little pricing grid, and taking those two numbers, square footage and age of the home, he can plot the precise price point on his matrix.
You could argue that he could come up with a more predictive pricing scheme, but the genius of his system is obvious: It’s reasonably objective, making it hard to argue with, and Mike can price a job from his cell phone, while driving, with his mouth half full of burrito. Lo-tech don’t mean no-tech.
Okayfine. Now let’s sell a couple of houses.
I’m about to do a Facebook deal with an old friend from high school. I will be representing her son in the purchase of the condominium he will live in while attending graduate school. Approximate purchase price: $80,000. Gross commission to me: $2,400.
I’m also about to help a very nice couple buy a small hacienda in Paradise Valley, one of the wealthiest towns, per head, in the United States. Approximate purchase price: $800,000. Gross commission to me: $24,000.
Obviously the differences between the two transactions are myriad, but here’s the one that matters most: The $80,000 condo will almost certainly take a lot more of my time than the $800,000 hacienda. I’ll get paid maybe $50 an hour for the condo, and possibly as much as $1,500 an hour for the hacienda.
How does that make sense?
Home inspector Mike Elsberry’s pricing scale makes sense, even if you could argue that something more complicated might make even more sense. The compensation buyer’s agents receive bears no relation to the time and effort expended. As the Freakonomics boys point out, the incentives are misaligned, as well: I get paid more if my buyers pay more, even though their best interest is to pay less. But even ignoring all that, basing the buyer’s agent’s compensation on a percentage of the purchase price, regardless of the amount of that price, is plainly absurd.
Why don’t buyers object? Because they’re not thinking about it. Because they believe their representation comes to them “free.” Because they never stop to work out the consequence of 3% or 5% or 8% or 16% buyer’s agent’s commission on their monthly payments — 3% or 16% of every dollar borrowed times 360 monthly payments plus compound interest — all of that reckoned against the opportunity costs of that money, again plus compound interest.
For the $800,000 house, the $24,000 I might scrape off the closing table will cost the borrowers $143.89 a month, for each one of their monthly payments. If they make all 360 payments without refinancing, my commission will have more than doubled to $51,800. They should just buy me a BMW.
How about new home buyers who unwittingly pay “their” agent 8% on their new $250,000 dream home? That’s $20,000 to the agent at close of escrow, but it’s $43,168 after 30 years. The kids will eventually move out, but “your” Realtor is going to be suckling on your checkbook for decades.
At the other end of the pay scale, exactly how much due diligence and zeal can I afford to expend on a $50,000 homestead, if my compensation is to be $1,500 — or even less — at close of escrow. That might sound like a lot of money to a buyer, but our monthly nut, the amount we need to earn each month to keep the doors open, is many multiples of that amount. I could sell ten $50,000 houses a month, 120 houses a year — a lot of houses — and finish the year broke.
This is broken, broken at both ends of the buyer’s agent’s pay scale. Even in that sweet spot between, say $175,000 and $350,000, a percentage-based commission still doesn’t make sense. One house can take fifteen hours of my time, the next can take 150 hours. And the incentives are still misaligned.
Misaligned in both directions, it is worth noting: Buyer’s agents are acting contrary to their own interests when they negotiate the purchase price downward — and god bless ’em for doing it anyway. But buyers have no cash at risk in the shopping process, and therefore they have no incentive to limit their searches to a reasonable number of homes in a reasonable span of time. Other pricing plans — and there is no limit to how many we could think up — would make much better economic sense for both the agent and the buyer.
As it happens, for the $800,000 hacienda, I’m rebating back all but $5,000 of the buyer’s agent’s commission to the buyers. This was an idea we came up with about 30 months ago, and it went nowhere at warp speed. Buyers simply did not care that, as in this case, they could save $19,000 at close of escrow. That’s a savings of $41,008 over 30 years, but absolutely nobody cared.
I’m actually doing two houses at a $5,000 flat fee right now, and I’ll do them all day for buyers smart enough to ask the question sellers never, ever fail to ask: “How much do you charge?” There is usually more work for me to do than the buyers anticipate, but, practically speaking, no more than we would end up doing for a $3,000 paycheck on a $100,000 tract home. But on the other hand, because we have openly acknowledged the elephant in the room — the buyer’s agent’s compensation — I can take this kind of buyer though everything, teaching them how to guard their interests every step of the way.
“An educated consumer is our best customer.” This is a motto to live by. What I’m really writing about is supplanting the National Association of Realtors, but this is how we will effect that seemingly impossible task. We have to do right by our clients, even when that might seem to be damaging to our own short-term pecuniary interests, and we have to train our clients to see and seek and insist upon better representation — at prices that align our interests with theirs. Even if we can’t get rid of the co-broke today, we don’t have to perpetuate its twisted, anti-consumer consequences.
Does that mean you won’t end up selling $50,000 houses for 2.5%? You probably will, alas — although it never hurts to raise the subject of compensation with buyers who can afford to pay for what they’re getting. But when you’re dealing with that $500,000 buyer you can look ’em in the eye and say, “Fair is fair, and $5,000 is more than fair for the amount of work I’m doing on this house. Why don’t you use the balance of my commission to update the kitchen?”
If you think that this kind of thinking is for suckers — good. We know that our business is built — and will grow — on delivering better value to our clients — a better quality of real estate representation at a better price. The more we can educate consumers — our own clients and the marketplace at large — the more difficult it will be for the anti-consumer policies of the NAR to persist. True capitalism — the mutually-voluntary exchange of values for values — is the only effective antidote to criminality in the marketplace.
If you want to supplant the NAR for good and all, here’s a good way to start the process: Instead of waiting for your clients to ask, “How much do you charge?” — a question they may never think to ask — go ahead and shoot the elephant in the room: “Before we get too carried away looking at houses, can we talk a little bit about my compensation?”
At a minimum, you will find out who you are dealing with right away — giving you the chance to forebear to work with people who are only going to cause you problems later.
Beyond that, that language or something like it is the ultimate qualifying question. Any sort of stalling or sputtering, in response, is proof positive that you’re not working with a motivated prospect.
But the beautiful thing about being completely honest, completely transparent and completely forthcoming about your compensation is that you will forge a much deeper, much more trusting, much more cooperative relationship with your buyers from that moment forward. The unspoken secret has been given voice, and now you are both on the same side. You’ve taken a wary, temporary affiliation and turned it into a lifelong association — replete with repeat transactions and referrals — and possibly even a lifelong friendship.
Just to avoid at least one “yeah, but” objection in the comments: You don’t have to settle anything right away. You may not know how the buying process is going to work out until it is 75% completed. But you can bring up your compensation at the start of the home search, with the understanding that it’s something you’ll be addressing again, later in the transaction. And without being mercenary about this, resolving how much you will get paid might be just the calming influence your buyers need when they get the jitters late in the escrow period.
Doing the right thing is always so right, in so many ways, that I can never think to catalog them all. But the best thing about addressing your compensation with your buyers — no matter how much you choose to charge — is that you will undermine the NAR-erected citadel of secrets and lies that is the co-broke fee. We’ll get rid of it completely in due course. But you can eliminate it from your own relationships with buyers right now — today! — simply by openly acknowledging its existence and arriving at a mutual agreement of what to do about it.
Do buyers have a right to know what they’re paying for representation? Do you dare say they don’t? They do, and because they do, they have every right to have the full discussion about compensation, even if they don’t know — or don’t know quite how — to bring it up themselves.
Or: More simply: You’ll skin more cats if you start out by skinning elephants.
Louis Cammarosano says:
The “because they are not thinking about it” mentality is why reviews of agents are not as valuable as say consumers reviews of restaurants or movies.
A first time buyer could use an agent, find their “dream home”, pay the “standard commission” engage with a pleasant, and seemingly competent realtor and award that agent a top rating.
As you point out the first time buyer might have overpaid (on the price of the home and therefore on the commission)
Unless the buyer is educated as to the incentives of real estate agetns and the commission structure which comes with experience that often requires repeition of the process, the first time buyers’ rating of an agent is near useless.
Kudos to you Greg for educating your consumers up front.
I remember tv commercials in New york about thirty years ago featuring CY Sims (maker of cheap suits) who ended his commericials with the tag line “an eductaed consumer is our best customer.”
May 15, 2009 — 5:15 am
Chris Johnson says:
Greg-
This is what drove me out of the business. A big builder in central ohio was selling a 750 house with a 6% co broke to a realtor.
45k.
I gave–cheerfully 22,500 back. I didn’t want to steer someone to a house based on comp, so I told them I’d rebate all bonuses back to them.
I gave it back as a disclosed inducement, as is law in ohio, at the closing table. The buyer was putting then 25% down, and had the rest in liquid MM accounts.
The disclosed inducement exceeded the 10,000 maximum that that particular lender wanted at the time, and the deal–near the last minute–was almost killed. As it was, the buyer put an extra 2% down to get to 70% LTV and all was fine. The buyer was happy enough, and DID mention the til.
Drove me nuts. If I had either taken the dough, or done it outside of the settlement, we’re all fine. As it was, the banks apparently prefered my compensation to be high, and the buyers to be bearing a higher commission.
This was 2004.
-CJ
May 15, 2009 — 5:55 am
Michael Cook says:
Stupid question from a smart guy, why give up money if a) no one else is doing it and b) the consumer does not seem to care or notice?
I have a hard time wrapping my head around the real estate consumer. The first time home buyer seems like the sap, who doesnt ask about commission, but they just want great service. The savviest of buyers/sellers will certainly ask about commissions and be willing to do more of the leg work and is therefore much more price sensitive.
What is there to be gain by giving people the “surprise” discount? Particularly with a product that is purchased very infrequently. I would think that superior service would be more than enough to keep word of mouth strong given the talent level of the average real estate agent.
Economically, it sounds like you are offering superior service at a cheap price. It would be like Macy’s charging Walmart prices. Their costs are higher, their service is better and people are willing to pay more for them, so it just doesnt make sense to me.
Are you not leaving a lot of money on the table? There seems like better pricing structures out there that are more competitive, but also fair.
On an $800k home with a standard commission of $48k, I cannot imagine any scenario that would merit a $5k commission. Your competition is probably pricing their inferior service from $35-60k. Even if you charged $35k with superior service, you would provide a better value than anyone in the market and the buyer would be tremendously happy. So why charge $5k?
In my mind this is more supply and demand. A great agent is in short supply and high demand. Basic economics says charge high prices. By charging low prices you would have more consumers then you could handle and be losing lots of money because of your higher costs. You know basic economics, so tell me why I am wrong here.
May 15, 2009 — 6:34 am
Greg Swann says:
Michael makes an interesting argument. I’m out showing all day — for 3%. Anyone want to take this on, either in support or rebuttal?
May 15, 2009 — 6:42 am
Brian Brady says:
“What is there to be gain by giving people the “surprise” discount?”
“Anyone want to take this on, either in support or rebuttal?”
I’m about to go into loan land so I’ll only be able to start the discussion. MC, stick “moral is the practical” into the search bar, on the right hand side, under “Ask the Broker”
“A great agent is in short supply and high demand. Basic economics says charge high prices.”
I believe Greg will find out that the $5,000 flat fee is too low. The market will dictate that he can (and should) charge more. In fact, he should always be trying to raise his prices so as to test that price elasticity. He has, in my opinion, a moral obligation to the owner(s) of his business (him and Cathleen) to do that.
His moral obligation to the consumer is to explain and fully disclose the buyer’s brokerage fee prior to acceptance of the engagement. Using the Sy Sims example, properly educating about the “silent costs” of a real estate transaction is both moral and practical because it answers the question that pops up in the consumer’s mind AFTER the transaction has closed.
One more search term for the right-hand side bar? “Implied accusation in real estate”
May 15, 2009 — 7:45 am
Louis Cammarosano says:
Brian
Are you saying to charge what the market will bear (ie. what you can get away with)?
I would normally agree that in any economic system that is what suppliers do. That works where there is perfect information. Normally, the market provides that information.
In the brokerage situation it seems that “perfect” information on pricing comes from the broker himself, as the consumer does not seem to have market data available.
This puts the brokers I suppose in a conflicted situation. Say nothing, and gain the benefit of the higher price. Or provide the information and perhaps get a lower price, but gain a valued customer and referrals.
Interesting dilema that is not normally faced in most economic transactions.
May 15, 2009 — 7:51 am
Brian Brady says:
“This puts the brokers I suppose in a conflicted situation. Say nothing, and gain the benefit of the higher price. Or provide the information and perhaps get a lower price, but gain a valued customer and referrals.”
This is what Sy Sims did, Louis and “I love the way I look”
May 15, 2009 — 8:07 am
Thomas Hall says:
Greg – great post – I am on board with the idea of a fixed rate fee. But here’s my take: for a consumer, i.e. the buyer to really be on board with the concept that real value is produced during the process of evaluating property etc, I think a discussion should revolve around the idea of collecting a retainer – this is what my service “costs”. When a deal is consummated, the commission, minus the retainer is refunded back to the buyer. It solidifies in the buyer’s mind that your services are worth money.
I have had that relationship with my investor clients. They never blink about the idea of paying for services.
Key is the cost of performing the service should reflect the level of expertise and actual work. Not all agents perform at the same level and the effort for every deal is not the same.
My favorite argument that I have heard from agents defending their commission is that they provide expert negotiation skills. Honestly, I think I am a good negotiator, but in many deals, I didn’t necessarily believe that my negotiation skills were the clincher – some deals simply come together with little effort – some don’t. I have learned some incredible tactics from my clients as well – in some cases, I learned from them.
Knowledge and experience cost money. If you aren’t communicating what your value is, you don’t deserve the fee.
May 15, 2009 — 9:39 am
Steve hysinger says:
Greg,
Provocative stuff. In a perfect world where we were selling enough homes every month to do as you suggest would be one thing, as for me , the $800,000 sale has to pay for the $80,000 sale to keep me in business.
May 15, 2009 — 10:33 am
Matthew Hardy says:
This reminded me of one of my all-time favorite sales books. In my early twenties, I travelled with Tom Hopkins, then strictly a real estate sales trainer. While many of Hopkins ideas – and those of his mentor, J. Douglas Edwards – have outlived their usefulness, a book by David Sandler entitled “You Can’t Teach a Kid to Ride a Bike at a Seminar” has continued to provide value. Two of his ideas, the “up-front contract” and “adult-adult” selling align perfectly with Greg’s “Before we get too carried away looking at houses, can we talk a little bit about my compensation?”.
May 15, 2009 — 10:40 am
Jeff Brown says:
Since I was 15, listening at the dinner table, to now, with the third generation of Browns toiling in the real estate brokerage fields, nothing of lasting substance has changed when it comes to broker compensation. Dad’s commission check in 1959 was based upon 6% as is ours today.
Buyers/Sellers/Brokerages have all had, in my RE lifetime, 50+ now to make their criticisms known via the marketplace, yet instead has done excellent impersonations of crickets. This isn’t to say different RE business models haven’t been introduced and succeeded — they have. But none have radically strayed from the infrastructure of what Dad worked under in 1959. There have been discount houses, 6-8% options, flat fees, you name it. All except the 6-8% option approach are huge FAILS in two of the three possible markets — normal and buyers.
The public, according to this post is not only moronic in nature, but they came by it honestly, cuz their parents and grandparents clearly passed on the stoopid gene.
Honestly, this is more a matter of degree to me. I’ve turned down double digit commissions because I hated the product and wouldn’t sell it to an enemy. I’ve taken more than 6% and rebated the overage to clients to pay closing costs. Would I ever take more than 6% to sell/exchange something? Abso-frickin’-lutely — and have. The seller in all cases said they received more than their money’s worth.
I bring value to the table and will charge what the market will bear, as I’m a staunch supporter of the invisible hand of the market. The few times potential clients have strongly insisted on putting their hands in my pockets, I’ve gently shown them the exit — no hard feelings at all. For the record, about half of ’em come back within six months or so.
This is about establishing your worth, nothing more or less. It isn’t, in my opinion, a moral issue. I owe my clients the value/service promised, honesty and integrity, and to make the most income possible within that infrastructure.
It’s been working for the Brown family since 1959.
