Inside Commissions

Discusion of real estate commissions...
There are 11 articles written on this subject. The most recent 10 are listed here:

Hot Real Estate Commission Debate Home Builders Sweeten Incentives Builder Desperation? Agent Incentives Agent or Consultant? Agent Incentives: Good or Bad?

Accredited Consultant in Real Estate Program Launched Interesting tidbits for Monday reading Starting a discussion on real estate commissions Do Commission Rates Drive Showings? Consumers Drive Real Estate Change

You will find a complete Index of Articles by Category and by Month in the Archives.

January 15, 2007

Mollie Wasserman and Paula Bean launched a new program at the recent NAR convention in New Orleans called the Accredited Consultant in Real Estate (ACRE™). Both have practiced successful real estate consulting for several years and Mollie is considered a pioneer in the consulting approach and fee for service business models. Mollie was my inspiration to enter this business with my own approach to consulting and fee schedules. Mollie recently finished the manuscript for her new book "Ripping the Roof Off Real Estate" about "consulting with" not "selling to" clients and the implementation of fee based services. It will hit the bookstores and online at Amazon or Barnes & Noble in early February.

In addition, they developed a course for agents to become skilled in this business approach with a followup coaching program that is rather unique in the industry. Learn more about the course at www.acrealestate.info. The Coaching Program will use an online Forum approach that is currently under construction. The Forum will be available to ACRE™ graduates when it is launched later this month (it will be closed to the general public).

More about Mollie at MetroWest Real Estate: The Home Consultants Realty Team, and at My Real Estate Consultants.

More about Paula at www.HomeOrlando.com and www.carib-gulf.com.

Here is an excerpt from Mollie's book:

REAL ESTATE CONSULTING

What IS It? How Does It Differ From the Real Estate Sales?

What IS Real Estate Consulting? Is it just a fancy new catch phrase that means the same way of doing business? Well, we can't speak for some agents who call themselves "consultants" but still remain salespeople in practice, but we can tell you that TRUE consulting is a totally different model - a whole new approach in Real Estate.

Let's look at the differences:

• The Real Estate Consultant is compensated for their expertise, time and/or the task. If they're paid contingent on a guaranteed outcome (a traditional commission), it is understood by the consumer that will be paying a premium to have this guarantee.
  
  The Real Estate Salesperson is only paid for a guaranteed outcome (one they can influence but not control).
• The Consultant is often retained and compensated the way other professionals providing a service are, such as CPA's or most Attorney's.
  
  The Salesperson is compensated the way other salespeople selling a product are. (By the way: this doesn't mean that a consultant can't offer commissions if that's what right for their client - the essence of consulting is providing choices. It's just essential that the consumer understand what it is they're paying for).
• Consulting covers a variety of skills and can be used to reach a variety of outcomes.
  
  Selling has one single focus - to SELL something.
• Sometimes the best choice for a consumer is not to buy or sell at all! (Or not now). The Consultant is retained to provide the counsel to help them reach that decision.
  
  A Salesperson, when there's no transaction, has nothing to offer (and no way to get paid).

The real estate salesperson usually has only one way of being paid: a contingent-on-a-sale commission. Consultants, on the other hand, can offer a variety of compensation alternatives such as hourly consulting, a flat fee, as well as traditional commissions, so that the consultant can tailor their services based on what the consumer needs to reach their goals. By the way, consultative service is not limited to transactions. As an example, wouldn't it be great to be able to receive (and pay for) just a couple of hours of objective counsel on the real estate market when you're not sure what you want to do?

Who might be interested in Real Estate Consulting?

• Any homeowner who's trying to decide whether to "move or improve" and wishes they could get objective counsel...
• Any buyer who isn't sure they're ready to buy but would like some guidance on the market...
• Any consumer who really doesn't WANT to play Realtor but feels forced to go it alone if they need to save money...
• Any consumer who's ever resorted to a Discount Broker or a Discount Commission and found out too late that they got Discount Service which didn't get the job done, or didn't get it done right - thus losing money and valuable market time.

This page is an excerpt from Mollie Wasserman's book:
"Ripping The Roof Off Real Estate"
It's Not What You Save, It's What You Keep
© Copyright 2006 Mollie W. Wasserman All rights reserved
Reproduced here by permission.

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November 13, 2006

Repeat after me: homes are selling...homes are selling. [from the Inman Blog] They are. Just not very fast.

Do sellers really not know what their agent will be paid? [from the Inman Blog] Transparency is not that hard...we do it day in and day out.

Are FSBO transactions on a downward trend? NAR thinks so. [from the Inman Blog] Maybe more are finding Fee-For-Service agents...I wish.

Sellers scrutinize the value of regular brokers' services. [Saturday Washington Post] Another reason Fee-For-Service just might be the answer.

Real Estate agents do not control buying and selling! [Bloodhound Blog] Dammit! Maybe I did learn this somewhere along the way.

Finally, the name BLOG is being questioned. [Dustin from move.com and Rain City Guide] Have you noticed I try to avoid silly jargon like post, permalink, trackbacks, categories, Blogroll, Blogosphere......what's wrong with just plain talk? You can change the name of Blog to Juice...and it still won't matter! How about Real Estate Juice for a Blog name? Somebody jump on this one. In the meantime, we keep on Blogging (or, writing articles that express our knowledge, wisdom and/or opinions on topics of interest). I think Blog is here to stay. Lets get rid of all the other techno speak! Maybe then regular people will understand us better.

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October 17, 2006

The chatter in the real estate blogosphere on commission models is on the rise. Here are a couple of good articles, one by Douglas Headings of True Gotham and another by Greg Swann of the BLOODHOUNDBLOG. (Thanks to Jim Duncan for pointing these out...) Ardell at the RCG has written a great deal on the subject from her perspective and, Eileen recently weighed in at the RCG with her thoughts. Great discussions and lots of comments. The traditional model is broke because ONE SIZE DOES NOT FIT ALL. The traditional model has no relationship to effort and expense across a wide spectrum of property types, markets and price ranges.

At the risk of being perceived as extremely self serving, I want to start this discussion by pointing to a section of my Website (not the blog) that I published back in January of 2005. In addition there are a few articles on the subject published in the Guide over time that received little attention. Here are the links:

• SmartChoice For Sellers
• SmartChoice For Buyers
• Commissions inside the Guide

Pam and I began using consumer Choice models when we established our relationship with RE/MAX on August 1, 2004. We have accumulated significant experience with different approaches and what works and what doesn't; the pitfalls, potholes, roadblocks and agent/broker scourge as well as documented successes. This stuff works! I believe it IS the future for the real professionals in this business.

Where did the models come from? We developed them based on a service/consulting fee model I used for over 25 years as an executive with EDS, an IT and Business Process services provider. In fact, it is a business model I have been familiar with for longer than my career with EDS. It is based on Activity Based Costing. Here's the simple explanation:

• Define every direct activity in a process at it's lowest convenient level and determine time and expense for performing that activity. In real estate, there are basically two types of labor activities: administrative (does not require a real estate license) and professional (a licensed agent).
• Group activities into major functions or components
• Develop cost models for each activity and major function
• Do the same for indirect (or overhead) function.
• Spread the indirect cost over the direct expense of each activity as a percentage of direct expense to the total.
• Add a reasonable profit margin (have to be careful not to price yourself out of the market).
• Develop a compelling value proposition on why you are better than everyone else at a competitive price (not necessarily lower) for your services.
• Show potential clients (sellers and buyers) your complete activity list that includes prices (this is called transparency) and collaborate with them on the services necessary to achieve their objective.
• Sign the contract (simple conclusion, there are, of course, other factors for both parties to be comfortable with before you get to this conclusion).

Determining the time and expense is easier than setting a value on your time for the different types of activities. Each individual must come to this conclusion on their own. I will say that it should be based (normally) on your skill level and experience in the business. Just like any other service business I can think of.

Using this model, we rarely let a consumer strictly define what services they want to buy. It is and must be a collaborative effort. Our skills and experiences must be a factor in developing an overall plan. In addition, we developed complimentary models for SELLERS and BUYERS. (Buyers can and will pay their agent when there is a compelling reason to do so. More about that in a future case study).

