Commission pay to fade away?
Essay: Roadmap to Recovery
By Inman News, Wednesday, November 26, 2008.
Editor's note: This guest essay is a part of the Roadmap to Recovery editorial project, which focuses on the future of the real estate industry. Essays should be 400 words or less and should detail your views on how to reinvent the industry and revive the housing market. You can pick a specific industry category -- such as brokers, agents, technology, title or lending -- or discuss the entire industry. Our editorial team will review the essays -- authors of essays published in full will get a free pass to the upcoming Real Estate Connect conference (for new registrants only), and the author of the top essay will receive $500. Send your essays to future@inman.com. There are other ways to participate in the Roadmap to Recovery project, too. Click here for more details.
By WILLIAM METZKER
The present down market isn't going away. It's going to get worse. Housing markets typically take years to recover, and this one is no exception. Home sales in 1993 were at about the same level as they were in 1988, and there wasn't a consistent increase until 1995.
Even when the market stabilizes and recovery begins, the market won't see a quick rise in prices or units sold, absent significant immigration. Aging baby boomers won't be buying as many houses as before. The risk inherent to home-buying, eliminated by cheap mortgage money, has returned, along with a crisis in confidence. These factors will aid in a return to the acceptability of renting, which also permits job mobility and fast lifestyle change. Homeownership will be largely confined to upper-income people and to those in professions offering geographical stability and de facto tenure.
The real estate market is not in some kind of "correction," but rather it's undergoing a sea change. Think lath and plaster. Until the 1950s, lath and plaster was used to finish interior walls of buildings, and the unions for lath and plaster workers were among the most powerful in the trades. Then, someone invented Sheetrock, and now that union doesn't even turn up in a Google search. The change coming to real estate is that big and will see enormous changes -- some very fast, some more gradual.
Brick-and-mortar brokerage houses won't be able to cover overhead and will severely shrink or fold. Their value as a brand is questionable anyway, but the huge dissemination of information online has made the business agent-centered and not broker-centered, which is the final nail in the coffin.
Moreover, the public demands and receives more and more information online, and the real paradigm shift will be a change from agent-centered transactions to customer-centered ones. Commission-based compensation will slowly disappear. Agents themselves will perform a transparent service with clear value-adds. An enormous dip in the number of real estate agents will occur. Many inexperienced ones can't make it in the current environment, and older, successful ones will retire.
But the opportunities are exciting. Agents (who will come to be termed something else) will specialize in niche areas -- estates and trusts, homeowner associations, etc. -- much as other professionals do. The market, their trade associations and state regulators will mandate better education, and professionals will receive higher compensation and enhanced social prestige.
William Metzker is a broker for RE/MAX Equity Group in Hillsboro, Ore.
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Submitted by Stephen Graham on November 26, 2008 - 5:25am.
"Commission-based compensation will slowly disappear."
That will be a tough change to come about, insomuch as consumers on any large scale, particularly buyers, are reluctant to pay for brokerage services regardless of the consummation of an actual sale.
Associate Broker | Buyer's Agent
www.realtown.com/BuyersAgentGeorgia/blog
www.georgia-new-homes.net
Submitted by Matthew Rathbun on November 26, 2008 - 5:56am.
I think that this argument is well founded, but if we can learn anything from the past, it's that the real estate world is epically bad at predicting the real estate future.
There are just too many variables. I've heard a great deal about divorcing the commission - and in theory I agree. Only time will tell. There are a great many barriers. I think more than likely, we'll simply see agents as a concierge service and everyone else will use some Google / e-Bay type service.
Submitted by Susie Blackmon on November 26, 2008 - 6:03am.
Another brilliant article ... and I think 'right on' target.
Susie Blackmon
http://www.BuckingtheRealEstateTrend.com
Submitted by Walter Boomsma on November 26, 2008 - 6:24am.
Fascinating topic... and I agree with the point that there are a lot of variables.
It's become an almost trite analogy, but the question does remain of whether or not real estate goes the way of travel planners.
One thing most industries never seem to learn is that sometimes you have to allow the market to be the market. There are natural ebbs and flows. And sometimes there are flash floods and droughts.
Ultimately, it's about value. (We've conveniently overlooked the fact that the entire subprime business devalued homeownership while we collected commissions.) Whether or not onnsumers buy homes is largely dependent on the value they place on home ownership. Whether or not they employ a real estate person to assist is largely dependent on the value they see in doing so. As an industry and as individuals, we deserve to have our value questioned.
Some things we think are change are actually not. Fixed costs have always been a major factor in the brokerage business. Down turns ultimately reveal bad management of those costs. It's less about the market and more about management. Always has been and always will be.
Unless, of course, we decide to apply to the federal government for an industry bail out.
Submitted by Lloyd Fox on November 26, 2008 - 6:32am.
I will agree that it will come down to a menu of services in the future. The earnings will undoubtedly drop over time, when that happens it will open the door to lack luster service and skill. The best agents may very well be the first to leave if it's too great an adjustment in income. Yet, we have been told ever since the internet was created that we would be obsolete and discount/flat fee brokerages are the future. Many of those have been among the first to disappear (Foxton's) as they are heavily dependent upon volume, a volume that no longer exists for our agent population. Our agent population will contract to a great degree and the models will change.
I certainly hope the rewards of being a quality agent continue to match the amount of work a quality agent does.
Lloyd Fox ABR, GRI
Broker
Long Realty The FOX Group
602-418-1153
Submitted by David Curry on November 26, 2008 - 6:45am.
I couldn't disagree more. Think about what this article says people "Homeownership will be largely confined to upper-income people". You're agreeing with that? So a person making $60k isn't going to buy a house anymore? We're going way overboard on this, and unfortunately, it's the industry "leaders" that are propagating this hyperbole. There's no reason to think this industry is going to turn upside down like it's so popular to suggest. The business model has already changed. It's obvious that brokerages will tighten the belt, seek out a more profitable business model, but that change has always existed in down markets. Is the business changing? Yes. But are agents going to "termed something else", and is the business model of matching buyer with seller ever going to go away? No. We need to get a grip and really look at our industry and accept that some changes are coming, but those changes are simply finding ways to modify our businesses to be the most successful they can be. Isn't that what we've been doing all along?
David Curry
Geneva Lakefront Realty
49 West Geneva Street
Williams Bay, WI 53191
262-245-9000
www.genevalakefrontrealty.com
Submitted by Lenn Harley on November 26, 2008 - 6:47am.
I don't see that "sea change" that many do, although I do see an increase of "fee for service".
Fact is, IMO, as long as sellers prefer contingent fees, meaning they pay after the sale is completed, we will continue to have commission sales and competition for fees.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Ralph M on November 26, 2008 - 7:27am.
I do think their needs a change in some way for the “Fee For Services” that many real estate professionals serve by or are licensed under. The problem though reverts back to the real estate professionals undercutting and doing little to nothing on a real estate transaction (Not all real estate professionals are classed in this statement) giving the public a bad taste utilizing a real estate professional, therefore expanding the companies of forsalebyowner, trulia, etc.
Just like the automotive and other plagued industries, when you build or have a product that is meager or lacking effort by it’s members or corporate entities, the consumer jumps ship to other companies or says, “No Way”.
The commission era shall never change. It will only get worse for the experienced, knowledgeable, and very savvy real estate professional who actually deserves more compensation. No matter what technology brings to the table, a persons emotions and experience can never be replaced. That is where a very good real estate professional evolves for the consumer.
The solution is, get rid of the real estate associates with barely a heartbeat or a passion (in your own office) who does NOT value thyself or the industry…
Easy as that.
www.aarsteam.com
www.nosellercost.com
Submitted by Ruthmarie Hicks on November 26, 2008 - 7:48am.
