Billable Hours, Straight Commission, Hybrid or Both?

First in an occasional and developing series …

Step one is demonstrating value.

Assuming that I, as a real estate professional, have built a trusting relationship with my clients and potential clients, what is the best way to compensate a good Realtor?

One giant stipulation for this somewhat hypothetical discussion is this – in this make-believe world of fairies and unicorns, the buyer pays the buyer’s agent and the seller pays the seller’s agent – in other words, we have succeeded in rending total control of the buyers’ agents’ compensation from the seller and the sellers’ agents. (hint: we’ve divorced the commissions). Or, as the inimitable Kris Berg said in ’07:

No coop means that buyers will finally be asked assign a value to the their representation. Buyer’s agents will finally have to demonstrate their value and earn their fee. And when the agents representing the buyers have nothing to give away but conversely have to place a price on their services and actually charge their clients directly, the associated accountability will only benefit the buyer…

So let’s assume that the buyer is willing to pay her buyer’s agent.

Straight commission – Buyer’s agent is paid a commission only if the buyer successfully purchases a house/land/condo. The buyer agent works on a contingency basis, with the incentive being a successful closing. The benefit to the buyer is that no matter how much time is required – from start of the showing process to the finality, the pay is the same. This is the “it all evens out over the course of the Realtor’s career” philosophy; in other words, the easy transactions make up for the extraordinarily difficult transactions.

Buyer pays an hourly rate, paid only at closing. But … the hourly fee structure is facing challenges in the law profession.

Many have called for the end of the billable hour. Have you seen any indication it could really happen?

Our firm has been doing alternative-billing arrangements. But you have to have an agreement with clients who are interested in doing it. At the end of the day, clients have the power of the purse.

Buyer pays an hourly rate, in a pay-as-you-go scenario, with an up front retainer – in blocks of three or five. So … if you, the buyer, see three houses you pay for that time. If you see seventeen, you’re paying for that time.

– Some combination of the above, or something completely different.

For the vast majority of buyers’ agents, the commission they are paid is set by whatever the seller is offering through the MLS* – and the buyer is most often not given an opportunity to set the value for whomever she hires (assuming that buyers’ agent is actually using a Buyer-Broker Agreement). As an aside, those who say to buyers, “hire me, it’s free! are doing themselves, their profession and their customers/clients a great disservice. Nothing is free. Ever.

Here’s one of the flaws of the current system. Rookies (and I was one too) are usually compensated the same as veterans. Good Realtors are paid the same as bad ones (and no, longevity does not ensure competence).

This must change.

Is the public ready, willing and able for a change? Would clients be willing to pay directly for Realtors’ services?

Part of regaining the public’s trust is embracing transparency in all facets of this profession. Compensation is a start.

Are Realtors ready?

* The foundation of the MLS is a contractual offering of compensation and cooperation between Sellers’ Agents and Buyers’ Agents.

* I categorized this post as “Politics” as well as “Buyers” because there is no way this type of seismic shift will happen without engaging the political realm – both within and without the Realtor structure.

* Interestingly, a visitor found RealCentralVA this morning following this search term – buyer’s real estate commission myth.

Update 03 February 2009: Jonathan Dalton writes at Agent Genius today about Seven Basic Truths regarding real estate commissions

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10 Comments

  1. Brant Meyer February 2, 2009 at 11:11

    Jim,

    I’ve noticed that you visit this issue time and again – and I think it’s well worth the discussion. The fee structure of the agency relationship seems to wholly define the nature of the business and makes change and innovation hard in your field. If change is going to take place, this seems like the place it has to start.

    I wanted to pose one question in regards to your “rookie vs. experienced agent” issue. You say that both being paid equally needs to change. I would love to see it happen. Here’s my question: Can something be valuable while at the same time not be able to be monetized? In other words, is it possible for something to be valuable under a certain set of circumstances and then not be once the rules are changed?

    Here’s what I’m getting at – your experience and expertise is highly valued in this community. As a result, people give you their attention (reading the blog), they seek your advice, and you have access to a number of people you wouldn’t otherwise. But does this translate into money? Are people willing to pay you a higher commission for a R.E. transaction? You probably get more business and referrals – but does your transactional value go up?

    One analogy would be LinkedIn. I think there’s no argument that it demonstrates high value. I use it a lot and love it. But, that company has made $0 dollars to date. Would I still value it if I had to pay $15 per month? I’m not sure I would. Part of it’s value rests in the fact that everyone uses it AND it’s free. Change either of those propositions and my value of it changes.

    So, does the market value more experienced Agents? Absolutely. Are we willing to pay more for their services? Not sure. But we definitely seek them out and try to give them more business.

    Reply
  2. Daniel February 2, 2009 at 11:43

    I have a feeling that what products / services agents provide will change faster than the compensation model. The rise of the internet-savy generation, whatever the current economic meltdown does to that generation’s perception of real estate, the decline of newspapers, and the availability of data once closely guarded will really change what, exactly, agents will be asked to do for their clients.