May 15, 2009 — 11:51 am
Jeff Brown says:
Thomas — >I have had that relationship with my investor clients. They never blink about the idea of paying for services.
Key is the cost of performing the service should reflect the level of expertise and actual work. Not all agents perform at the same level and the effort for every deal is not the same.
A couple times I’ve had clients who’ve done exceptionally well, think they could do what I do and with the same results. They wanted me to reduce my fees. I said I’d work for free if they signed a contract giving me 10% of all their capital gains. Dead silence, dead subject — Hey! How ’bout those Chargers?! 🙂
May 15, 2009 — 12:00 pm
Matthew Hardy says:
> “Abso-frickin’-lutely… I’d work for free if they signed a contract giving me 10% of all their capital gains.”
LMAO, twice.
🙂 🙂
May 15, 2009 — 12:36 pm
Brian Brady says:
“This is about establishing your worth, nothing more or less. It isn’t, in my opinion, a moral issue.”
Jeff, the two are one in the same. When you establish your worth and pre-negotiate the compensation, you avoid the nagging post-closing question.
May 15, 2009 — 12:54 pm
Matthew Hardy says:
The primary negotiating stance is a binary: will I negotiate or not. If not, I will not bring up the subject of negotiation. If I will negotiate, I will always allow the client to bring it up first. Of course, stating pricing is not negotiating.
I used to have as a friend a bad-ass New York salesman (the highest of the music industry – instruments and audio gear for international concert tours, etc.) whose “negotiating” tactic was to put a sealed, flat envelope containing his proposal/contract on the table and say that if, upon opening the envelope, they objected to anything it contained, the offer would be withdrawn automatically and offered to a competitor.
Of course, I’m not suggesting this for the practice of real estate, but the guy had a pretty clear idea of his value to the customer.
May 15, 2009 — 1:18 pm
Jeff Brown says:
Brian — I see your point, but I think we’re splittin’ hairs here. As we’ve discussed before, a person of integrity doesn’t hafta make at least half the decisions some others do in life. My price is already set — by me — based upon what the market and experience says I’m worth.
Your point says everything we do in life is ‘one in the same’, a concept with which I wouldn’t quibble.
But when the market has dictated for half a century plus, that 6%, give or take, is what we’re worth, and it’s worked smoothly at that price, where’s the moral dilemma? There is none — unless one is manufactured.
Those who wish to charge more or less or in a different manner are free to do so. But it’s a business decision, not one of morality.
May 15, 2009 — 2:08 pm
Sean Purcell says:
Confusing ethics with economics. They are not one in the same as Brian suggests. The former addresses how you conduct yourself, the latter addresses how business is conducted. That is not the same conversation.
Why would you charge a flat fee? That is disingenuous on almost every level. Your job – your responsibility – is to charge what the market will bear… given your level of expertise and experience. To frame the issue of commission as one having a relationship to your hard costs or time spent is to equate your value to that of an hourly employee under someone else’s employ. (Which someone else IS charging what the market will bear and IS reaping the profits which the hourly employee chooses not to toil after.)
You are an entrepreneur – a business owner – with all the attendant risks and challenges. Hourly employees bear no risk and deserve no reward. They are simply exchanging their time for money whereas we are exchanging our knowledge, expertise, negotiating skills, marketing skills, rich friends… whatever is our particular niche or expertise. This concept has the added benefit of driving from the business all those who do not have a value proposition.
I am a little confused Greg. I have read you here on BHB, more than once, discuss your listing strategies. They are superior to that of most agents – I think we would all agree to this. You acknowledge that you only work with clients you want to work with (“that make me smile”) and currently charge less than 6%. But you also fully expect this target group to grow… and you’ll raise your commission to 6% and eventually 7% even! (Supply and demand I believe you called it).
Are your selling agent skills not subject to the same economic laws as your listing agent skills?
May 15, 2009 — 2:20 pm
Brian Brady says:
“But when the market has dictated for half a century plus, that 6%, give or take, is what we’re worth, and it’s worked smoothly at that price, where’s the moral dilemma?”
There isn’t a “real estate brokerage market”; there is a “real estate brokerage industry”. As Louis mentioned earlier, in a closed market system, where information is withheld, a true “market price” can’t be established.
May 15, 2009 — 2:20 pm
Louis Cammarosano says:
Sean
I would agree generally that ethic and economics are two separate disciplines. However in this case there appears to be some overlap.
Getting the highest price by withholding information could be viewed as fraud in which case a breach of ethics would result.
The fact pattern that Greg has outlined causes real estate practitioners to think about their pricing model and how or whether they choose to explain/justify the price they charge.
If one takes the unthinking view that the commission price is standard and one is worth that price than no discussion is needed and the practitioner can believe that he/she not be concerned of any breach of ethics.
It comes down to how much do you really want to/ need to tell your customers about your services.
In some respects as Sean points out a highly paid professional justifies their fee based on the value they believe they deliver to their clients not how much work they put in to achieve the result.
Likewise, most businesses don’t at the point of sale discuss their cost of goods and the profit margin they will make when the items are sold.
But that position is more tenable when the customer is not relying on the seller to educate him/her on the market, but merely dispensing of goods that have a market value.
May 15, 2009 — 2:32 pm
Sean Purcell says:
It certainly can be established Brian. As a matter of fact, it has: 6%. Jeff ably points out that if this were not very near the market price, it would have seen change through one of the other models that has been attempted over the years. It may just work because part of “charging what the market will bear” assumes that the more someone pays for something, the more they can pay. I.e. a person buying a $500,000 home can pay more in commission than someone buying an $80,000 home… and so they should.
