Andrew Wetzel's Musings

March 23, 2019

Compensation in Real Estate

Filed under: Buying,Ethics,Hiring an agent,Marketing,Price,Selling — awetzel @ 4:31 PM

While there are many different business models as far as how sellers and buyers compensate their Real Estate representatives, the one that seems to remain the most popular is based on closing a sale meaning that the agents work on full commission.  Typically the seller pays the listing broker a fee due at settlement and that broker offers a portion of their fee to buyer agents as an incentive for them to show their listings.

Anyone working on a full commission-basis has to constantly focus on finding new clients if they want to continue to generate income.  While most agents will have opportunities to work with friends and family as well as people referred to them, we also need to identify prospects from people we do not already know.  The point I want to stress is that Real Estate agents, and perhaps anyone who works on full commission, have two commodities to trade for the opportunity to earn a commission.  One is our time, meaning that any time we devote to developing leads and working with prospects, customers and clients has to be invested wisely as the amount of time we have is finite.  Time management is one of many topics we have to master.  How much is our time worth?  Can we differentiate between important tasks and urgent ones?  How is our time best spent?  Some agents have a better handle on this than others.  One of our challenges is to evaluate which clients to accept based on the likely outcome of our working for them.  It boils down to probability:  am I likely to sell a client’s house or is a buyer likely to buy a house?  Of course nothing is guaranteed and we all will spend some time for which we know we will not be compensated.

The other commodity we have to trade is the combination of our skills, knowledge and ability.  Our actual experience is only one part of this as some of us spend a lot of time, money and effort to learn more so that we are better prepared for the unexpected.  While some clients may be more self-sufficient than others, perhaps minimizing what we do for them, others are much less so and will need more time from us as we advise and counsel them.

One of the basic facts of Real Estate is that commissions are negotiable.  In fact, when a group of agents get together we are NOT allowed to discuss commission as doing so may be perceived as collusion.  Offices and companies set their rates or fees, we try to avoid the word “commission”, and may or may not allow their agents the flexibility to charge what they can or need to in order to acquire clients.  There is more to our fees than simply comparing one company to another.

I have heard since my first day in business that our fees were under assault.  Different business models have done a variety of things to capture market share and, frankly, many focusing on low fees have not survived.  Some consumers do not value our services as highly as others, reducing our role to preparing documents and unlocking doors while others demand a lot of our time, seemingly expecting to learn everything we know regardless of whether or not their situation requires it.  I do know that when the market went crazy, some sellers thought our job easier so they wanted to pay less.  Of course, I never had a seller offer more when it took longer to find a buyer for their house.  Conversely, no buyer ever offered me more even though it took writing and negotiating several offers to get them a house.  I often joke that when I look at my commission check I either think I was overpaid or that it was not nearly enough!

The word commission is an interesting one as is the concept of only getting paid when a house is sold regardless of how much time and effort we have invested or whether or not the seller and buyer were really motivated to get it done.  Many sales fall through when a buyer cannot get a loan or when the two parties cannot agree as to how to address a home inspection list.  Even if the sale falls through during or just prior to settlement, there is no payday.  That is part of what we accept.

Our commission is a marketing expense.  I understand that buyers and sellers prefer to pay less rather than more.  From the buyer’s perspective, the seller typically pays the buyer’s agent although the fee comes from the funds offered by the buyer.  From the seller’s perspective, the less they pay, the more they walk away with.

What is the reality?  Some sellers will settle on an agent solely based on the fee they charge.  You do generally get what you pay for and if an agent is willing to accept less than their competition, perhaps they are not as capable of earning the trust of prospective clients.  Sellers might want to question the negotiating skills of an agent who accepts what the seller wants to offer:  how hard will they negotiate the selling price?

In addition, sellers need to understand their competition.  Part of the fee charged by the listing broker will be used as an incentive for buyer agents to want to show and sell the listing agent’s property.  The portion offered is determined by the agent and the seller but if it is not competitive with other listings a buyer agent might show their client, the seller could see their house sit on the market longer than it should.  Houses with a high “days on the market” can become stigmatized, meaning that buyers and their agents wonder why someone has not bought it.  Even worse, houses that go under contract and then come back on the market may be thought to have repair issues.

More to the point, assuming that a buyer has “hired” an exclusive agent to represent their best interests, the buyer and their agent likely agreed to a fee owed to the agent at settlement.  If the contract allows the agent to accept compensation from the listing agent, it may well include a provision that the buyer has to make up any difference between what they agreed to pay their agent and what the listing broker is offering.  Why would a buyer pay “fair market value” for a house and still be willing to pay a portion of their agent’s fee?  Of course, if the agent does not have a formal contract with their buyer, this may not apply.

One of the many possibilities in today’s market is for the seller to agree to pay their listing agent but to expect the buyer to compensate their own agent.  Sounds simple and fair, doesn’t it?  However, our local MLS requires listing brokers using the MLS to advertise, expose and promote their property listings to offer some compensation to buyer’s agents who successfully “procure” a buyer for their listing.  The answer for some is to keep their listings off the MLS.  These are called “office exclusives”.  When used, it is important that the listing agent respond to inquiries even though they will be offering no compensation.  I doubt that any seller, even those not willing to compensate a buyer’s agent, would expect their listing agent to prevent agents from other companies from showing their property to their buyer-clients.

When I talk to prospective seller clients I need to gather information.  Prior to our actually meeting, I need to learn what I can so that I can prepare a market analysis for the house so that I have some idea about the possible range of asking and selling prices.  At our meeting I need to walk through the house to see how it compares to others on the market, under contract or recently sold so that I can better assess its marketability and pricing.  In addition, I need to discuss the seller’s motivation, is it more based on the price achieved or the length of time it takes to sell?, their expectations as far as asking and selling prices and, whether we can work together.  There is a lot more to taking a listing than signing paperwork.  I need to make sure that my clients understand the market, the process, the paperwork and how I do what I do.  A significant part of this is explaining the commission and how it works:  is it more than a “line item expense”.  Do they understand the need to compete with other available listings, do they value what we do and do they value my time?  They may simply want to know a price so that they can try to sell it themselves without spending anything on commission.

As I hope I have explained, there is much more to selling Real Estate than deciding how much commission you want to spend.  The fee is a marketing expense and studies over the years have shown that houses offering lower commissions to buyer agents tend to take longer to sell.  While we all want to save money, there is nothing wrong with that, signing a listing contract based on a low commission may not work.  I have seen the same result time and again:  a low commission is offered to buyer agents, the houses may get shown but not sold and the listing agent asks for a price reduction which more than likely offsets any perceived commission savings.  While the new price may appear attractive, the commission has not changed so the house may continue to sit unsold.

There is no time for inexperience, empty promises or false expectations!

Remember:  HIRE WISELY!  We are not all the same!

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: