This past week, my husband and I made a pilgrimage to America’s Heartland. Our mission was, on the face, rather simple: deploy our collegiate daughter from the middle of Missouri to our nations’ capital. We were there as service providers.
As we arrived on schedule to commence Operation Internship, we knew that, like any complex transaction, this one would involve many moving parts. We knew this because we are trained professionals bringing years of experience in the nuances of flight connections, moving boxes, security deposits and overweight luggage surcharges. Our client, on the other hand, is relatively inexperienced. Thus, we had been commissioned.
Now, before I get to my point (one I fully intend to make within the next 400 words or so), it is important to understand the challenges we faced:
- We had to book our flights, hotel and rental car on three weeks’ notice, because that is how the college internship hiring process and 20-somethings roll.
- We had to schedule an auto transport service to arrive on a given day and deliver her car back to our home in San Diego for a summer vacation.
- There were three years’ of accumulated belongings that would need to be relocated to the "new" apartment across town where they would await her return for her final fall semester.
- Finally, for a grand finale, we had to schedule flights to opposite sides of the country departing from the same airport during roughly the same geologic era.
All of this had been preplanned and coordinated to perfection. The entire process would take 48-hours. And the one critical path was the expectation that her things would be packed when we arrived.
Instead — well, let’s just say we walked into an apartment that looked like the entire Associated Student Body had been pulling all-nighters there since 1974 and somewhere along the way an outlet mall had thrown up in her bedroom. And, as I was mentally penning my new novel, "Please, Can’t Someone Develop Birth Control that is Retroactive?" I realized that all "clients" are different.
This was going to be a time-intensive project — one that would test my patience, my physical stamina, and my mental fortitude.
As my husband and I had our clandestine rendezvous in the Kohl’s parking lot at 10 p.m. with the man driving the really big truck with all the cars on it, and as my daughter — undoubtedly brimming with gratitude for the parents with whom she had been blessed — met a friend for drinks, I thought about how this might have gone had it been my other daughter.
My current "client" needed this level of service, with the quadrant of her brain devoted to common sense, logic and the ability to tell time having fled her body sometime during her freshman year. Without our help, as her scheduled flight landed at Reagan National, she would still be sitting in her bedroom floor sorting through a mountain of empty Starbucks cups and back issues of Vogue while her car was delivered to a truck stop in rural Nebraska.
Daughter No. 2, by contrast, would have packed her apartment and the apartments of her five best friends, cashed in her used textbooks, put in a couple of hours at the food bank, and greeted us with a plate of cheese and crackers upon our arrival.
Just like my real-life clients, I love my daughter-clients equally. But they aren’t equal. Their needs are different. And here is the nexus I promised in paragraph three (or was it four?):
I have been reading a lot lately about our real estate fee structures. It’s a conversation that rears its little head every solstice or so. There is no one-size-fits-all because all clients are different. Further, the prevalent commission-based model will continue to prevail for precisely that reason.
Some, like Rob Hahn, have danced (more like kickboxed) around the idea of charging an hourly rate for real estate services. Others trumpet the virtues of a fixed-fee approach. Some customers may, in fact, be well-served by those models, and I understand the arguments in each case.
But I am here to tell you that the vast majority of consumers today demand more, not less. If I charged by the hour, you couldn’t afford me — unless, of course, you are my youngest daughter, but she’s an anomaly.
If I charged a flat rate, something would have to give. I would have to either limit my customer base or my services.
And here is the reason — reasons, actually — that neither approach will ever win a "most popular" award in the school of homebuyers and sellers:
- Business costs, and
- Risk aversion.
Waste is what happens when you show a buyer homes for eight months running, only to have them "go a different direction" — because they lost their job, found a job in another city, got married or divorced or are suddenly expecting, or because their hair stylist got her real estate license.
Waste is what happens when you prepare for and attend listing presentations where you don’t get the job because the seller selects another agent, or — as is too often the case these days — the "seller" doesn’t have sufficient equity to actually be a seller.
It’s what happens when your listing doesn’t sell, when the buyer bails 29 days into a 30-day escrow, when you discover the cracked slab, and when your short sale is rejected by the bank after months of bureaucratic paperwork gymnastics.
Let’s tackle the fixed-fee model first. I pay a fixed fee when I buy produce. The price of tomatoes is the price of tomatoes, but that price necessarily reflects the waste — all of the tomatoes gone bad that had to be thrown out. I pay a fixed fee for cosmetics, but inherent in the price is the cost of all the mascara that has been shoplifted over the years by ornery teenagers and Winona Ryder.
In real estate, then, prices in the fixed-fee model either need to account for anticipated waste and be structured accordingly, or the broker must cherry-pick the clients. Short sales are a higher level of difficulty; they take oh so much time.
WaLaw Realty figured this out. So did Redfin — even with their rebate model, the more time-intensive short-sale projects are either declined or referred out to "partner agents" to make it pencil.
And then there is the fact that people are different, and some people simply require a lot more time and expense to serve. They have varying needs and expectations. I just closed a transaction with one low-maintenance, hands-on client who made it feel like a mini-vacation. I had to beg him to allow me to "help out" every once in awhile during our three-month relationship.
I have another who sends me approximately 17 emails a day, usually between the hours of "dark time" and 5 a.m., in each case expecting a response before he has actually hit "send."
One of the latest emails in his drip campaign was to clarify that, since we pay for photographs, staging and brochures, we would also be footing the bill for his carpet cleaning and window washing. (The correct answer, by the way, even during bankers’ hours, is "No.")
So either you are forced to establish the fixed fee as a blended rate of customers’ needs and expectations (which means one of my daughters is getting a raw deal while the other is getting the deal of the century), or you are in a position of having to set boundaries.
Maybe to keep costs down, I have to turn off the spigot on weekend or evening availability. Maybe I limit the number of showings or number of brochures. It could be that I only agree to list the cleanest or nicest homes because those will sell more quickly and cost me less to market. Perhaps I shun condos under litigation or homes backing to power lines because those are just too much work.
And, just maybe, this whole idea of cherry-picking isn’t in the best interest of the customer at large, or our image as agents.
So, hourly rate it is. Attorneys charge by the hour. So do engineering consultants. In the case of the latter, I used to be one of those guys, and I assure you that our billable rate included time on the job and profit, but also both "procurement hours" and "overhead."
Procurement hours include all of those failed listing appointments and buyer interviews — we all have them, on occasion. They include the hours I spend on dreaming up and publishing marketing materials, managing the business books, renewing my license, continuing my education, and earning your business. They include my time at the community fairs, the open houses, and, yes, the Inman conferences.
Overhead — our hard costs, and those are staggering — includes all of the business supplies and equipment, the memberships, licenses and renewals, and the health and errors and omissions insurance. With buyers, it is time and gas. With sellers, it is often thousands, not hundreds, of dollars per listing in our market — whether their home ever sells or not.
And while we are on the subject of hard costs, let’s not forgot that the attorney and engineering consultant generally have paid vacations, sick time, and employer-provided health insurance and retirement accounts. I, on the other hand, am the employee and employer. I pay both ends of the social security tab.
Which brings us to risk, and I am not even talking about the liability we incur every time we touch a document or speak to a client. The commission-based model puts all of the risk squarely in my corner, and the vast majority of our clients wouldn’t have it any other way. Either they succeed, or we don’t get paid.
They are thrilled with our performance, or we are unemployable tomorrow. They expect a lot. They expect it 24 hours a day, on call, and we deliver — in good faith, on the come, and always at the expense of a normal, time-clock existence.
For 48 hours last week, my husband and I saw our daughter off to her next stop. We also spent our flight layover forwarding documents and opening escrows. We spent our down time in the hotel room copying each other on important emails — me from the room and my husband from the business center.
We are always on the clock. It was a paid vacation — one we paid for with time away from our daughter who we rarely saw even when she was living at home because of the demands of the job. Priceless.
We work hard, we assume much risk, and we have the potential for nearly limitless reward. Such is the nature of our business. That reward comes at great cost, however. How much is our time worth? How much is one transaction worth? That is up to each of us to answer, and each answer will be different.
And this is why we will always have a menu of commission models out there from which the customer can chose.
In my case, I still prefer the commission-based model. The idea of taking on risk in order to reap reward, the idea of investing in my clients, and ultimately myself, suits me. Buying and selling a home is a big deal. It is a process — more of a process for some than others, but a process nonetheless.
To model our services for the "average" client so that our fixed-fee pencils, or to have our clients feeling like they are playing a game of "Beat the Clock" in a transaction involving five, six or seven figures may have a place with a certain audience. But, I do not believe this approach is in the best interests of the vast majority.
Besides, if I charged per transaction or by the hour, no one could afford me.