By the way, none of my comments should suggest I disagree with Greg’s central point on skinning the elephant. Selling agent commissions should be discussed and agreed to between the buyer and their agent. Divorced? Better still.
You want to do one better than divorcing commissions? Allow buyers and sellers to make offers on homes in some type of organized, transparent exchange (similar to the open outcry system we used on the floor of the options exchange).
May 15, 2009 — 2:35 pm
Jeff Brown says:
Brian — There is indeed a ‘brokerage market’. If you and I were able to sell property for half the going rate and remain significantly profitable, we’d do it. The central reason discount brokerages fail so miserably in a normal or buyers market is that they simply cannot stay in business while providing results oriented service. This ain’t debatable on any level I’ve seen yet.
The so-called ‘industry’ is a classic straw man. That logic says you can charge $70,000 for an Accord and because you’re such a large industry, nobody will complain. I’ve never seen the logic in the industry argument.
Did I mention the auto industry? A little motor bike maker in Japan showed the giants of the industry how the cow chewed her cud. It still may happen, but if I was a bettin’ man I’d be careful about bettin’ on half-price models workin’.
Contrary to some folks’ wish list, real estate doesn’t sell itself at the highest price quickly.
And while we’re at it, (he says, while repositioning himself on the rickety soapbox) real estate’s information is real estate’s information and we can do whatever the heck we choose to do with it. Adam Smith says we should use it in a way which results in the highest honest profit. If folks don’t like what we do with our information, ‘folks’ meaning especially those who pay us, they can go elsewhere, or start their own ‘new and improved’ real estate industry.
I won’t be holding my breath though. 🙂
There, I feel so much better.
May 15, 2009 — 2:41 pm
Sean Purcell says:
Louis,
I understand your point, but I am so tired of excusing the public for ignorance and/or laziness. It was inappropriate in the loan mess and it’s inappropriate with real estate commissions. Who is responsible for discovering the lowest price of gasoline in your neighborhood: the public or the gas stations? Who is responsible for deciding the value of Nordstrom’s higher prices and higher service? Or Wal-Mart’s lower prices and lower service?
I think I see your rebuttal in your comment:
But that position is more tenable when the customer is not relying on the seller to educate him/her on the market, but merely dispensing of goods that have a market value.
I don’t see this being an issue with attorneys or doctors or even hair salons. They each provide levels of expertise and charge what they believe they can. It’s the consumers’ responsibility to decide relative merit.
If there is a problem here it is this: the public should be told, in no uncertain terms, that commissions are negotiable. The current industry standard is to relay this info in but a whisper.
May 15, 2009 — 2:45 pm
Matthew Hardy says:
> If one takes the unthinking view that the commission price is standard and one is worth that price than no discussion is needed and the practitioner can believe that he/she not be concerned of any breach of ethics.
Two entirely unrelated things. To know one’s price and comfortable not negotiating it is not “unthinking”, it’s “pre-thinking”. Being concerned with breach of ethics is only necessary when there’s breachin’ goin’ on; it has nothing to do with your price.
May 15, 2009 — 2:50 pm
Jeff Brown says:
Man, this whole transparency thing alternately cracks me up and gives me a headache. Sometimes I wonder if I’m obligated to let my clients in on why my mood is so upbeat today vs the day before. 🙂
What data is being hidden for Heaven’s sake? I’m a huge practitioner of dual agency. I’ve had dozens of clients insist I handle both ends of transactions if it was even remotely possible. They trust me based upon real life, real time experience. They know there won’t be any ‘hide the ball’ antics from me. They simply want the results for which they’ll handsomely pay me.
The market ultimately makes fools of those insisting they can economically jump off a roof and fall sideways. Sometimes it just takes longer to become ‘transparent’.
May 15, 2009 — 2:53 pm
Thomas says:
Buyer here; I’m using my bank’s buyer’s agent who rebates a part of their commission to me and the bank. It’s geared towards military officers who fly in and make a quick decision and look at only a few homes. My impression is there is a massively different market and as information becomes more available, some of those other models may be able to compete. Time will tell. Here is what I’m willing to do if I was ever able to be king for a day. As an educated consumer, I would pay an upfront fee to an appropriately certified professional and than establish a sliding scale to ensure he/she wasn’t being paid squat. In other words, I would establish time/involvement benchmarks that could take me anywhere from flat fee up to 5% (or even $15K) to my rep. Why would I be willing to pay such a huge percent? Because if I trust the transparency of the process, I can see the difference between a deal and a FANTASTIC deal. An example would be 30% below comps in a great location. I would love to pay my buyer’s agent for sniffing out a great deal. Of course, my agent told me I was very well read on the process and most people just don’t care that much. Anyway….Greg as always, thanks for getting in the arena of ideas.
May 15, 2009 — 2:56 pm
Brian Brady says:
“It still may happen, but if I was a bettin’ man I’d be careful about bettin’ on half-price models workin’”
I’m not arguing price, I’m arguing about the inability for market forces to set price. Zillow set the price of real estate brokerage at zero (and its efficacy is similar to the price charged). You’re suggesting it’s “set” at 6% because, well, that’s what it’s always been, it’s worked well, and why fix it if it ain’t broken?
Agents state publicly that all fees are negotiable but in practice miss the opportunity to negotiate HIGHER than the “standard” 3%.
