14 Years Later, Real Estate Commissions Have Shifted

We’ve been thinking and talking about the real estate lawsuits for years. The first of many have now concluded, and real estate commissions are changing. How? We don’t yet know. Ramifications? Still unknown.

Right now, we have lots and lots of questions.

I know this – this is the greatest existential shift in real estate in my career, that started in 2001.

Some background, for those who haven’t been paying attention:

• Are real estate agent fees a racket? – NPR
• After a $1.8 billion verdict, the clock is ticking on the 6% real estate commission – CNN
• Commission lawsuits are piling up. Keep track of them all right here – Inman
• New lawsuits crop up to challenge agent compensation – Real Estate News
• Realtor.com CEO: World without buyer agency a ‘dangerous scenario’ – Real Estate News

I wrote the following in 2009, and it’s more relevant now than ever.

Billable Hours, Straight Commission, Hybrid or Both?

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

And then just the other day, a friend sent me this text – Also, did you know that being paid hourly violates the IRS / independent contractor carveout for real estate professionals?!

I’d love to live in precedented times, but that would be boring, right?