This is only an introduction to this subject at best. Our next series of articles will be real case studies on why it works most of the time and why it doesn't some of the time. Ardell is right:

For now…price matters is the key, and almost none of the discussions anywhere, focus on different fees for different home prices. So basically, they are ALL wrong.

We will attempt to fix that.

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May 26, 2006

I remember writing an article about calls I received from buyer agents questioning the seller's offer of co-op sales commissions and my thoughts on agent "bonuses." You can find them here and here. The following excerpt is from the latest issue of REALTOR® Magazine:

This article was published on: 06/01/2006

ETHICS: Q & A
BY BRUCE AYDT
In whose interest?

Co-op offer shouldn’t dictate showings.

Q: I recently received a call from a salesperson who wanted to show one of my listings. During the call, she asked if the cooperative compensation percentage offered in the MLS was a mistake. When I said no, the agent said that she wasn’t sure she was willing to show her client the property unless I offered her one-half a percentage point more than the cooperative commission offered in the MLS. Is this salesperson violating the Code of Ethics by putting her own concerns about how much commission she might receive before her client’s best interest?

A: If the salesperson is indeed putting her own interests before the legitimate interests of her buyer client in finding a property, then she has violated Article 1 of the Code of Ethics. Article 1 requires that "Realtors® pledge themselves to protect and promote the interests of their client."

Aydt, ABR®, CRB, is senior vice president and general counsel of Prudential Alliance, REALTORS®, in St. Louis, and a former chair of NAR’s Professional Standards Committee.

Read the full article here.

Read the full article. There are circumstances when a buyer agent might warrant asking the question acting in the best interest of their client. That is when a buyer agreement is signed requiring the buyer to pay any difference between the seller co-op fee and the fee (commission) required in the buyer agreement.

Our buyer agreements always denote the compensation as "the buyer broker co-op commission as stated in the MLS listing." We show every property our buyer wants to see. It is never an issue. And, if there is a "bonus" offered we always disclose it to our buyer and offer to rebate the bonus to them at closing. This is an interesting topic and invite your comments and/or experiences.

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April 7, 2006

This just in from Inman News:

Client as catalyst: Consumers drive real estate change

Report focuses on consumer behavior, demands
Friday, April 07, 2006

Inman News

Consumers are demanding a range of real estate products and cost options and driving the real estate industry to a new era of specialization and segmentation, according to a work group that included real estate brokers, sales associates and consultants.

The work group, formed by a National Association of Realtors committee that is composed of Realtor association executives, also reported "conflicting consumer desires" – consumers seem to want both autonomy and personalized service in real estate transactions.

"The Consumer: Catalyst of Change," a Realtor association report released this month that is based on the work group discussions, also noted that consumers are hungry for: "convenient online services and search tools, including full information about listed properties," "immediate responses to their online or telephone communications," "personal, friendly service from both the agent and the real estate company," "a smoothly integrated transaction process with effective solutions for any hurdles along the way and no surprises at closing," "low fees and commissions or a choice of fee packages," and "a convincing sense that the agent and broker add value to the buying (and) selling experience."

This new study report from the National Association of REALTORS® (NAR) reinforces the A.D. Little study prepared for NAR several years ago.

National Association of REALTORS® A. D. Little Study: "Technology and the consumer will change the business model and execution of the real estate transaction. By 2005, real estate licensees will re-frame themselves from salespeople to real estate consultants".

The conclusion then and now: consumers are empowered with more information from the internet, want to see real value delivered by hiring an agent and want more choice in what they pay for and how they pay for it. Enter: the "Real Estate Consulting Model". When Pam and I founded our business we concluded that consumers were ready for change and that we would do business in non-traditional ways. So far, we are very successful using this new model. It is based on the premise that "one size does not fit all" in a real estate transaction. Here is how it works:

• We show you all the services and associated costs that makeup a real estate transaction and we jointly choose those right for your situation. We call it smart planning or SmartPlan™.
• We show you the cost of the services selected compared to typical commission rates.
• Then, you choose how you want to pay. We call these financial smart choices or SmartChoice™.
• We put our joint plan into action and focus on producing the desired result. You attain your real estate goal at the right cost, in the shortest amount of time with the least hassle.

