This is a further dissection for discourse of Mark Nadels (who is not an FTC attorney, he is an attorney and works for the federal government, and has presented his work at a 2006 FTC Bureau of Economics seminar..sorry Mark :)) critical assessment regarding traditional real estate brokerages revenue and subsequent disclosure models.
‘Marketing Your Competitions Weakness’ outlined the problem and opportunity that lies within the current state of Realtor/Consumer affairs:
- The NAR has control over the passage of most any state level legislation.
- They wield this power to protect the traditional Realtor, prohibiting alternative model practices such as rebates and ‘unbundled’ services.
- Localized MLS access rules may discipline non-traditional brokers and restrict the exposure of a consumers listing.
- Consumers have relatively little objective content and are surprisingly ignorant of their rights about how to negotiate with an agent. Or they are browbeaten by Realtors for attempting to do so.
- Traditional brokers have been successful in suggesting alternative models are ‘discounted’ or ‘inferior’, with little justification except the ‘you get what you pay for…’ cliché.
Six Disclosures that Might Stimulate Price Competition doesn’t so much outline alternative commission models, but rather describes the type of information consumers will gain increased access to, and could cause a $30 billion dollar decrease in broker revenues according to Mr. Nadel.
As an agent, considering the alternative channels consumers now get more and more information from, outside of the influence of the NAR’s raw marketing power, how would you address the following disclosures if they became mandatory in some shape or form? You will notice most of the disclosures are heavily weighted towards buyers’ agents. This will be a 3 part post.
- Home Buyers Should Require an Estimate of the Dollar Amount of the Fee That Their Broker Expects to Receive for Serving Them if a Sale Occurs.
Furthermore, to help buyers compare that fee to an hourly fee, they should also be told how their broker’s fee would translate into an hourly rate. Although the time spent by an agent may vary widely and the estimate of 20 to 69 hours as the average374 appears to be on the high side, agents should provide buyers with an estimate of their hourly rate based on their previous sales. They should also inform buyers of what that figure would be if the effort required only 10 hours (exceptionally short) or 100 hours (on the longer side). These figures should encourage buyers who chose to handle some of the tasks themselves to discuss a lower fee or an hourly rate with brokers.
The idea would be to create an easy, consumer friendly comparison method based on an hourly rate.
How much is an hour of your time worth?
- Buyers Should Be Told Whether Their Broker’s Agent May Refuse to Inform Them About Homes That Become Available and that Meet Their Criteria, Even if They Are Not Represented By Traditional Brokers.
As a consumer I would ask a broker to sign a document requiring them to disclose all listings that meet my criteria, regardless of commission offering or broker type, traditional or otherwise.
It is debated whether not showing a listing to a client based on commission offerings officially breaks the ‘code of ethics’, regardless, it doesn’t appeal to the consumers code of finding the best all around home available.
I’ve written many posts regarding the lack of disclosure in the mortgage industry and the resulting harms, primarily do the fact consumers are not typically afforded a transparent look at how much the mortgage is truly costing them.
The real estate industry is a far different animal. While costs/fees are fully disclosed, very few consumers understand that they are able to negotiate, let alone how to negotiate, commissions with a Realtor.
‘Disclosure’ typically means additional paperwork. The RESPA docs that every mortgage lender must (should) send out within 3 days of pulling credit, is a small book. Some similar disclosure docs should be required of Realtors, although not through some act of legislation (that’s obviously futile), rather through community acceptance and consumer fostered demand. A Realtor who pro-actively accepts and performs under some format of these disclosures has an opportunity to significantly differentiate themselves from their competition.
As stated, these disclosures (and the 4 others to come) could result in a $30 billion dollar fall in annual broker revenues. Who suffers? IMHO (just recently learned what this meant) the agents who part-time it, the ‘coat tail’ riders, and buyers agents who attempt to collect 3% for relatively little value provided. Listing agents could actually be better served with such disclosures. The top producers would continue to succeed with less ‘fat’ in the industry.
Remember, Im wearing my marketing hat, looking for ways to identify weaknesses and leverage knowledge for future Realtor success (call it Realtor 2.0). These posts aren’t meant to cast stones, rather to discuss through community discourse regarding the practicality and feasibility of implementing some well thought principles and disclosures.
I write these posts out of personal and professional interest for the comments they induce, which are invaluable. Do I think Mark Nadels discourse and proposals are the end-all discussion? No. But his research can’t be ignored and deserves to be debated by those it proposes to effect the most.
