Editor’s note: This is the latest installment in a multipart series of articles focusing on low-cost real estate brokerage models.
Though the commission-based real estate transaction has been the norm for decades, some real estate professionals are no longer satisfied with a compensation model they feel does not always validate the work they do or take into account clients’ changing needs.
Some agents are looking to monetize services typically offered at no cost to consumers who are not necessarily buying or selling a home, such as counseling on how to deal with a distressed property, lower their property taxes, or increase the value of an underwater home.
Others also think the commission-based structure should be reformed, for the sake of consumers and agents alike, and that it represents an inherent conflict of interest for the agent.
Conflict of interest
Licensed real estate broker and lawyer Marc Holmes, along with fellow lawyer and licensed agent Craig Blackmon, launched WaLaw Realty in the summer of 2009. WaLaw pairs real estate and legal services, offering both for a flat $3,995 fee, most of it due at closing or after six months if for some reason the transaction hasn’t closed.
“We started in 2005 … solely as a law firm focused on residential real estate and did both litigation and transactional work. We had lots of buyers and sellers approach us who wanted to do FSBO-type transactions but weren’t really comfortable with the traditional hourly billing approach used by attorneys. We came up with a flat-fee option and it really took off,” Holmes said.
Most of the brokerage’s clients are buyers, which Holmes attributes to offering a large number of services, in contrast to many other flat-fee brokers.
“I wouldn’t describe WaLaw as a limited-service broker. We do (almost) everything that a traditional broker does; we just charge for it differently. We have a set schedule of services that are included in our flat fee, then additional services are provided on an hourly basis at $75 an hour,” Holmes said.
In 2010, the brokerage rebated more than $600,000 to buyers, with an average rebate of nearly $15,000, Holmes said.
“(Clients) love it. One reason is that it mitigates any conflict between our compensation and the price they pay for a home,” he said.
“It also helps convey a level of assurance that many find appealing — a sense that we will act with their best interests at heart. As attorneys, we’re obligated by law (to) act in this fashion, which is another thing our clients really like.”
In 2006, Mollie Wasserman founded the Accredited Consultant in Real Estate (ACRE) Training and Certification Program, in part to address the problems with commission-based income. The ACRE program trains agents and brokers to develop their own consulting practices designed around assessments of clients’ needs. About 350 agents and brokers have enrolled in the program, most of them in the last six months.
ACRE agents tend to offer various fee packages that often include hourly work as well.
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“When our compensation depended on the decisions they made that we were advising them on, that was a huge conflict of interest,” Wasserman said.
Paying for risk
In addition, Wasserman said she believes the commission-based structure is unfair to consumers. Because real estate commissions are paid only when a transaction has closed, part of what consumers are paying for is risk mitigation.
Clients with successful deals are paying for “all the buyers that didn’t buy, the sellers that didn’t sell. It might even out for the practitioner, but the (deals) that close are subsidizing the ones that don’t,” she said.
Nevertheless, she recognizes the historical influence of commissions and suggests to ACRE trainees that a commission can be one of many possible compensation choices.
“Consulting (is) not about a fee schedule, but about defining clear options for the consumer,” Wasserman said.
She acknowledges that even when clients are given a choice they will often still choose to pay by commission.
“Do all consumers feel comfortable going with a fee? No. My own mother would never pay by anything other than commission because she’s risk-averse,” she said.
“But she understands that she’s going to pay a premium for that insurance policy.”
Working for free
The traditional compensation structure also means agents often end up working without pay, Wasserman said, either because a deal falls through or because they are helping people with things unrelated to an actual transaction in the hope that those people will come back as clients later.
“It would be like if you only paid your doctor if you got well,” Wasserman said.
While some believe getting paid through fees instead of commissions means they will make less money, fee-based models often can be more profitable, she added.
During ACRE training, she has agents calculate how much money they made in the previous year and divide by how many hours they worked in the past year, regardless of whether or not a transaction closed.
“The overwhelming majority of agents are realizing that they’re working for less than minimum wage. They could earn more as a Wal-Mart greeter,” she said.
That’s mainly why William Metzker, owner and principal broker of Terradigm Real Estate Consultancy in Portland, Ore., said he recently decided to no longer work on a commission basis.
“I’m going fee-based because I’m tired of doing so much work for free, and (I’m) no longer comfortable with the fairly low regard the public has for real estate brokers, much of which, I believe, results from working for free,” Metzker said.
He recently closed on his first fee-based listing, in which he provided the client with the typical range of real estate services, he said.
“Our market is pretty bad, but this home went under contract for full price in less than a week. The owner was a bit nervous about the arrangement at first, even though it complimented her needs, but she’s pretty pleased now since she saved more than 50 percent over a sales commission,” he said.
The do-it-yourself crowd
WaLaw Realty’s clients tend to be highly educated and professionally employed, Holmes said.
“We get lots of high-tech workers, doctors, executives, and the like. A common trait among these particular clients is their desire to be very involved in their transaction, he said.
“They don’t want someone holding their hand and telling them what to do. However, they do want someone with experience that they can trust to advise them over unfamiliar ground.
“Somewhat surprisingly, we also get a decent number of retirees. They typically have plenty of time to search for homes, love doing stuff online, and have often had bad homebuying or selling experiences in the past.”
