The commission debate continues ...

Submitted by Phillip Jones on September 3, 2008 - 1:19pm.

Jonathan,

We charge upfront and it works. We provide excellent service and give customers a great value so our referral business is very strong. We implemented a “menu of services” 3 years ago and the public just loves it. For buyers, we charge a professional services fee and then give it back doubled at closing so the customer is rewarded for their loyalty.

These concepts are going to take a long time to penetrate the culture, but as older “traditional” agents and consumers exit the industry it will catch on. Just my humble (biased) opinion!

Thanks for writing to post - keep up the great work!

Regards,
Phillip Jones, Broker/Owner
Your Choice Real Estate, Inc.
151-18 College Drive
Orange Park, FL 32065
Phone: (904) 298-2679 Ext 501
Toll Free: (888) 490-0671 Ext 501
Fax: (866) 923-9990
Email: pjones@ycre.net
Website: http://www.ycre.net

Take a moment to look at our new website! Now with online MLS entry & payment options!

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Submitted by Rich Rector on September 3, 2008 - 1:34pm.

This is one of my blog posts from a couple of years ago dealing with this issue. The restaurant analogy by the author of this piece doesn't acknowledge the fact that the "server" has no liability, where a real estate agent does. And that liability is in direct proportion to the price of the property.

"Why do we charge a percentage of the sales price?"

Over the long weekend I was traveling. By amazing coincidence, I was seated in the airplane next to one of my executives (we call our real estate agents "executives"). He has been in the business a short period of time, and we had a great dialogue.

He posed the question to me: "Why do we charge a percentage of the sales price as our commission?" I really don't know how this form of compensation began in the real estate industry, but it made me think.

I believe that real estate professionals should get compensated for the skills they bring to their customers and to the marketplace: skills like marketing expertise, negotiation skills, market and product knowledge, transactional expertise, to name a few.

Few people realize that real estate people pay for many items for their customers (advertising, inspections, meals, gasoline, etc) with the real possibility that they may never get paid for their time, effort and expertise. This risk is one reason for getting compensated on a percentage of the sales price.

Another reason is that the risk of litigation, the costs of malpractice insurance (called "errors and omissions" insurance), and the cost of any possible settlements if something goes wrong is in direct proportion to the sales price of the home. Therefore, getting compensated in proportion to the same basis makes sense.

Consider if a real estate professional gave a seller a choice: "You can pay me for results only, in the form of a percentage of the sales price. I take the risk that I may never get paid if I don't perform, but I have an incentive to sell your home for you quicker and more efficiently, OR you can pay me by the hour for my time, reimburse me for all my expenses and you will pay me whether your home sells or not. I have an incentive to work less efficiently because I will be charging you by the hour, not for the ultimate result."

Which do you think the client would prefer?

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Submitted by Stephen Graham on September 3, 2008 - 2:34pm.

It's a risk vs. reward system. What's more, the commission creates an incentive to close out the deal. If fees are paid upfront, what incentive is there to consummate a transaction? Would it not be easier to be a slacker and not preform for the client?

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Submitted by Michael Thomas on September 3, 2008 - 7:17pm.

Just as the travel agent found themselves "out of a job," many Realtors will be out of a job if they do Not realize that competition drives every market. Let's be realistic, if you can continue what you do, make plenty of money then "Why Change?" As more and more consumers begin to understand how commissions are split and paid they will demand much more from those Realtors and maybe you will actually earn the commissions your charge.

Sellers and Buyers have different needs. Some need the full service Realtor who does everything including holding their hand from beginning to the closing table and sometimes after the closing table. Some need limited service and an a la carte menu may suffice. Some just need to pay to be on Realtor.com for their marketing needs. Of course, there are degrees of each of the above buyers and sellers.

Only by truly Listening to your Buyers and Sellers are you going to know what is Fair to all parties.

Commissions are going to change: be a Leader in this exciting New Time.

Michael Thomas
Passport Realty & Mortgage
904-866-6777
Jacksonville, FL
www.PassportRealty.com
Michael@PassportRealty.com

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Submitted by Tim Daunch on September 4, 2008 - 5:16am.

I still have a hard time with percentage of sale price, i.e. the same 1500 sq. ft colonial that sells for $100,000 in Pigsknuckle, AK goes for $500,000 or more in the pricier markets.

Did one Realtor perform and incur five times the effort and expense of the other? Are the associated costs in these respective markets a 5X difference? I think not.

Then there is the matter of pay for performance or "hard work" as some call it. I've listed several houses with successful brokers or agents. In each case they showed me their portfolios, discussed their marketing plans, etc. In each case, the marketing plan consisted of the usual MLS, internet and print listings, some very nice brochures and open house takeaways. I followed their pricing quidelines and market analysis. They took an interest in the property and were not simply tour guides (and there are a lot of them out there).

After 90+ days, not one brought a reasonable offer for these rehabbed homes. I sold all of them on Craig's list at or with a few thousands of my asking price within 30 days ($140k on average). These agents were all very intelligent, nice people, with a solid career of success. So what happened? I don't know nor could they tell me.

Many agents solicited a listing from me. I don't think I should pay a listing agent for entering data into the MLS, only to have another agent bring the buyer. I countered that I would pay 6% if they brought a buyer, which of course, means no splits with a buyer's agent - and pay for results. Not one took my offer. One had the nerve to tell me that she was "a listing agent who concentrates on marketing to buyer's agents, and seldom shows houses". Next. A "bad apple" story? Perhaps. Or not.

Unfortunately, I'm afraid the dirty little secret is that Realtors don't "sell" anything. They can't make or convince a buyer to buy (which is true in all sales, not just real estate). They present the product and hope that the buyer takes an interest. One agent admitted that she had approximately 25 hours into my marketing effort, including a couple of showings; that's about $400/hr, if successful. Are we simply amortizing the agent's costs across successfull sales? Why am I paying for the efforts of failed sales?

I COMPLETELY agree with Mr. Rector's comments that real estate professionals should be compensated for the skills they bring to the sale. That said, I have had some candid conversations with two Realtor friends who confirm that in our region the same house can sell for $100k - $400k, depending on the area, and require about the same marketing effort. My own FSBO selling experience (5 to date) bears this out. So how can we justify the commission difference?

Now, I'm sure the faithful will be leaping to their keyboards to blast me but you'll be preaching to your own. It is natural to become upset when one's livelyhood may be at stake. I work in a commission sales position, so I understand the issues of cost, risk, need to make a living, etc.

However, these are the fundamental questions that savvy home sellers are asking (i.e. what am I really getting for my money?) that need to be addressed. Instead of a frank discussion, many real estate professional and the industry seem to keep ducking the reality of the situation and trotting out the same old horses viz. "hard work", expenses, risk, etc., desparately trying to preserve the status quo. When savvy sellers continue to run into these road blocks, they simply find another route. And that leaves the Realtor with nothing. You can make the plan or have it made for you - your choice - but the current plan is falling apart.

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Submitted by Rich Rector on September 5, 2008 - 11:35am.

To Tim Daunch:

Thanks for your comments. I did not hear anything from you regarding the difference in liability for the 100K vs 400K sales. That is where the true costs are. Even if a Realtor doesn't "sell" anything, he or she is still held highly responsible for things that go wrong, even if it was his or her fault. This is where a real difference could be made in the industry, if buyers and sellers would take on that liability.

Rich Rector
President
Realty Executives INTERNATIONAL
check out my blog: www.richrector.blogspot.com

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