Jeff,
I don't think breaking things down to an hourly rate is a good way to look at things. Agents get paid for results and experience, not the number of hours they spend doing something.
I can spend two minutes saying the right words and negotiate a better deal and save my client several thousand dollars.
I heard a tax preparer answer a client about how he can charge $100 to fill out a form that takes him only five minutes to complete. He said that it's not the five minutes he's charging for but the 5 years he spent learning enough to be able to know how to do it in five minutes.
As far as disclosing all homes that meet their criteria: buyers usually are using some internet site to search for homes and usually know about all the homes that might interest them. I don't know if that is such a big deal to use as a marketing point. I don't get a sense that people think agents are holding out on them. The only thing where it gets difficult is FSBO's. But usually those homes are overpriced and more of a hassel to deal with that my clients really don't care to pursue them anyway.
I love to hear mortgage brokers and government lawyers expound on how real estate agents and brokers make too much money, are not competitive, do not provide cost effective service and other things about which they know little to nothing of what it took to get us to where we are, able to charge for what we know, not what we do.
Real estate brokers and agents are in business, a very competitive business. If the consumer doesn't want to buy our services, they are not forced to do so. If using the services of a licensed real estate broker or agent to achieve the goal of buying or selling real property, why do government attorneys or lenders feel the need to denigrate what we do, when we do get the job done.
Our services contribute about $30,000,000,000 to the economy. How much is contributed by all of the government attornies combined? I've worked with bad lenders and good lenders. But, I surely don't paint them all with the brush of "not serving the needs of consumers". If they provide good services to my buyer/clients, they get my business. If they don't, they don't. I believe that is the way of a market economy. I also work on a contingency basis. I believe the government lawyer gets his paycheck whether or not he produces anything of value. I've worked in government service and observed government attornies at work.
Let the market decide who is worth how much. I'm for a smaller government.
Lenn Harley
Ok, I was all ready to write something, but Tim ^ said it all... I am paid for my results and experience, not for the time I spend doing something. Next, we never "keep" homes away from people just because the co-op is "different" or because it is a FSBO. We are BIG on educating our clients. An educated buyer or seller is a powerful buyer or seller. If they choose to write an offer on a "different" co-op or a FSBO, then we make sure that they are armed with whatever they need to know to be as successful as possible.
I agree, the agents who will fall by the wayside because of this new influx of information will be the part-timers and the so-so agents. Thank you for the post.
(update: Lenn - BEAUTIFUL!!)
The mortgage industry seems over-regulated for BROKERS while the BANKERS enjoy less disclosure.
For AGENTS many alternative/flat-fee plans are available - only time will tell what impact they make.
The same is true for negotiating commissions - the market forces and customary practices will decide.
Not showing properties based on reduced AGENT compensation - inlcuding FSBO'S is a different story.
Assuming BUYERS would not want to pursue FSBO'S because they are generally overpriced is WRONG.
A BUYER wants the HOME regardless if its sold by a private party, bank or traditional listing agent.
Pursuing FSBO'S may create a greater revenue opportunity if the AGENT is able to negotiate the sale.
Jeff, Most of your disclosure points would be met very simply by using a Buyer's Broker Agreement. The only thing not covered is breaking compensation down to an hourly wage. Personally, I don't work by the hour and never will. Some deals take a lot of time and some don't. How much time it takes me to achieve the goal has nothing to do with what what I charge. If I were to approach this from a buyers broker perspective, how many hours I spend on a deal is 100% in the hands of the buyer. Some buyers make quick decision some will run you around for months. What I would be willing to do is set a time frame for the buyer to make a decision.
Something like this: Mr Buyer will pay me $1,000 upfront. For this I will show him 5 houses in a 24 hour time frame. If he doesn't buy he has to give me another $1,000 and so forth until a suitable property is found. This money is non refundable. If and when we find a suitable property and the deal closes I will be paid a sum equal to 3% of the purchase price. Any shortage will be paid by the buyer at time of closing. The funds the buyer has already paid the broker and any co-brokes being offered will be used to offset this 3%. Any overage will be refunded to the buyer. Broker will never make more or less than 3%.
I sold one house this year where I made approx. $6,250 per house. On another I made about $400 per hour. On another, I made $196 an hour. However, no one paid me for the approx. 1,300 hours I spent on real estate training, research, previewing, market update, etc.