In addition, we offer a one stop shop to provide any necessary pre-listing items such as new carpet, paint, maintenance, floors and even new appliances to get the home prepared to sell. We use contractors and suppliers we know and trust and manage the entire process. We charge a management fee for this value added service.

Ever wonder where our name came from: Choice³ Realty? It is intended to brand our way of doing business; giving consumers choices. You can find a complete description of our service model at OUR SERVICES: Real Estate for the 21^st Century. You will even find an entry titled: Consumers Drive Real Estate Change that we created over a year ago.

We believe we are on the edges of what will be enormous change in the industry. We didn't make 2005 as A.D. Little suggested but, it is not far off. The innovators have and will continue to change the landscape. "Lead, follow or get out of the way." We choose to lead by being different.

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March 13, 2006

Evidently Brad Inman of Inman News touched off a hot debate about real estate commissions last week in one of his blog entries. Quite a variety of comments and lots of them (over 200). Brad has another regular news article discussing his remarks and the comments. Very interesting to see the various reactions to what seems to be a very touchy subject.

Here are my top 20 21 responses to the commission debate.

1. Commissions are not sacred.
2. Brokers and agents do not have an inherent right to anything including commissions.
3. The consumer has a right to negotiate.
4. Consumers have a right to understand what they are paying for.
5. Innovators have a right to interject themselves into our business.
6. FSBO's have a right not to pay anyone.
7. Consumers are tired of the old models.
8. The old models are dying.
9. New models will provide enormous competition.
10. Change is good for the consumer.
11. Consumers generally don't want cheap, they want to understand the value delivered for the fee paid.
12. All agents have a right to present themselves to consumers.
13. The agents with the highest quality, professionalism and VALUE driven fee structure will be chosen by consumers.
14. Transparency in fee structure will win.
15. This is still a relationship business.
16. Relationships are built on trust.
17. Trust is attained by being trustworthy.
18. Trustworthy (worthy of trust) is attained by being honest, looking after your clients best interest and not your own, and delivering on commitments.
19. Prospering in this business is dependent on doing the right things and doing things right.
20. Consumers will do business with people that deliver value and people they trust.
21. We should not feel threatened...we need to innovate.

Comments are welcomed and valued!

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November 11, 2005

Jim Duncan, my Blogging friend at www.realcentralva.com commented on my last post referring to this article in the WSJ. Thanks Jim.

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Great News for You: 6% Commission*
Good News for Your Clients: 6 Months Free*

I receive emails from the real estate agent and builder community advertising the homes they are marketing. I received this one (click to view) a couple days ago with the headline above. That's right. 6% commission to me if I can sell one of their homes and 6 months free to home buyers (I assume no mortgage payment). There are three caveats:

• Purchase contract signed by 11/30/2005 and
• Close by 12/31/2005
• Buyer must use their lender

These homes appear to be ready for occupancy. We are seeing lots of incentives to buyers (and agents) everywhere in the region. This one is the most extreme. These homes range from the mid $600's to over $1 million. If you follow our thinking on a regular basis, you know how we feel about agent incentives. We don't think it is right.

So, here's the deal: anyone out there that wants to buy one of these Stanley Martin homes as described and you can meet the time constraints, we will share half, or 3%, of the commission with you as a rebate at closing! Now that is a buyer incentive. You have to call us before you visit Stanley Martin.

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October 10, 2005

We started blogging on March 25, 2005 and are gradually increasing our audience. Our blog and business Website are constantly evolving. Our objective is to provide meaningful, straight forward information about this business of real estate with a little fun thrown in. It occurred to us that we have not really explained our business approach and why we do what we do and look the way we look. Well...here goes (Warning! this may be a little tedious):

When Pam and I decided to start our own real estate business we concluded that we did not want to join the herd and compete in what is a "me too" business. Look around. You will find agents all look the same, sound the same, use the same canned materials and are very self promoting. They all talk about their production levels, #1 this, #2 that, integrity, and years of experience. They have glamour photos, a catchy tag line, a template website (or web page) and some sort of personal or brokerage branding. Dont' get me wrong, there are may great agents that have built a significant business using this approach. In recent years, many more are adding price differentiation by offering discounted "commissions". According to their very competitive ads, sellers can choose 5%, 4.5%, 4%, 3.99% and 3.85% full service listings. If we were buying a commodity, why wouldn't we always choose the lowest price? 3.85% looks good to me. The fact is "service" is not a commodity. All of this seems to be very confusing and, in our opinion, not very compelling...