This change would require a monumental change in the mindset of the consumer who has it written in their DNA that they can list a home with NO financial risk and they can look and tire-kick to their heart's content without ever paying a fee.
Until that change in mindset occurs, real estate will be a high-touch, high-risk business for the agent and the compensation will have to match the risk factor. There is just so far that rates can be squeezed.
The biggest reason agents are devalued IMO - is that ...IT'S TOO EASY TO GET A LICENSE and brokerages have failed utterly and completely to control the agent population and agent competence.
Submitted by Robert A. Hulme on November 26, 2008 - 8:15am.
This may happen over time, a long time. Society in general is changing, we are not the only ones affected by the economy. The consumer will continue to need Realtors to do the work and Brokers will still be needed to train and control how the agents perform. Our profession as we see it will not change very much for years to come. We will just have to adapt to new methods of working and keep our clients satisfied with our performance.
Robert A. Hulme
Realtor, GRI, e-PRO
Prudential Utah Real Estate
www.UtahCountyRealEstate.us
www.UtahCountyHomes.ws
801-885-2586
Submitted by Katerina Gasset on November 26, 2008 - 8:26am.
"Commission-based compensation will slowly disappear."
This may be on the horizon for the lower and middle income households but this certainly is not the case, nor is it showing any signs of being the case in higher end clients nor in International sales. In fact, most countries are just coming on board with commission offerings and is not going to be letting up any time soon. This is an exciting time for agents who wish to really make a great business for themselves. They will need to be specialists, niching, not generalists.
When markets get tough we see the opposite trend.In our marketplace agents are being offered double their normal commissions, cars, trips; all kinds of incentives and bonuses.
In our market as well as other markets around the country that are high end and professional sellers who want to deal directly with the broker. The small independents are the broker of choice. The more online the transaction the more there is a need of interpreting the information. It is just like the bond broker who spoke to us yesterday about listing his house, he says that clients come to him for his expert advice and pay him what he is worth, likewise he is depending on our expertise in the market and therefore has no qualms about paying us what we are worth for that expertise,he is commission based and so are we. We are on the same page.
Submitted by Barb Van Stensel on November 26, 2008 - 8:56am.
I agree that this is not a "correction" period. I do see experienced, older Realtors retiring as this latest "wave" will take great efforts in change to forge a better path in real estate and those experience and/or newer agents, or ones that may not have applied themselves over the years will just fold up shop.
I see a path of written compensation agreements between buyers and Realtors coming more in place then in the past.
The days where these real estate brokerages created these large lavish offices for non-producing agents are over. It is an adjustment for major and mom and pop companies to review the entire office strategy and set new guidelines and boundaries to act in a more responsible manner when it comes down to profit, training versus wasted monies on office space, requiring Realtors to produce, to take classes, to be commited to the consumers as well as themselves.
I see the level of professionalism, the amount of knowledge, skill, value that the agent brings to the table for their client that will be the base for compensation.
I see the consumer realizing that maybe their agent in the past may not have delivered them a good investment but just "sold" a house. I do this area changing and it is a little unnerving to me when I have to tell my client, you have foundation problems as well as structural, which cost this client dearly on the resale 20 years later.
I am glad to see the sea of change with the younger generation expecting a level of knowledge from their realtor and not just one who shuttles them around as in the past. The new generation consumer is a pleasure to work for, especially when they understand the value that the realtor brings to the table for them.
Yes, we are not down to the bottom of the financial crisis but what I do see are logical steps being put into place whereby the consumer can and is adjusting versus some of the wild cards that have been flung out there in years past with financing, impulse buying and most recent and consumer confidence evaporated.
Real Estate is an investment. It wasn't in the early years but was expected for a man to provide for his family. I believe that some of the old values should be reinstated.
You don't borrow money unless you can repay it in 30 days. (doesn't include homes)
You invest in real estate to put a roof over their head not to use the home's equity for "that specific car", "credit card indebtedness", "impulse buying".