If I hadn't done the training, research, previewing, market update, etc., I wouldn't have been worth the $6,250 per hour for that luxury buyer.
The one group that NEVER complains about my fee is my buyer.
Lenn
Oh yeah...keep in mind these are only 2 of 6 disclosures....and i don't necessarily advocate any of them....
Ill take the time to address each of you individually.....:)
The above comments are so well-spoken, it's hard to add to them! But if you're going to get into the hourly stuff-how are you going to address the difference in price ranges? I provide the same high level of service to first time buyers as I do to luxury second home buyers, and often it's the lower-end deals that require the most time. Should I be punished for being willing to serve them?
Jeff, you apparently have the wrong idea about Buyers Agents as well. We might spend four days with a client and walk away with nothing, actually coming up with a loss on these clients. The Buyers Agent doesn't show two houses and shove a contract in front of them. When I represent a buyer I spend time counseling them to really get a feel for what they want, I talk to their mortgage lender, I call and make appointments, when the client is late, I call and reschedule appointments, I show (sometimes for days) and it can be darned difficult when the sellers have an attitude. when we find the property we are most interested in I show again, we go over the sellers disclosure with a fine tooth comb, I pull up comparables, I pull up tax records, I find out the utility bills. I then write the offer and negotiate the offer. I then set up inspections and am there for the inspections. Then I negotiate an amendment. I am there at closing and keep in close contact with the client in the meantime.
My listings I don't typically do quite as much work for.
How are you going to equate time spent and hours served with my expenses as well? I pay almost $2000 a month in office fees, I pay for my assistant, I pay for my car and my gas, I pay for advertising. I am a business owner. If I go to a store do I have the right to demand to find out how much they are making per hour for selling a TV?
Tim...an hourly rate is not a good sole measurement of the value of a Realtors time....agreed...although it would help a consumer better understand a Realtors value as a baseline measurement...i.e. I typically make about $400/hour per listing. Many buyers agents will not show homes that are not listed with another traditional Realtor, or homes that pay less than the typical 3% commission....and most who do will admit to this.
Lenn...Im not a mortgage broker (anymore) and used to own a real estate brokerage. I didn't say Realtors make too much money, nor propose that they should make less. In my opinion, the top tier of any business industry is hyper-competitive. Consumers are not forced to use a Realtor, but are well aware that their property will not be marketed with a considerable amount of exposure, probably even avoided, if they don't. I don't see where I am denigrating Realtors, rather simply pointing out areas where consumers (and thus attorney's and gov't) see problems with how the current system works. Please explain where Realtors net add $30,000,000,000 to the economy?? As far as let the consumers decide who is worth how much? AMEN!!
Mariana...Well said...as usual...
Well put as well, Brian Brass...
Bryant...Good thing your not a buyers agent ;) (Lets all remember that Im not advocating any one disclosure, rather putting 6 of them out there as potential barometers of measurement of value, none of these disclosures work in a vacuum).
Gosh Lenn, you spend an awful lot of time on education, you must have you PhD in Realtornomics:) Buyers don't typically complain about commissions because they falsely believe they're not paying any.
Leigh...I advocate a non % based commission model....IMHO you should be paid fairly and appropriately, regardless of home price.
Chris...I believe you need to rethink your business process model...You appear to be working way to hard for your money...(im not trying to be funny...I can feel your stress)....
I understand that you are not necessarily advocating these, but ...
It IS good to know what others think about our industry. It is hard to have an accurate perception of a "situation" when you are part of that "situation"... right? These posts may ruffle feathers, and I, personally am quite glad. Sometimes it takes a rabblerouser to sift mediocre from great. There are WAY TO MANY "grown ups" walking around with RE licenses. The ones who can effectively validate what they do and continue to grow and learn and pass on their education and experience to the consumer, well, they will be the ones that not only survive, but become truly successful in this business.
If we are worth our salt... NOW is the time to prove it.
If there is anyone I have come to know about that has a Ph.D. in REALTORnomics it's probably Lenn Harley.
Back to the post, it is, of course, thought provoking and I like that. I have had clients ask about flat fees, hourly fees, etc. (I'm speaking now solely in the commercial world, never had this in residential, but I do much less work there). In each case I have pointed out what must be included in that to make it an appropriate measure, as well as the fact that I get paid for results (something already well addressed here so I won't expand on that). In the end, I never even need to get to the "it is what it is, my results prove I do the best job you can hire someone to do and that's the cost of hiring me" because they long before that stage agree their question was a bad idea of a direction to go.