Our journey into this business began in April, 2004. After several months of industry research, looking at hundreds of ads, scores of Websites, reading several real estate success books and dissecting the the real estate transaction we concluded the business was very much like any other service driven business from a delivery and cost standpoint. There are unique rules and laws that govern us but the essential ingredients are the same: create trusting relationships by paying attention to detail, delivering on promises, using technology to inform and gain internal efficiency, keeping clients interests above our own and delivering at a reasonable price that pays us for our time and expense. Real estate is not rocket science.

It was during the research phase of our start-up that we discovered three very important concepts and practices. First, the A. D. Little research report commissioned by the National Association of Realtors® that basically predicted the old business models of "selling" real estate will give way to a concept of "consulting". Next was the discovery of the National Association of Real Estate Consultants that offers education and a passion about "real estate consulting". And last, and perhaps the most important, was the serendipitous discovery of Mollie Wasserman, a real estate agent with Keller Williams in Boston that pioneered the "consulting" concept many years ago. It all started to make sense. The internet provides consumers with a wealth of information making them more knowledgeable. Consumers are demanding more at a value price they can understand. Consumers want a partner in a real estate transaction that is not "selling" them anything. They want experienced, thoughtful guidance.

We put together the business plan, including the philosophical beliefs and value system, tools including appropriate technology, business models that are "value to the consumer" driven and of course, marketing. Our objective is to create a brand the symbolizes all of this and represents to the consumer a symbol of value. Hence Choice³ Realty. It needed to be anything but personal promotion.

By August, 2004 we were off and running. I joined RE/MAX Renaissance because of the business values expressed and because RE/MAX provides the freedom for agents to be creative and very independent. We didn't want a broker to tell us what we could not do. September 1, 2004 Pam left Long and Foster after 5 successful years to join me at RE/MAX.

The response to our approach is phenomenal. Our clients now understand what they are paying for and how much. It's all about fixed vs. variable costs and providing choices (the Choice in our logo). Fixed costs are those services/materials provided in every transaction such as sign post, lock box and MLS entries. Variable costs are those that may be different in every transaction. These include the level and types of marketing required. Some properties require lots of marketing, some don't. Some services are optional such as a seller home warranty, staging and full VisualTour vs. a few photos.

Hence, we provide a flexible service schedule where we customize a plan for buyers and sellers and offer three (there is a ³ in our logo) ways to pay for services; time and expense, fixed fee or commissions. Most clients choose fixed fee. It is also the seller's decision on what to offer cooperating brokers (buyer agents).

It is a win-win for our clients. They only pay for the services they need to meet their objectives. We get paid for our time and expense and provide uncompromising service (have you noticed our tag line is You Choose. You Win!...?). Finally, we refer to ourselves as the Choice³ Realty Group. Our intent is to create a growing business and include other agents who want to do business the way we do. By the way, we refer to ourselves as "advisors" because that is the relationship we build with our clients.

So, there you have it. The evolution of a different business model and how it works. We have an entire section devoted to our business model on our Website at www.choice3realty.com.

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October 7, 2005

As mentioned in my last Market Update article, more sellers and new home builders are offering incentives or "bonuses" over and above stated commissions to agents who bring buyers and write contracts. "What's wrong with this picture?" I ask.

First, it seems to me that my duty to a buyer is to help them find the right home that fits their needs, wants and desires in a price range they can afford. Should I be trying to SELL them something because I can make more money? The answer is "I won't do it"!

Second, sellers or new home builders would attract more buyers by putting that money towards sprucing up the property, lowering the price or reducing closing costs to buyers. My humble opinion.

Finally, all things being equal, if I have a buyer that is interested in equivalent properties and one was offering agent incentives, I would fully disclose that fact and offer to rebate that incentive to the buyer at closing.

The real estate business is a hard business for a high percentage of agents to make a decent living. The question: Are agent incentives good or bad for the buyer and the real estate industry in general?

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