What are the arguments against Divorcing the Commission?

Continuing the argument for Divorcing the Commissions. The current system exists due to the legacy of sub-agency, where there was no such thing as Buyers’ Agency. While this is currently allowed, the culture of “we’ve always done it this way” is a seemingly immovable force.

One question – how do we change the culture – the culture of the Realtors, lenders, buyers and sellers?

These are a few of the questions that come to mind –

– Would buyers be willing to finance their Realtors’ commissions into the purchase price of the home?
– One argument is that Buyers and sellers have always paid the commissions out of the equity – would Realtors fees go down if this were not the case? (this may be a moot point in today’s market). Greg defeated this argument last month – but how does one distill this argument into a marketable sound bite?
– Are Buyers ready, willing (and able) to pay for Buyers’ Agents’ services even if the transaction does not succeed?

Real estate is perhaps the only profession where the person hired gets paid only in the event of a successful transaction. Drive 500 miles over three weeks, dedicating time and expertise to the clients only to have the transaction fall apart or the buyers not relocate? Are buyers ready to pay for those 19 hours of the Realtors’ time? Right now, I doubt it.

Or while many buyers and some Realtors are unhappy with the status quo, is the alternative (whatever that may be) far less palatable?

What is the alternative?

In order to effect a solution, we must clearly understand the arguments in favor of the the status quo and we must define that solution. What is it?

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  1. Sean Reilly December 4, 2007 at 10:37

    As someone who will be buying a house in Charlottesville next spring/summer I vote for divorcing the commissions. I will gladly pay the commissions out of pocket or lump them into the mortgage. The primary reason is that the buyer would get to negotiate the commission and make it independent of the price of the final sale.

    Why shouldn’t the buyer’s representative be paid based on the actual work (hourly rate) and expenses they put in?

  2. Jim Duncan December 4, 2007 at 11:22

    Sean –

    Thanks for commenting again. Here’s an offer for you – if you are interested, I would welcome the opportunity to talk to you offline or in person about how we could do something like that. If you’re interested, please let me know.

    If not, please do keep reading and commenting.

  3. Athol Kay December 4, 2007 at 20:05

    It’s all the failed transactions that drive up the effective price for the successful ones.

    Say I need to make $6,000 in the next couple months as an agent, and I have three buyers I’m working with. I’m driving around and around showing houses and putting in lowball offers that get rejected for two buyers, and driving around and around and get an offer acceptted for the third buyer.

    The first two buyers take up 2/3 of my time and pay me nothing, so I have to get a $6,000 worth of commission from the third buyer.

    If buyers were paying for my time, as an hourly rate or whatever, then I might get $1,500-2,000 from each of the first two buyers, and $2-3,000 from the third buyer to equal my $6,000 commission goal.

    For an actual serious buyer, willing to buy, a divorced commission makes a lot of sense. It works for the agent because there is no risk of unpaid time.

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  5. verbal December 4, 2007 at 21:07

    Note that most sales jobs are mostly, or only, commissioned jobs. If you can’t move product, you can’t make money. So, no, real estate is not the only business where you only make money if someone buys something.

    Also, a lot of people have been talking about the possibility of hourly-fee or set-fee real estate agents… it even seems more fair to agents who don’t work in ultra-wealthy neighborhoods. But the NAR is lobbying heavily for that not to happen, aren’t they?

  6. Jim Duncan December 4, 2007 at 23:14

    Verbal – Thanks for stopping by. Correct me if I’m wrong, (and this is an honest question) but don’t most sales jobs get a salary plus commission?

    I can’t speak for the NAR, but my question holds – would you be willing to pay a Realtor an hourly fee, even if your house didn’t sell, or if you didn’t buy a house?

  7. Pavel December 5, 2007 at 11:05

    Jim, I think the question you’re asking speaks to the motivation of the buyer/seller. If a Seller is just “testing” the market he/she would be more reluctant to pay an hourly fee or the cost of advertising (print or online). However, I believe if I were a Seller and I MUST sell (moving to another town and want to buy there), I would welcome an option to pay someone an hourly consultation fee, pay per ad, etc.

    I think the first step would be introducing “per hour” alternative as an option – not a complete disregard of the traditional model. The “per hour” alternative would have to be clearly spelled out.

    Sounds like Sean is someone that would take advantage of the alternative model.

    What about this scenario: Buyer hires a Realtor on per-hour basis. They write up an offer, proceed to close..but somewhere down the line the deal falls through (title issues, etc.)…. Buyer needs to find another home…. the process starts all over again. Buyer’s costs keep going up. Attorneys have issue with this too – what constitutes an hour? Is a question/answer e-mail an hour? Lot’s of details to work through for this to work well.

  8. Athol Kay December 5, 2007 at 11:55

    Pavel’s question of what constitutes an hour is a good one.

    I suspect the answer lies in somewhat blanket measures like “a tour of homes = x $”, “writing up a purchase offer = x $”, or something similar to that.

  9. Jim Duncan December 6, 2007 at 10:53

    One of the challenges with “pricing” is that with the current system of percentage-based commissions we generally know how much a Realtors’ time is worth on any given transaction – and how much it will cost buyers and sellers.

    With the hourly-fee model, there would be no way to determine that before the process starts, and the cost to the consumer would be an unknown. Personally, I don’t like unknowns, particularly with my clients.

    No surprises is a good path to take with clients.

  10. TrvlnMn December 6, 2007 at 18:50

    Real estate is perhaps the only profession where the person hired gets paid only in the event of a successful transaction.

    Talent Agents. You don’t get the client a job, you can’t collect the commission. No Salary. Instead you get a “Draw” against anticipated commissions (which are paid out at the calendar years end). If you don’t earn enough commissions to cover your draw you’re out.

    As to the meat of the topic. It sounds like an interesting idea. Lots of things to think about.

  11. Chris Lengquist December 6, 2007 at 18:58

    Jim – while I still think most of the public prefers the traditional system I work about 1-2 times a year on an hourly basis.

    To do so I charge a retainer and keep track of hours on the fifteen. I’m expensive since the advice I’m giving also deals with their largest investment assets. And I get paid through all the analysis process regardless of whether or not the client decides to move forward.

    I put my professionalism on par with an attorney and expect to be paid well. Asset managers, as well.

    Either way is fine with me. I throw that out all the time and every once in a while someone takes me up on it.

  12. Bob December 7, 2007 at 12:26

    I worked with a realtor acting as a buyers agent who required a small up-front payment ($100 I think) to prove that we were serious about buying. The up-front payment was refunded at closing. In the grand scheme of a house purchase, it wasn’t a lot of money, but I’m sure that it was a good tool for weeding out buyers who were not serious.

    Also, as someone who will probably sell a home and buy another home soon, I hate the current system. I think the current system creates several conflicts of interest between the buyers agent and their clients. For example, if I listed my house at a reasonable price, but with a 2% buyers agent commission, then I’d bet that very few agents would show my house to their clients – even if it met their requirements and needs.

    I enjoy your blog. Keep up the good work.