On that note, I also like (not shy away from) incentive based compensation. I am VERY willing to put my results on the line. BUT (again, the one they back off because of) if I do better than the rest, I expect by the way I structure incentive based compensation to be PAID better than the rest, which means (to me at least) a higher than "market" commission. Once again, it's a rare client that wants the chance to save 25% (which generally then comes in the form of a rebate) but is still willing to come out of pocket for the additional 25% when I blow the expectations and the market out of the water.
What's really funny is I never have to have this conversation with a client AFTER I do a deal for them. For all subsequent deals (and for me that has meant literally hundreds with one client) there isn't a question. Furthermore, I have had clients back me to the wall on getting paid when other brokers (agents) and/or landlords/sellers have tried to pinch me. Why, because they know they get their money's worth and a whole lot more.
This discussion, though, has merit then to me on the fringes, those that don't add more value than they get paid (like the last post I cite Bryant as one who provides service and results far in excess of the fee he is paid and this is a double edged sword - if the higher fees get hacked, the lower fees need to come up). The rest of the world, that doesn't provide that level of service and performance SHOULD get marginalized. HOWEVER, not by legislation, but by the marketplace, the most efficient regulator of the price/value proposition there ever was.
Lenn:
This mortgage broker believes you don't make enough money for the services you provide. People forget of the "dead time" spent building a practice. There is value to that fat rolodex you've cultivated over the years.
Jeff X:
I think the per hour disclosure discounts the efficiency that experience brings to the transaction.
Jeff X- I love how you instigate and get our brains all worked up. I think it's been said here- putting an hourly wage on what we do would be extremely difficult because we do get paid for results and our experience. Although sometimes I think that buyers would be a lot more indecisive if they were paying an hourly fee, would certainly be more loyal, and would appreciate our services a lot more. Bryant's model is not bad at all...with a little tweaking it could certainly work.
Not showing properties because of reduced compensation is just bogus - I think Active Rain has proven to be a network of professionals and as you stated, those who follow those practices usually admit to it and are not up to the standards we expect here. I also love what Mariana said about having an accurate perception of a "situation" - we need to know how others perceive our industry in order to improve our services and become better professionals. Thanks again for your controversial post; it certainly is food for thought.
Ines
I agree with one of the writers above, it is amazing how many ideeas mortgage brokiers have when it comes to telling realtors how we should handel our clients.
Jeff, you said, and I quote"
Home Buyers Should Require an Estimate of the Dollar Amount of the Fee That Their Broker Expects to Receive for Serving Them if a Sale Occurs.
you know I always thought that borrowersw should know about the secondary loan market and where all of the profit really comes from when doing a loan. I love it when a lender will shave a half point, because they are good guys.
Jeff, go play in you own sandbox and let REALTORS do what we do - sell houses and you can do what you do, loan money. I won't tell you how and please do me the same courtesy.
I for one, want (and have) a lender who can work with me.
"Oh Boy!", he said as he pulled up a seat, dusted off the computer screen, and cracked an Old Milwaukee, "I think we're ready for an old-fashioned blog war, here"
John, you might want to check Jeff's website.
Jeff, go play in you own sandbox and let REALTORS do what we do - sell houses and you can do what you do, loan money. I won't tell you how and please do me the same courtesy.
John: I'd appreciate if you DID tell us (lenders) how to improve our service offerings. That's why we're here.
Jeff, thanks for having the courage to stir the pot. Someone needs to do it. These discussions can take place with real estate agents involved and helping shape the future, or without them. It would be a shame to have it happen without them.
I think the good ones, like many commenting here, would want to have a voice, are open to the debate and the value it brings, and would welcome the challenges being thrown at them. You are 100% correct, the ideas deserve to be debated by those who would be impacted the most.
I think this is a good discussion. I have often flirted with the flat fee/hourly fee idea. In fact I have done it a few times.
When people ask me how much I charge to list their house I have one pat answer. I do it for FREE ! I spend several hours doing a CMA, review their home to find the best way to stage it. I spend money advertising it in two print media and 5 internet based sites. I put up signs, make flyers, list it on two different MLS systems. I follow-up on buyer calls, realtor calls, and research the title, well and septic info and other information. I help you negotiate with buyers and help you all the way through escrow.
I do all of the above for free !