May 15, 2009 — 3:04 pm
Louis Cammarosano says:
Sean Brian and Jeff
Thanks for the discussion
I think this is one where there is no clear analogy.
The “there is no brokerage market but rather a brokerage industry” characterization is attractive, however, not absolute as Jeff points out.
There is a quasi brokerage market that Sean and Jeff note and would be a “real” market if consumers realized that ANY transaction they enter into requires market research.
It just so happens in real estate that the data points are neither intuitive, nor plenttiful in one individual’s experience as is in the market price of a beer or a quart of milk. That makes the brokerage commission issue sound more like an “industry” driven price than a market driven one.
However whenever a consumer pays for any thing, he/she should, esp when engaging in a large transaction like buying real estate, gain an understanding of the value of what he/she is looking to contract for.
There is a brokerage market, it just takes time for the consumer to gain an education about it. For some reason buyers don’t seek the necessary education as Greg points out “Because they’re not thinking about it.”
One could, as Sean says, be fed up at consumer’s calculated ignorance (caveat emptor) but if you are aware that most consumers will come to you armed with this type of ignorance do you (here comes the ethics part again)owe them an explanation?
I would say they would most definetely appreciate one and would think better about you and paying your fee, than if you say nothing.
The alternative is to just to say nothing, charge the “going rate” and collect your money.
The danger in this is not short term, but perhaps longer term when the customer later discovers when he decides to re calculate his ignorance.
When he does so he may find by chance that some brokers actually have these types of commissions discussions with their customers. At this point your customer may feel cheated both of the commission dollars paid and of the conversation that was never had between the parties.
May 15, 2009 — 3:04 pm
Brian Brady says:
“The danger in this is not short term, but perhaps longer term when the customer later discovers when he decides to re calculate his ignorance.”
See comment #5. Negotiating a fee, in advance, answers the nagging post-closing question
May 15, 2009 — 3:08 pm
Louis Cammarosano says:
Matthew
That’s right-“unthinking” as to ethics, but “pre thinking” with respect to economics.
That states Sean’s position that the two are separate and justifies the approach.
May 15, 2009 — 3:09 pm
James Boyer says:
Greg, I believe you are undervaluing the service you are providing to your clients.
May 15, 2009 — 3:29 pm
Sean Purcell says:
Louis,
owe them an explanation?
I would say they would most definitely appreciate one and would think better about you and paying your fee, than if you say nothing.
The alternative is to just to say nothing, charge the “going rate” and collect your money.
I personally find it unethical to “charge the going rate and collect (my) money,” but there we go again, mixing ethics and economics. The fact that I would never “say nothing” speaks to no one but me and my clients. There are two questions here as I see it: Should the buyer’s agent discuss the concept of commission, who really pays and so forth with their buyer? On what should an agent base their commission?
My answer to the former question is YES. My question to the latter is: what the market will bear… given your expertise and experience. No different than a doctor or an attorney… or a hair stylist. 🙂
May 15, 2009 — 3:37 pm
Don Reedy says:
Talk about late to the party. But, since I actually posted a splendid comment this morning that a server error killed, I thought in light of the comments I’d at least throw this out.
From my post yesterday (and yes, it was my first post, so if I’m too much the virgin, blow me off)….
“For me transparency is about saying what you want to say, showing what you want to show, sharing what you want to share, and doing it in a manner and method that is most likely to allow the reader or listener to understand. In order for that to happen the writer or creater of thoughts and ideas, facts or fictions, must decide up front HOW they will present the information.”
When Jeff is talking about, grousing about, “transparency”, it just simply occurs to me once again that transparency is a concept, a mathematical variable if you will, to which data and algorithms can be attached, and this data will invariably be different, and thus result in a final approach to the “transparency” that is being sought.
Greg applies different variables to his listing model (which is hard not to love). Jeff applies different variables to his investor model (which is hard not to love). Sean applies different variables to his marketing approach (which is hard not to love). Which of these men are truly transparent?
Yep, they all are. Transparency does not mean that we should share everything. Jeff, you cracked me up with whether we should let a client know we had a good day, or bad day, or any day. What transparency means to me is that whatever defines the character you will carry to your grave; that character must show itself consistently, clearly and truthfully.
I may be going to heaven one day, but don’t expect me to confess my sins to you just because I’m applying for a job selling you a home.
And, for what it’s worth, Greg, I don’t see a flat fee creating the operating theory around which you should list and work with clients. You will attract, I fear, iron shavings to the magnet, when what you want and deserve is a marketing compass.
May 15, 2009 — 4:11 pm
Jeff Brown says:
Brian — You quoted me: “It still may happen, but if I was a bettin’ man I’d be careful about bettin’ on half-price models workin’”
Then responded, saying > I’m not arguing price, I’m arguing about the inability for market forces to set price.
If the market doesn’t play a huge part in setting price, who does? Me? Prudential? Keller/Williams?
I reject the premise. What I meant about half-price models failing, wasn’t that 6% has been in place for so long, or anything like that. I was referring to the empirically provable fact that models ad nauseum have tried and failed to bring home the bacon for sellers at significantly reduced fees. They’ve failed because the capital it takes to make that happen has generally dictated a fee of roughly 6%. I didn’t make that up, it just is.
The fact so many brokerages are drowning in red ink while charging 6% shows that even that rate sometimes isn’t enough when management isn’t cutting the mustard. Note however, that the discount models disappeared long before the ‘6%ers’ started goin’ under. So no, for those about to ask, lowering the price while hoping for more ‘volume’ has already belly flopped big time.
