Brokerage, Industry News, Opinion

A fee-for-service future

Perspective: The ups and downs of fee-based real estate

By KELLE SPARTA

In 1995 I was taking retainer fees from buyers who wanted to work with me. Those fees either went toward their deposit on a home or it went into my pocket if they didn’t purchase.

Over the course of the next three years, that fee went from $100 to $250 to $500 to finally $1,000 as I had to retain the deposit from each person who walked away. I had started to realize how much of the work I did took place up front and how much time I was losing every time I lost a buyer.

So when the idea of a fee-for-service model crossed my desk a few years ago, I wasn’t surprised. It made sense, but I didn’t think it was in the best interests of the client. After all, the most valuable services that the best agents provide to their clients aren’t really something you can easily set a price tag on.

Those services offer the peace of mind that comes from knowing everything is handled. A skilled facilitator can get you unstuck by walking you through an emotional challenge that is getting in the way of your sale. Those are the services that people miss out on because they are already too stuck in their own issues to think to ask for help, much less be willing to pay for it.

But aside from that challenge, there are many benefits to a fee-for-service model:

Comparative market analysis (CMA). Well, we can let this one go entirely, since in most states the appraisal lobby would have us roasted on spits if we did a CMA for money. So this would instead become a marketability report.

Showings. This would be a boon for the industry, agents and buyers alike, but it’s a challenge to determine how to compensate for the results you want. A skilled showing agent, who knows the market and listens carefully to the buyers, would be able to add value to buyers who are willing to accept it by reducing the number of showings needed to find the right house.

The downside is that if the agent is paid only by the showing then there is no motivation to show the good properties first. To counteract this effect there should be some bonus to the agent, based on which house the buyers pick, that encourages the agent to show the best house first.

Who pays? The cost of the showings should be split between the buyer and seller since both derive a potential benefit from it. The existing appointment-setting services would do well for the facilitation of appointments. They could even increase their rates since they could charge per appointment set. The downside of sharing the cost of the showings would be sellers trying to show their own houses and botching up the job or severely limiting the availability of the house to be shown.

Marketability report. This report would indicate a combination of factors, including price, location, condition, staging, etc. If taken seriously by the client (and that’s a big "if" — although if they were paying for it perhaps they would pay more attention to it), it would serve to encourage sellers to improve their properties and have a professional stage them. This would result in higher sales prices — a good thing for the consumer.

Marketing/advertising. This one is trickier. Especially in an era of blogging, podcasts and other social media venues, how does an agent set a fee for this type of exposure? Do we end up with agents who become experts in keyword research for properties, or is this something we subcontract out of the industry?

And, of course, we’ll need good copywriters who are familiar with the fair-housing rules and regulations. Perhaps we’ll end up with real estate media buyers and marketing agencies. Regardless of how it shakes out, as with most marketing the challenge is in finding the right way to spend your money. This is where I see the greatest potential pitfall for clients. Perhaps the solution here is also to bonus the marketing agency based on the speed of sale.

Potential profits for agents. The good news is that there is potential for these real estate ad agencies to pay agents for ads on their blogs, podcasts, newsletters, etc. This would allow agents to even out their income and scale their efforts more effectively.

Multiple listing service (MLS). Fee-for-entry on everything. Sellers will write their own copy (or hopefully hire a copywriter) and provide their own pictures.

Negotiations. This is the place where I see the greatest potential for improvement in the industry. The average agent today is a terrible negotiator. There is NO training on it. Those who become skilled at it do so because they sought out their own training. Paid negotiators, who have bonuses based on how much they can get over/under the average list/sale price ratio for their market would be a boon for the industry and for the clients.

Closing coordination. Real estate virtual assistants would do well with this one. Clients could hire the virtual assistants directly to facilitate their closing, coordinating all of the details of the transaction. The closing attorney or title company would be responsible for creating a checklist of items to be completed to make sure that nothing got missed.

The downside for the customer

Notice I said "customer." I don’t believe that any of the services I have laid out above would be sufficient to constitute agency. Confidentiality could be contracted for within the hiring contract. Being that sellers may be doing their own showings, the duty of disclosure would have to fall on them instead of the agents. Loyalty isn’t required when compensation is based upon results. Since the customer is handling their own transaction and is able to interface directly with the person on the other side of the transaction, there is no need to worry about obedience to lawful orders (except perhaps in the role of negotiator). If the customer is handling their own transactional details, then the duty of accounting would fall on the attorney or title company doing the closing, not on the agent. And reasonable care would be assumed to be in place given the fact that the customer has hired the agent (or perhaps I should say facilitator at this point). In short, the customer loses out on her ability to be fully represented in the transaction. Given that this is the largest financial investment that most people make, I’m not certain that this is a good thing.

The downside for the agent

Most state laws have a ruling that the expectation of the customer determines the relationship with the agent unless a disclosure to the contrary has been signed. And, even then, if there is sufficient action on the part of the agent to behave as an agent, they are on the hook for it — regardless of the disclosures signed. With agents being in the habit of representing clients, and the public being used to being represented, I think we will have a host of lawsuits and the agents will not fair well. Then there’s also the issue of the degradation of the level of service agents provide. Part of the reason we can command high prices is that we are seen as professionals. If we are relegated to the role of chauffeur are we really doing ourselves a service?

The bigger-picture downside

As any agent can tell you, too many cooks spoil the soup — and slow down the transaction. The more moving pieces you have, the greater the chance that something will go horribly wrong. In the example I’ve set forth, the only person looking out over the entire transaction is the customer — who in most cases doesn’t know all of what needs to be done. This is the biggest problem I see. Things are going to get missed. Attorneys and title companies are going to have to take a larger role to make sure that all the bases are covered. And, frankly, they are often the largest barriers to a transaction closing, so this doesn’t bode well.

Inequality of cost and income (aka "it pays to be rich")

Sadly, this new model means moving away from the current model that allows people from all levels of income to have the same services. Under the new model, we’ll be seeing a lot of the lower-income people getting fewer services to save expense. The problem with that is that sometimes the expense they save on the back end will cost them big on the front end in the form of not getting a better house because they weren’t willing to pay a few more dollars to see a few more houses, or not getting a better deal on the house because they skimped on the negotiator.

Those with the cash to do so are the ones likely to purchase a full-service model and get complete coverage — once again relegating the poorer people into the lesser-served arena.

Cash-flow challenges

There is also the challenge of coming up with the cash. Most sellers don’t have a lot of extra cash sitting around to pay up front to cover the costs of the transaction. And, without control over whether the deal closes or not, most agents aren’t going to be willing to work on contingency.

Add to this the fact that most distressed sales take a huge amount more work and thus will cost more when there is less money available to pay for it and we’re going to have an inherent cash-flow issue that will need to be addressed as well.

The Upside for the Customer

Buyers and sellers will be able to pay only for what they need. As an example, my friend who did a lot of his own advertising when he sold his house a couple of years ago wouldn’t have to pay nearly as much as he did under a traditional model.

If someone works from home and doesn’t mind doing their own showings, they can save, too. Plus, there will be the added benefit of getting specialists who excel in their field — expert negotiators, for example, or professional marketers.

The upside for the agent

Agents would see a higher hourly rate using this model. Since much of the average agent’s efforts are lost in endless showings and dealing with people who aren’t serious (issues that this model would eliminate), they would reduce their time spent working, increase their quality of life, and increase their income.

Today’s agents have to be a little bit of everything to everyone — they have to master a TON of skills. Tomorrow’s agents can be really good at a few things instead.

Most of the skills listed above don’t require being available 24/7, so a more reasonable and measured work week would be possible.

With the new model, there will be the opportunity for additional outcroppings of products (like "How to Do Your Own Neighborhood Research" or "Negotiation 101" courses) that could save customers more money and increase the scalability of being an agent.

The big picture upside

The industry, in adopting a fee-for-service model, gets more specialists and hopefully draws a higher level of respect from the community at large. Agents or agencies will likely have to work in a team structure so that the rainmaking can be shared amongst all parties. This should help to equalize the income for all of the agents and allow for vacations and economies of scale for marketing efforts.

There is certainly a place for the fee-for-service agent in the world. Is it a good change that the entire industry should embrace? The jury is still out, in my opinion. There are too many factors that could affect the whole and there’s no way to tell which way they will fall. This is just the briefest look into what COULD happen.

But it is intriguing, isn’t it?

Think about it: charging for your services. Not driving uncommitted people around, losing deals you’ve worked months on, paying for advertising on a listing you know isn’t going to sell — all of these things would be a thing of the past.

It has its appeal.

Kelle Sparta is author of "The Consultative Real Estate Agent" and founder of Sparta Success Systems, a company that provides real estate products, coaching and training for real estate agents and brokers.

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