I only get paid if your house sells and you get your check for the proceeds. Then I have to give my broker some of that money and also pay my employees.
Jeff,
Thanks for the post. I agree with Tim, Len and Bryant. To say anything else would be redundant. My clients and customers pay for my experience, I bring to the process.
"X" (wink wink). No I will not stop flirting with you. :)
I am pulling up a seat to watch the games. SVW.
Bingo: Checking out (good way of putting that) with the PASSION.
Sorry guys. Just a little game I play with that human fruit word.
TLW...ROAR!
"Home Buyers Should Require an Estimate of the Dollar Amount of the Fee That Their Broker Expects to Receive for Serving Them if a Sale Occurs." Is this not a Net sheet? We offer both a Buyers and Sellers Net Sheet. This way our sellers know what roughly what they can expect in proceeds from the d=sale-which is adjusted when an offer is accepted to reflect within a small margin of error what they can expect at closing. We do the same for Buyers entering into a contract. To better gauge the closing costs, recording fees, and commissions WHICH also appear on the HUD statement. Is that what you meant?
As for the hourly compensation vs a percentage of sale price.... Attorneys usually charge hourly and all too often their rates are prohibitive to people seeking their services. One would be hard pressed to find a legal client and get them to say they found "monetary value" in an attorney's hourly rate charge. A retainer was a divise for attorneys to get paid in advance for work they have yet to perform. It certainly is an interesting idea.
A further thought on the hourly thing comes to me. If home buyers (or sellers, if they went to such a system) knew that every time they picked up the phone or got together with their agent, etc. cost them more, they'd be loath to do so and start becoming resentful of the billings, especially because those that work hourly get paid whether a deal comes to fruition or not. They'd also, as consumers, start trying to avoid those costs by doing some things themselves that would leave them very exposed when things went "south" (interesting phrase, since this time of year going south seems nice, but I'll save that for another blog).
There is actually a direct comparison between real estate agency and attorneys here. Some attorneys work for (high) hourly rates, others can back into an hourly rate after the fact but work on contingency. What's interesting is that in real estate, given the two alternatives (if they lead to fair, risk-adjusted compensation for the hourly agent structure) the consumer will generally still choose the at-risk, "contingency" based compensation model. In the legal world, interestingly, it's not the consumer/client that gets to make that choice, it's the lawyer, yes the service provider, because they don't take things on contingency unless they think they will come out even or ahead of the hourly structure, and if they don't think a case has high enough merit financially to take on contingency, they require hourly payments!
I, for one, have no issue being paid under that same general structure, and as I've pointed out before, I have proposed that to numerous clients when asked, and again, they all go back to putting me and my compensation at risk, not paying me an appropriate hourly amount in lieu thereof. Again, unlike the attorneys, I give the client the choice, not the other way around.
Well a very thought provoking post. One that got a lot of folks thinking about how to justify what they make. Seems like no matter how someone answers here they get defensive. With technology what it is do you have a system for searching for homes? I have a system for searching for loans. My system reduces the amount of time I spend on each client but improves the speed of service by days. My assistant (processor) working at full capacity can do about 40 loans a month if he is at work everyday and works for 8 hours every day. I wish I could keep him completely busy. But he has a fair amount of free time on his hands that I am still paying him for.
Doesn't MLS allow you to search for homes that reduces the time you spend. Is your assistant completely busy all the time? I am not sure where you draw the line.
Do we get paid for what we do, the service we provide, our ability to get a deal completed or have you invented a business model where you get paid with the guidelines you provide your clients. Define your business model and what you will get paid. Tell your client upfront and everything else is just noise. Disclosures become a necessary piece of paper that has no relevance to how you get compensated.
John...you should take Brians advice and read my past posts regarding the mortgage industry...Everyone was kicking sand, I dont think theres much left in that sandbox ;)
Brian...Old Milwaukee?
Jeff...Always the rational and objective voice...thx...
Marty, William, Tony, and Allison,..Thx for your $.02...well put.
Gabriel...On point, as usual...
David...Very perceptive...technology can be a great equalizer for those who recognize and apply its benefits within their day to day business....
TLW...wink wink ;)...right back atcha...got popcorn? Share? Brians already got the Old Milwaukee....
Anyone who would like to see where Mr Nadel stands on some of these issues, from the horses mouth, ought to check out BB's post here.