    The services provided will affect the preferred compensation method. But those services may be very different than the traditional drive-me-around-until-find-a-house-I-like model.

    Reply
  3. Jim Duncan February 2, 2009 at 13:52

    Brant –

    Thanks for the comment and discussion, as always.

    I keep coming back to this because I feel strongly that change isn’t going to happen unless we keep pressing the matter.

    Thanks for the kind words about my expertise. 🙂 I have not been able to directly translate my (real and perceived) greater level of knowledge into higher fees, as I don’t think that consumers are necessarily ready. But … I have been able to not be dependent on what sellers are offering, so in that sense, I have been able to “raise” my fees.

    And frankly, you’ve got me here –

    In other words, is it possible for something to be valuable under a certain set of circumstances and then not be once the rules are changed?In other words, is it possible for something to be valuable under a certain set of circumstances and then not be once the rules are changed?

    Yes.

    So, does the market value more experienced Agents? Absolutely. Are we willing to pay more for their services? Not sure. But we definitely seek them out and try to give them more business.

    And thanks for framing this matter so well –

    So, does the market value more experienced Agents? Absolutely. Are we willing to pay more for their services? Not sure. But we definitely seek them out and try to give them more business.

    Daniel –

    I couldn’t agree more. For example – the buyers who live in Charlottesville who are familiar with the market, able to go to open houses, do some of the legwork should theoretically pay less than the overseas buyers who will likely require more time.

    Regarding the availability of data – there remain a few examples (locally and nationally) who continue to refuse to send their data through IDX, therefore attempting keep their data behind lock and key. Until they release their information, we’re not going to have a truer representation of the full market online (rant/video coming soon)

    The negotiating for both is likely to be extensive as is the paperwork …

    Reply
  4. Jay Thompson February 2, 2009 at 15:24

    “Nothing is free. Ever.”

    Not true. I give free hugs.

    Oh, wait… If I’m honest I want something in return…..

    Great post Jim. I don’t know what the answer is, but I know something has to change. You know the bureaucracy and politics better than I do, but until a significant portion of existing brokers/agents begin dying off, I just don’t see it happening.

    But I hope I am wrong.

    Reply
    1. Buyers Advocates February 9, 2011 at 01:44

      nothing is free – absolutely
      i believe also that a portion for brokers/agents are dying off

      Reply
  5. Pavel February 2, 2009 at 23:04

    What about the listing agent’s side? From time to time I’ve pondered the following scenario and it’s fairness to seller: if a typical listing agent spends $1,000 to market and sell a $250,000 property; and $2,000 to market and sell a $500,000 property – why should the seller of the $500,000 property typically (and I am generalizing here) pay $10K-$12K more in commission fees? It seems to me in the traditional brokerage model the cost of operating a successful business can get very expensive and the result is that the cost is ultimately being passed off to the consumer. Just a small example: 3rd party vendors (such as Realtor.com) charge listing agents sky-rocket high fees (hundreds, sometimes thousands of dollars per year) to “enhance” their listings. In return, listing agents, to cover their costs and expenses, turn around and charge the consumers a “justifiable” fee. (Realtor.com is just one example here… there are so many other entities which exist solely to make money every time a home goes on the market, is sold or purchased). In the end, however, it is a free market out there. As consumer confidence and awareness grows, change will be inevitable.

    Reply
  6. Jim Duncan February 3, 2009 at 16:15

    Pavel –

    You’re absolutely right, and one thing that man/most Realtors don’t do is explain how much goes in to marketing a home building the infrastructure to market a home and to represent a buyer in their search/transaction.

    The little costs add up … quickly.

    Reply
  7. Jonathan Dalton February 3, 2009 at 16:53

    If I were to go to billable hours for my own business, it only would be “pay as you go.” One of the reasons I’m willing to risk considerable time spent without receiving compensation (buyers who don’t buy) is my overall structure is able to overcome that (just as stores build breakage and other such items into their own pricing structure.)

    So working at a billable rate paid only at closing wouldn’t produce sufficient income to justify continuance of the business.

    Pay as you go, however, places the onus squarely on the buyer. It means that when you hire an agent and go looking with an agent, you’re going to be serious. This allows individual agents to work with my clients since less time will be spent with people who like looking at homes but may never buy.

    Reply
  8. Pingback: Real Estate Relativity » Blog Archive » Theatre of Cruelty in a Carnival of Real Estate - Web 2.0 marketing research, tactics, strategy for the real estate professional

  9. Orlando February 12, 2009 at 22:20

    There is $500 billion in Option ARM’s that will be resetting interest rates and/or reached 125% cap on loan to value ratio very soon.
    I believe that we will see some severe declines in housing values in next 12 months. So get ready… a lot of tire kicking and having our time wasted =o(

    Reply

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