Real Estate Biz 2.0: The Problems With Compensation

No matter how you look at compensation in real estate it's befuddling. The 6% commission model has been criticized because it seems exorbitant when you're talking about a $900,000 home or a 2 million dollar home. Some of the arguments in defense of the model have been that it takes longer to sell a 2 million home, it requires more expensive marketing and liability is greater in case of law suits. These arguments haven't washed. Some companies have lowered their commission but if you lower the commission too much you can't attract other agents to show the listings, because the commission split is lower.

What we have now may be based on a 6% model, but as we all know, it's negotiated many ways in all the daily transactions across the country. Some discount companis have offered a flat rate -- I've seen $2449.00, $4995.00, but then many have fine print that excludes the cost of another agent bringing a buyer. These flat rate models haven't caught on for whatever reason -- local resistance from competing, traditional agents or failure to show a profit.

Then there's the whole commission split thing, where many think that the buyer agent ought to be paid by the buyer and the listing agent by the seller. This would loosen up the 6% model somewhat. You most likely would have sellers negotiating from 3% downward, and the buyer and buyer agent would be negotiating the price for service on the buyer end. In this model, if the listing agent brought the buyer, the double side would be less, around 3%, and the sellers would save money. However, what would most likely happen is that the buyer's would negotiate for the buyer agent to be paid from the proceeds of the sale, 1% or 2%, maybe 3%, or what might happen is that buyers don't want to involve compensation in the negotiations and begin rationalizing that they don't need a buyer agent, therefore increasing dual agency. Savvy buyers with the wherewithal would pay the buyer agent directly if the agent is good enough and proves the value. This might open up interesting compensation scenarios on the buyer's side. I hate to say it, but the whole attraction of buyer agency now is the concept that it's "free". Direct payment from the buyer will kill buyer agency.

If all that needs to be done is paperwork, representation and management of the closing, a fee like, say, $1000.00 might be worked out. If the buyer agent is starting at the beginning and working with the buyer throughout the process, the compensation would most likely be higher, but the question is will buyers pay directly for representation.

I'm not sure we could ever have this situation, buyer paying buyer agent and seller paying listing agent, without some law being passed forcing it to happen, but I don't think lawmakers would do this, because they would see the probability of dual agency becoming the norm and buyers losing the leverage to get "free" representation. It would also be seen as gumming up the negotiations as buyers attempt to get the seller to pay their side. I don't believe buyers would pay buyer agents directly on a large enough scale to make it worthwhile for any agent to become an exclusive buyer agent, just as the seller wouldn't price his house without taking the marketing costs into account. Part of that marketing cost is to pay the buyer agent who's been working with a buyer to bring a buyer to buy the seller's home. So, while splitting the compensation pay might seem like a good thing to do for integrity's sake and it would break up the negotiation to both sides and the consumer would benefit, it doesn't seem likely to happen, because lawmakers would see it as an unnecessary complication that would increase dual agency.

Then there's the employee/salary model I just wrote about. This is risky and brings productivity into question . Will salaried agents be motivated to produce as much if they have a guaranteed salary, and will internally motivated agents produce far more income then the salary they are paid. The representation problem would be somewhat resolved with a salary model, because companies would be offering buyer agent services, and the agents would be getting a salary, but if it's through the same company that has listings, the same question arises about objectivity and true representation.

If you could answer the productivity problem, I think the buyer agent problem would find an easier solution -- companies would have to allow agents to truly represent buyers and they would have to strive for integrity in the process. However, the productivity problem remains the big stumbling block. I suppose it comes down to whether a company thinks they can not find enough internally motivated people to do the job or they think they can. If they think they can't then the 6% model will be around for a long time to come, until the government steps in or the market totally rejects it. If companies begin to believe they can make it work, then the innovation begins to create the best system -- most likey a combination of base salary, bonuses, perks, working environment, tools provided for success, leads, training, coaching and instilled pride from talented leaders.

I'm an idealist, so I think it can work but I fear many cynics and realists will disagree. I next want to write about how I think a company can make a salaried model work, just for the sake of thinking about it as a possibility.