Jeff,
Why do we always have to justify what we make? A good real estate agent puts in a lot of hours keeping up with new technology, new laws, new properties, taking classes,working on web sites, desigining advertising campaigns, and a multitude of other items that all help to make them a good agent. Do sellers want me to bill them for the hours it takes to write articles that help bring in clients to my website and blog so they can see their listings? Do they want to see how long it takes me to write good advertising copy on their property? Do they want to follow me around when I preview 25 homes to pick the five that meet their needs and charge them an hourly rate + gas? Should I bill them a full hour as most attorneys do for a half hour of time? How about every call I make during a transaction to escrow, other agent, title company, inspectors etc. I'm well educated with a degree from UCLA. Do I get extra money for that? Where do we start or perhaps a better question is where does it all end. Real Estate is not an hourly occupation.. it is a profession. As others have stated when you hire me you are getting my knowledge and experience and it doesn't come by the hour. If all you want is someone to put your property on the MLS the pay them $500.00. If you want someone who can get the escrow closed when the buyer has a last minute glitch and neither the lender nor the buyer's agent know what to do...then you will pay my fee and gladly.
Yup. Hubba! Hubba! I brought enough for everyone. :)
I also brought these, you might remember them. SVW. (smiling very wide)
Okay. My job is done here. Wink. Wink. TLW...ROAR!
Jeff X: Well...Christmas has left me a bit short for the usual Corona.
Kaye: Excellent comment except for the opening question:
Why do we always have to justify what we make?
We, salespeople always have to justify what we make. We call it building value. And you did it extraordinarily well in the answer to your opening question.
At the risk of sounding like a broken record:
Price becomes an issue only when there is an absence of value. Let's continue to demonstrate that value daily.
John (In regard to Jeff's sandbox counter-comment.):
You won't be the first to kick sand here....definitely not the last. We all did it. Don't stop being opinionated; it's how we all hone our skills.
Jeff,
I just discovered this post (I saw part I earlier, but saw no reason to intervene). I am happy to try to offer a strong justification for my proposal that residential real estate brokers should offer consumers the option of paying for services on the basis of a combination of
Flat fees (for routine tasks)
Hourly fees for more unpredictable tasks, where the consumer is willing to accept the risk that tasks will take longer than average.
Incentive based fees, e.g., 40% of any incremental value the agent produces by obtaining a price above some agreed upon baseline.
First, a number of people oppose hourly rates (if not flat rates?) because they say they want/deserve to be paid based on their
- results and experience (Tim)
- the investment of time they have already made in terms of training, research, etc. (Lenn)
The general view may be that stated by
Kaye: "Real Estate is not an hourly occupation. It is a profession. As others have stated, when you hire me you are getting my knowledge and experience and it does not come by the hour."
This does not make sense to me.
Lawyers, plumbers, political consultants, Washington lobbyists, tennis and golf pros who give lessons, etc. all set hourly fees based on the results they are expected to deliver and their experience. All have made significant investments in time and training. All must invest time keeping up with their fields. None seem to regard being paid by the hour as insulting. Why should real estate brokers/agents?
Lenn admits that on one recent transaction he made $6,250/hour and maybe he was worth it. I propose that brokers receive a substantial (not half of 6%, but rather more like 40%) of the incremental value they provide to a seller, irrespective of the hours invested. But assuming that my agent was unable to bring in a buyer at more than the estimated fair market value that we agreed upon, I would expect that competition would enable me to find an excellent agent willing to work for more like $500, if not $200/hour for providing standard, albeit excellent service. I would resent paying $6,000+/hour for such service in a competitive market. Note, also, even if someone in my family needed surgery to save their life, but the procedure was relatively common, I (or my insurance company) would expect to find a surgeon willing to work for a competitive fee (much less than $6,000/hour).
2. Marty points out that agents often spend hours preparing a careful CMA and them give it away free. I share the view of Julie Garton-Good ("Real Estate a la Carte" (2001) and founder of the Nat'l Assn of Real Estate Consultants, that realtors should not give away valuable services free. You don't see doctors offering to diagnose your illness for free and charge you only for treatment.