You invest in real estate for the long haul. If you are going to pull money out of your principal residence, it should only be to reinvest in more real estate or something that will profit the family for their retirement.
Just like the Bible has the Ten Commandments, those Ten Commandments are rules as a guideline for our lives. The rules set up for us by our ancestors, are pretty solid and I believe that the new generation is basing their financial future on something grounded, obtainable, solid that will assist them to create wealth for their retirement.
The days of impulse buying, keeping up with the Jones', greed, are over. We were given some great financing options but those options were abused to the point of fraud, desception, that it is not just one factor that the finger points to but many in today's credit crisis.
How we come out of it depends upon the rules we set, the new programs that are allowed with knowledge of the results of those programs, to a better informed consumer, and if we stop the "greed". One can obtain wealth for retirement even now but it has to be done with both eyes open.
Just MHO.
Submitted by William Metzker on November 26, 2008 - 10:07am.
A couple of points.
The end of percent commissions, if it ever comes, doesn't mean an end to compensation, even high compensation. Think if it this way: If someone sues you and has a fair chance of winning everything you own, do you want to be represented by the $500/hour specialist lawyer from Harvard or the $150/hour second-story guy from XYZ State?
I can already hear the argument that the real comparison should be with the lawyer who takes the case on a percent contingency. Fair enough. But keep in mind that that lawyer also turns down ten or twenty cases for every one he or she takes on.
The analogy with the bond trader doesn't hold up, as most of them have either bachelor's degree and often an MBA. You don't even need a GED to be a real estate agent. The new and coming wave of consumers is better-educated than their Boomer predecessors, and the spin-and-grin happy face just won't cut it for them. Authenticity will. Ironically, the pervasiveness of the internet exacerbates this trend: So much of the information in cyberland needs validation from experts.
Fee-for-service (and I don't mean flat-fee discounting, I mean full service) could very well arrive in a couple of areas. My neighborhood, for example, governed by an HOA,is managed by a professional community manager, who is also licensed. The management company prices its services as itemized value-adds. Why shouldn't it offer its clientele a fee-based listing service at something significantly less than 6% as part of its management package? Who knows the house better? Incidentally, this company has thousands of homes under management and could easily offer its own web-based listing service by neighborhood, school district, zip code-- whatever MLS does.
And oh, by the way--48% of homes constructed in the U.S. since 2004 are managed by HOAs.
High-end homes are another target for high-end, fee-based service, because their owners can pay for it. Would an owner rather pay an agent $60,000 to sell her $1 million home (that was worth $1,250,000 a short time ago), or $500/hour plus expenses, with the hourly charges transparent, objective, and making the agent accountable?
Years ago, securities traders were all percent commission-paid. Now, only a few are. Sure, you have Scottrades out there, but you also have Wells Fargo Private Client Services, who has given me and the trusts I manage outstanding service and demonstrable value for the fees charged. Wells' fees are even acceptable in the current tanking market, because they're tied to value-adds.
When my father was eighty-seven, he'd say he'd give anything to be seventy-five again. At sixty, I feel as he did. The opportunities to succeed in real estate are enormous and exciting. I wish I could be fifty again.
Submitted by Ileri Ogunfiditimi, REALTOR® on November 26, 2008 - 10:37am.
Definitely , the real estate industry is becoming more complex and the level of education and specialized skills are becoming increasingly more necessary for real estate professionals to obtain. I don't see the fading out of commissions, though.
I see an integration of different compensation models being used by real estate agents occuring in the near future. Like some other professionals, real estate pros are "really" paid on contingency. However, instead of classifying our fee as a contingency, we call it a commission.
I think this is a relic of the past when the real estate agents' role was primarily sales (before the enactment of fiduciary law in real estate brokerage). When agents became legal fiduciaries of their respective clients, it transformed the role of real estate professionals overnight!