The reason 6% has remained the benchmark for such a long time, is that property values rose along with business expenses. What worked for Dad in the 1960’s works for a well managed firm in the 21st century. I get confused by these discussions because it’s so obvious to me, I’m constantly wondering what memo I missed.
May 15, 2009 — 6:06 pm
Jeff Brown says:
Louis — >It just so happens in real estate that the data points are neither intuitive, nor plenttiful in one individual’s experience as is in the market price of a beer or a quart of milk. That makes the brokerage commission issue sound more like an “industry” driven price than a market driven one.
Please explain ‘industry driven’ price, as I’m inferring it means the industry is more or less unilaterally setting the price. If that’s the case, why can’t the huge players in the industry simply begin charging 10% commissions?
Like every other industry in the country, prices are driven by the buyer/user’s perceived value of the service/widget and by the cost to deliver the service/widget to said buyer/user.
The reason most if not all of the larger brokerages in the last 15 years began taking ownership positions in escrows, title companies and the like, isn’t because they had too much profit margin and didn’t know what to do with all the resulting cash. It was purely a survival move.
Am I missing something?
May 15, 2009 — 6:21 pm
Greg Swann says:
Showed all day — two parties — and I’m toast. Tomorrow is another rich, full day.
But: I wanted to go at least this far:
I don’t particularly care what anyone charges. I think there is a huge, long-term marketing benefit to be realized by having the compensation conversation as early as is feasible in your relationship with a new buyer client.
I think that one conversation will do more to secure your relationship — for life and for a lifetime of referrals — than anything else you can do.
Brian and I love to make fun of all the old style closing tricks of sales trainers, but wide-open sincerity — transparency — is the ultimate triple-cinch lock-down close:
“Mister and Missus Parker, here is what the rest of the real estate industry doesn’t want for you to know: Every dollar to be disbursed in this transaction, including my own compensation, will have been brought to the closing table by you and your lender. Can we talk for just a moment about how you will be paying for my services — and what I’ll be doing to earn my fees?”
Bring it up and take it down. You’ll be the most honest Realtor they ever met — in 75 words or fewer.
This is not a trick — and if you’re looking for tricks, for god’s sake get lost! — but it is the most effective way I can think of to put you and your buyers on the same side of the table — immediately and forever. “I work for you — not for the seller, not for the listing agent. Here’s how you’ll be paying me.”
I think that just kills…
May 15, 2009 — 8:56 pm
Sean Purcell says:
I’m constantly wondering what memo I missed
You’re killin’ me Smalls… 🙂
May 15, 2009 — 9:12 pm
bs says:
I see it as risk reward. The real estate professional takes the risk and receives the reward. Take away our risk and we’d be OK with less of a reward.
For example, let’s say I’m willing to work for $250/hr (I’ll use ‘by the hour’ just as an example different than a commission, flat fee, sliding scale fee, or whatever), if a home buyer pays me by the hour (if they buy or not), I’d be OK with rebating 100% of my commission (if there was a COE). Same with sellers, if a seller wants to pay me $250/hr and pay for all marketing and expenses, then I wouldn’t charge a commission (on the listing side).
Consumers would rather ‘overpay’, if you will, in order to reduce their risk.
Do all homes listed for sale, sell? Do all buyers looking to buy, buy? Sellers don’t want to pay a real estate professional unless their home sells (out of their proceeds), and buyers don’t want to pay unless they buy (as Greg points out, by financing it).
Want a change within the industry? Convince the consumer to pay the real estate professional – of their choice (some would charge more, some less, some would have no online reputations, some Louis approved reputations, some would offer full service, some limited service, etc.) by the hour (guaranteed, whether there is a COE or not), and those professionals (I’m guessing) would be more than happy to rebate back all of their commissions. Yes, commissions would then not be necessary, but I’m just drawing a picture here.
Greg, I see your two buyers as the same buyers, just over time . *OK, the value of the dollar stays the same here* Greg sells John and Jane a condo, makes a $2,400 commission which pays him $50/hr (which he deems unacceptable, but does it, because he believes/trusts it will work out in the end). Twenty years later, Greg sells John and Jane their dream home, makes a $24,000 commission which pays him $1,500/hr (which he deems more than acceptable). In between the 20 years (one, two, three times?), Greg showed John and Jane other homes when they were considering an upgrade, or discussed selling their home, or showed them investment properties (you get the picture),…and makes a whopping…$0! Now, did it all even out for Greg, John, and Jane, are they all OK with this arrangement? Or would John and Jane prefer to pay Greg by the hour in all of their encounters with him?
May 15, 2009 — 10:33 pm
Brian Brady says:
“If the market doesn’t play a huge part in setting price, who does? Me? Prudential? Keller/Williams?”
Yep. You, Greg, Don, Sean, and all of the NAR participants do, Jeff. This is a closed system much like the specialist system on the NYSE. This is why the National Assn of Securities’ Dealers Automated Quotation (NASDAQ) system gained market share and the NYSE, ASE and PSE had to merge. The former is a negotiated, transparent market system while the latter was a closed, member-market. The “size” or intent to buy or sell is disclosed in an open marketplace. Disclose size or intent and you’ll dramatically reduce the capital required to operate a real estate brokerage.
I participate in an even more closed market; mortgage financing. Today, lenders offer terms but vary in intent. The value proposition of a mortgage broker is that she, as an educated market participant, better understands the “size” or intent of the “sellers” of money than the “buyers” of money do.
Arguments will always be made that our marketplaces (real estate and mortgage financing) are different but I might suggest that all markets basically strive to be efficient. Transaction costs can be reduced when a seller discloses the “size” or intent of the buyers, in any marketplace.
Your industry and mine is doing a lousy job moving from functionaries to fiduciaries, whereas securities brokerages have done a better job. Today, the full-service securities brokerage is charging its clients MORE than they might have 20 years ago. They did it by defining their value proposition and fees before they accepted the engagement. This is why I argue that Greg is undercharging for his services.
Note what “Thomas the Consumer” proposed, in this thread:
“As an educated consumer, I would pay an upfront fee to an appropriately certified professional and than establish a sliding scale to ensure he/she wasn’t being paid squat. In other words, I would establish time/involvement benchmarks that could take me anywhere from flat fee up to 5% (or even $15K) to my rep. Why would I be willing to pay such a huge percent? Because if I trust the transparency of the process, I can see the difference between a deal and a FANTASTIC deal”
Please read this, Major Tom (I’m banking on your sense of humor and familiarity with David Bowie, Sir):
http://delmar.typepad.com/brianbrady/2007/03/paying_realtors.html
I’m with you, all the way.
May 15, 2009 — 11:05 pm
jim canion says:
What an interesting discussion by some top agents. I am not sure where all this leads however. It sounds like there is an epidemic of agents remorse floating around.
Why isn’t the discussion centered on providing a more
complete,thorough, and valuable service rather than how
to reduce our fee because in certain cases we feel like
we dont deserve it. Our future clients will be better
equipped to determine our real value so cutting a fee will not get you as far as becoming a better agent.
Jim Canion
May 16, 2009 — 9:15 am
Jeff Brown says:
Brian — We’ll just hafta disagree on this one. Your position says that unlike every other industry, real estate has been successful in setting prices apart from market forces. That’s untrue for every other major business you or I could name.
If somebody came along and sold houses quickly and for top prices while charging significantly less than 6%, they’d have forced the industry to follow or die. It hasn’t happen, and in my opinion won’t be happening soon.
The problem as I see it is that anyone perceived as being very effective as an agent will always be in demand, therefore able to charge relatively higher fees for superior results.
What you’re suggesting happened in baseball before free agency. They were protected by their anti-trust exemption, and the Supreme Court. Once the latter went away, they could no longer set artificial values on their players’ salaries. We all know the rest of that story. Realtors don’t have that protection, as they’ve operated in a free market from Day 1.
Some very smart, highly capitalized people have tried, in vain, to operate real estate brokerages using discounted fees. They’ve simply never been able to deliver in normal or buyers markets. That’s only due to the consumers choosing en masse to pay higher fees for better results.
Sounds like free enterprise capitalism to me. 🙂
May 16, 2009 — 9:53 am
HEIDI says:
NEVER, I REPEAT…NEVER NEGOTIATE YOUR COMMISSION! YOU ARE WORTH EVERY PENNY YOU EARN! JUST THINK OF THE ACTUAL TIME YOU REALLY PUT INTO EVERY TRANSACTION. IF BUYERS AND SELLERS REALLY KNEW THAT I THINK THERE WOULD BE A WOHOLE NEW RESPECT. ALL THEY TEND TO SEE IS THE BIG CHECK AT THE END!
May 16, 2009 — 10:14 am
Patsy Snyder says:
In my almost 20 years as a Realtor and Broker, I have only had one person voice his opinion that my commission was a lot of money. Of course, apparently, he thought nothing of all the time I spent in dealing with the fights between him and his wife and the endless questions over and over and over. I also had to overcome advice from a sister who knew nothing about real estate but advised them all along the way, of course, contrary to my advice.
I deliver superior service and make myself available to my clients whenever they call. I would not consider working for less money at all and, to date, have not been asked to.
If we do not consider ourselves worthy of a $30K commission, we are probably nor worthy of it.
May 17, 2009 — 6:35 pm
Michael Cook says:
While I am pretty excited about the all the discussoin generated here, it strikes me that realtors have a varying degree of self-worth, very few of which are based on an actual logical calculation of value.
Lawyers charge by the hour and bankers charge a flat fee. Sure, as an investment banker, I put up with a lot more crap because of my fee structure. I am encouraging the customer to come to me with any little thing because in the end their marginal costs is zero. Why shouldnt I push my realtor to the limit with every stupid question, concern or nit picky thing when I am not paying anything extra to do so.
My original comment to Greg was much more about the value of services he provides, which are quite obvious and can be quantified rather easily.
In contrast to several of the people above (Heidi, Patsy, Jim, etc.) who present no actual value, but rather cite their “glorious” mediation skills, I suggest they are most certainly not worth 6%. Putting up with crap is not adding value, sorry to break that news to you. Anyone who charges a flat fee invites that onto themselves. Charge by the hour and see how many time consuming fights you have to break up.
Times are changing rapidly and the realtor who feels that they are somehow entitled to or worth 6% because they took some classes and got a license will find themselves out of a job.
Not to rant, but why are realtors so out of touch with economics? When business gets bad, one method of generating sales is to reduce price, no? Interestingly enough, realtors would rather go out of business or get a second job, rather than reducing their commissions? In these tough times, every retailer in Manhattan is offering 60% off or more, but realtors are sticking with their 6% in one of the worse markets in history. Talk about playing a violin in a burning city, how much hubirus do you guys have???
Ok, perhaps that was a rant, but I hope someone gets my point. No matter what Brian Brady says, ecnomics applies to real estate agents.
May 20, 2009 — 7:01 am