Clients for Albert Hepp, president of the American Real Estate Broker Alliance, also tend to be either professionals or what he calls the “Do-it-yourselfer segment.” These include attorneys, commercial brokers, appraisers, retired agents, builders and rehabbers.
Consumers who don’t fit the mold
In the 15 years she was practicing real estate, Wasserman encountered a lot of people who weren’t necessarily buying or selling a home but still needed advice.
“I believe we’ve lost a fortune over the years because we didn’t serve the minority of clients who didn’t fit the mold. Now they’re becoming the majority,” she said.
She said she has received a “phenomenal” amount of business from a “negotiating and troubleshooting to close” package she offers once sellers have found a buyer on their own.
“More and more buyers and sellers are finding each other without the help of a professional. Previously these people went to attorneys or muddled through on their own,” she said.
“If we don’t provide the consumer quality options, responsible options, then the only other thing they’re going to do instead of taking a full package is continue to go to discounters, or (pay) the flat fee that gets them into the MLS,” she added.
In his brokerage, BuySelf Realty Inc., Hepp said he has seen an uptick in referrals from agents with underwater sellers.
“The agent knows they can’t afford a traditional listing commission — it would keep them from selling. The agent refers the seller to us, and then that agent will have a buyer client once they sell,” he said.
The flat-fee model is less appealing when distressed properties are involved, however.
“Large REO (real estate owned property) sellers want Realtors to manage properties as part of the listing, although some small REO sellers go with a flat-fee option to sell properties they have taken back,” Hepp said.
And “short-sale sellers need so much assistance managing the lender contact that it is not a good fit for flat-fee brokers, especially when lenders usually approve of paying somewhat of a traditional commission as part of the sales expenses,” he added.
WaLaw Realty has represented buyers of short-sale homes and REOs but has never accepted short-sale listings — though a rise in distressed properties in the Seattle market means that’s about to change.
“We didn’t feel comfortable asking sellers to commit to a flat fee when there was no guarantee their lien holders would agree to a short sale. This would render them unable to sell but still liable for our fee,” Holmes said.
“However, this is such a growing share of the market that we don’t want to ignore it. Accordingly, we just decided … to accept short sales on a more traditional basis, i.e. (a) 6 percent commission to be split between us and the buyer’s agent.”
Some MLSs have not always welcomed unconventional business models. In October 2006, the Federal Trade Commission announced complaints against seven MLSs that were refusing to transmit “exclusive agency” property listings to public-facing websites.
A federal appeals court ruled in April that one of those MLSs, Realcomp II Ltd. — Michigan’s largest multiple listing service — “unreasonably restrained competition” among real estate brokers by refusing to transmit such listings. The MLS rescinded its policy in February 2009 after an order from the FTC.
AREBA’s Hepp was called as a witness by the FTC in the Realcomp case and he said he’s hearing less these days about MLSs engaging in alleged anti-competitive actions.
“I think all but a few MLSs have realized that competition between traditional and other business models is not only healthy — (that) it strengthens the MLS by keeping it relevant,” he said.
“The marketplace is evolving. The MLS can either evolve with it or become obsolete. Hiding listings and sabotaging innovative members is a failed strategy.”
On a peer level, nontraditional brokers sometimes face subtle rebuffs from other brokers, however.
“Calls not returned, dirty looks, offline accusations of ‘discounting,’ ” Metzker said.
Sterling “Joe” Ory Jr., broker for Re/Max New Orleans Properties and past president of the New Orleans Metropolitan Association of Realtors, said some traditional, full-service brokers feel they’ll have to pick up the slack when an inexperienced homeowner uses a limited-service broker.
“Usually the homeowner doesn’t see the difficulty in selling property. Put up a sign, get it in the MLS and find a buyer. The easy part to selling property is the first two steps. The hard work is when you find the buyer,” he said.
“Sellers have many pitfalls that they may never (foresee), expenses they’ll never recover, and sometimes, legal exposure that could cost thousand of dollars, lawsuits, and cloud the title of the property.
“It’s analogous to crossing the highway at night with a blindfold on — the fact that you made it to the other side doesn’t mean it’s an acceptable method of getting to your destination.”
Jason Lopez, a real estate broker and director of business development at Realty Executives Advantage in San Diego, Calif., questions the appeal of some low-cost brokers to most consumers.
“If the overwhelming percentage of real estate consumers preferred this model, then the companies that operate this way would dominate the market. Yet they don’t,” he said.
“At the end of the day I think consumers understand there is probably a trade-off. In other words, you get what you pay for. Rarely, if ever, has one of my agents lost a customer over a 1 percent rebate,” he added.
The biggest challenge
Regional and local brokerages with unconventional models report that their biggest challenge is lack of consumer awareness.
“The traditional model is so ingrained that most people don’t know there’s a viable alternative and don’t make much effort to look for one,” WaLaw Realty’s Holmes said.
“The clients who do hire us typically have figured out that they can do a lot of their own home search themselves and don’t want the traditional broker experience. They then go online searching for alternative ways to buy or sell a home and come across our website.”
Part of the confusion lies in how the commission structure is set up, Hepp said.
While a flat-fee option for sellers is relatively easily explained, “the commission is a source of mystery and confusion for buyers because it’s technically paid by the seller. I think that’s the huge barrier to it,” he said.
“A consumer has to understand what they’re getting before they say, ‘Yes, where do I sign?’ ”