So, I see a continuation of real estate agents becoming more business-like. And being compensated on a retainer, hourly, or a project-based fee, in addition to the commission or rather contingency fee structure.
Many agents are beginning to realize that they are small business owners. Very much like the proprietor who owns a retail shop or the dentist who operates a dental practice. And consequently, such as myself, are converting their real estate practices from sole proprietorships to LLCs. This trend alone, can be a contributing factor to the business becoming more agent-centered.
In closing, I agree that now is a great and exciting time to be in the real estate brokerage business. I wouldn't want to be anywhere else.
Ileri Ogunfiditimi, REALTOR®
Ileri Ogunfiditimi, LLC
Direct Dial (202) 390-6096
Direct Fax (866) 283-7840
www.ileriogunfiditimi.com
Jobin Realty
7825 Tuckerman Lane, Suite 201
Potomac, MD 20854
Office (240)403-3400, Ext 742
Fax (240) 403-3405
Submitted by Brian-Logan Reid on November 26, 2008 - 10:46am.
The way I see it, the 'traditional', brick-and-mortar real estate model (or what I call 'bundled services' model) is slowing disintegrating. Due not only to the consumer's increasing ability to access once guarded property information, but also due to the agent's ability to become more efficient, streamlined and mobile (read: "virtual"), the old model must change.
The reason that the bundled services real estate brokerage model has and continues to exist is the same reason why cable companies make you pay for hundreds of channels you probably neither want nor need. The bundling has been the only way to keep the providers profitable. Wouldn't you prefer to be able to choose and pay for only the channels that you want? (If so, check out: http://hulu.com or http://joost.com) Obviously cable channels are products and differ from the services that agents provide, but the model remains the same and are being sold in a similar fashion.
I believe that the bundled services model is so ingrained in the industry that it would be extremely difficult and costly for it to change. Capitalizing on this, new hybrid brokerages are starting out without the enormous overhead and legacy liabilities while also providing consumers with more options.
The evolution we are witnessing is from generalization to specialization, the same way the law and medical fields progressed. Both lawyers and doctors obtain basic and general certifications first and then specialize. Some lawyers specialize on estates and trusts, while others on environmental issues; some doctors specialize in pediatrics, while others in neurosurgery. The point is that the vast majority of real estate licensees offer their service broadly, i.e. residential or commercial, without focusing on and specializing in a particular niche. If a consumer wants to purchase an urban condo, which she can do at http://condodomain.com! :), she doesn't want an agent that deals primarily with farm land or industrial property sales. The buyer benefits by working with an agent whose expertise is with the particular type of property she is buying; the agent benefits by becoming and being known as an expert in his particular niche.
I predict the proliferation of alternative brokerage models - flat-fee, a la carte, etc. - will eventually challenge the bundled services model.
_____________________________________
Brian-Logan Reid
International Director of Real Estate
www.CondoDomain.com
blr@condodomain.com
Submitted by Larry Wright on November 26, 2008 - 11:25am.
I must agree and disagree. Consumers are more value minded than ever and will gravitate to economical limited services UNLESS a full service professional effectively articulates how they are worth "all that money". NAR has attempted to educate the public about this very issue for decades, but without much success. Brokers and agents with the ability to explain their worth will thrive.
If you haven't already noticed, the traditional business model of "the Broker with the most Agents wins" has already faded.
Larry Wright
www.nwrealty.com
www.nwrealty.net
Submitted by Deede Wockenfuss on November 26, 2008 - 12:01pm.
I found it very interesting that Robert feels that renting will pick up, as consumers want more mobility. My first reaction was to purse my lips and think, 'yuck'. Why yuck? Because, tenants have always been treated like a second class citizen. A tenant never feels like the home they are living in is their own. Why? All of the rental stigmas, such a don't paint, don't decorate, don't plant, don't, don't, don't come to mind. Can you imagine a brand new type of landlord? This landlord ENCOURAGES the tenant to make the home 'their own', by painting, decorating, landscaping, etc., and even participate 'with the tenant' in the cost of these improvements. One of the most demeaning landlord/tenant rules is , NO PETS. Does anyone really want someone you don't know telling you that loved 'member of the family' is not welcome in your new home? I guess the point I am trying to make is that landlords and tenants could somehow 'partner' with each other for the best for the property and each other by relaxing some of the negatives involved in renting. Also, with so many lender owned properties out there, 'lease to own' could get many of these homes off of the books quicker, as there are so many more tenants right now. It would also help the people who lost their homes to foreclosure to begin to build to own again in the future.
Deede Wockenfuss
CybrSold Concepts
A Frugal Virtual Real Estate Company
480-248-9500
http://www.CybrSold.Com
Submitted by Steve Hicks on November 26, 2008 - 12:37pm.
In 1968 we REALTORS were told by the gurues of that day , that all REALTORS in the near future would be made employees and paid a salary by the hour with a small bonus tied to sales.
In 1975 the gurues told us within 7 years there would be only 5 or 7 real estate companies left in the business. Because the independent could not compete with wall street.
In 1979 we were told by the experts that interest rates would never be back to the low rate of 10% again.
In 2003 we were told that all REALTORS would have to offer a discounted commission to remain viable in the business.
After all these predictions only one fact has remained constant. The producing real estate agent remained the producing real estate agent.
Submitted by Steven Beam on November 26, 2008 - 12:54pm.
I disagree with a lot of what you say. Homeowners will be at all levels of income. Big brokerages are already a waste even though I work for one. Few people care about what company helps them sell the house they just want it sold. Discount brokers have been a joke for the most part failing left and right. Everyone around here thought the down turn was going to create a mass of business for local discount brokers but instead they were the first to go out of business and the remaining ones are bleeding badly. When people are hurting they want HELP and from a professional they know will work to sell their property. They don't want to walk in and pay $2000 to have heir house sit on the market for 2 years with no answered calls or active marketing. Denver was in the downturn 2-3 years before the rest of the country we have been in this cycle much longer and have seen the fun it has created.
I can only hope there are many less Realtors after this market turns. There were way too many as it is.
Steven Beam
Parker, Colorado Real Estate
http://www.parkercoloradorealestatehomesforsale.com
Submitted by Charles Vlahos on November 26, 2008 - 2:06pm.
I wouldn't put the way Realtors are doing business now out to pasture. If you want to sell a house - many of the things Realtors do - a homeowner wouldn't want to or couldn't. Often times the best customer for a Listing Agent is the homeowner who sold their home without a Realtor. They don't want to go through all that work again.
A person selling their house (in a normal market) doesn't have a clue even how to start the process let alone deal with the issues they can't even imagine that might come up.
A person buying a house finds a bunch of houses on the Web - Owner's don't want to talk to them directly let alone begin the buying process with them (are they qualified - do they know what they really want etc.) You found the house of your dreams (or did you) now what do you do?
No...the current model will be around for quite sometime - even after most of us are gone. Perhaps large Brand companies will disappear in favor of smaller firms - or even 1 person shops - but I can't see things changing in the basic model for quite sometime - if ever.
By the way - if everyone out there keeps lowering their fees or offering reduced fees for the same work all that might happen is more individuals will leave the business until those that are left begin raising the fees and earning a decent living. Then the circle will be complete and start all over again.
All the information out there is good - but maybe there is too much information for Sellers and Buyers to comprehend. They need someone (a Realtor) to make sense and organize it. Do you expect your lawyer to make that appointment, meet with the inspector, negotiate selling prices etc. Perhaps someone else who you are paying a couple hundred dollars will do it for you and care about the outcome?
Don't worry - the basic model will be around a long time - just worry about having enough realtors around when the market improves to help handle the increased business.
The Web is here to stay - I know that. Realtors arn't the keepers of all the info anymore - but they are needed when a Seller or Buyer is ready to actually sell or buy.