3. Gabriel raises some initial concerns that consumers would be uncomfortable with non-contingent fees and that it might lead them to request less service. That is a valid point to consider, and I think that it is correct. But on the other side, offering unlimited amount of time leads to the opposite problem of clients requesting too much attention, wasting time, etc. So what is a reasonable answer? Well, I think it is useful to look out how society has resolved the issue in an area where the consequences of such incentives can affect life and death: medicine, an arguably more "important" area than real estate brokerage or law. The same goals of providing high quality service, but controlling costs has led to a system that I believe is the best option: a co-pay system, where patients generally must pay at least a small amount for each doctor's visit, although, as Gabriel recognizes, this sometimes leads patients to refrain from a critical visit and it leads to death. The reason this is tolerated is that society has concluded that we cannot afford the alternative of unlimited free medical attention for all. I don't want to get in any deeper on this issue, and I am not saying that our current health system is the best it could be, but I believe that all health systems in the world ration service in some way, whether with co-pays or long waiting lists, and we have concluded that this IS PRACTICAL, even with respect to life and death issues. Thus, I argue that it is not impractical to apply it to real estate brokers.
That said, I think that Gabriel's point goes towards the point that most consumers appear to strongly prefer certain flat fees over uncertain variable rates, such as minutes of use on a cell phone.
4. David's posting brings up the issue of how technological change can provide value and REDUCE prices.
If David can perform some service (provide the same value) twice as fast as anyone else, then he can charge the same price (flat fee or hourly rate) as they do, but make earn much more. Economists call the extra high return David would earn an "economic rent." (This has nothing to do with rental income, but rather is a return on the special talent (patent?) David holds. The situation changes, however, once David loses his monopoly status and other brokers can match his increased productivity. Now competitive pressures are likely to lead one of David's competitors to take advantage of their lower costs to lower their prices a bit and increase their market share. This competition - which is at the heart of capitalism - will generally lead prices to decrease down to costs, so that the flat rate or hourly prices charged for the original service now decline by 50% to reflect the technological change that has reduced costs.
What follows from this, in my view, is that if a broker has a unique talent, or more likely, has an exceptional and rare knowledge about a particular community, s/he can justify charging a high rate, e.g., $500+/hour for consumers who desire to receive that superior service. If the broker is merely good, however, then the broker must offer a fee that is competitive with what the many other good brokers are offering.
I expect that many of you will strongly disagree with these comments. Rather than simply telling me that I don't know what I'm talking about or that I should play in my own sandbox, I would greatly appreciate any comments that actually help me to understand why and how my thinking goes wrong. The latter comments may actually help me learn and change my mind. At a minimum, they will help me respond in a manner that sharpens the issue and reveals better why we disagree. Thank you for your attention. I think that most of this analysis is also covered in my 75-page paper.
Mark Nadel
Mark:
I absolutely love the incentive-based compensation proposal. I'm digesting my fiorst read of your paper. I'll be back on Bryant's post with more questions this weekend.
Jeff C,
Another excellent thought provoking post....not only do you present good subject issues/concerns for debate or exchange but you seem to find the "tickle spot" in those of us who have a passion for the business. Good job in handling a sensitive subject. Hmm.....where was this side of you during the Civil War Blog? Guess I had not seen this side or abiltiy in you. I look forward to the series.
I don't know how good a job I've done but I have tried to answer some of Mark's questions about why hourly pricing is not easy in real estate in my blog post Agent Fees and Options. I think there are so many variables in real estate that comparing us to plumbers, golf instructors and others who bill hourly is difficult. We probably have closer ties to attorney's as to a wide job description yet there are major differences and even attorneys have various methods of calculating their fees. I do believe we will see changes but I doubt the hourly method will prevail.
Kaye,
I do not dispute that any particular real estate transaction can require a broker/agent to handle a myriad of tasks that vary from routine to beyond-the-call and which can sometimes require one to use their unique set of talents. My point is that many other professionals, e.g., lawyers, psychiatrists, accountants, face similar situations and find it both practical, reasonable, and profitable to charge by the hour. In your description of the service you provide, I see nothing that goes beyond would I expect is commonly faced by, for example, divorce lawyers and yet those lawyers do not complain that it would be impractical for them to charge by the hour. They can and do, voluntarily, and their hourly rates vary widely along with their skill levels.
Also, Kaye, I do not recommend that agents and brokers charge solely by the hour. My proposal is that they use a combination of 1) flat fees for routine services (where the agent/broker offers a set fee for a particular job, probably assuming that there are no major, unexpected complications, the way most doctors fees are set), 2) hourly rates for services that vary widely depending on the customer, assuming that the customer is willing to take this risk, and 3) incentive based fees for obtaining extra value for the client in terms of dollars or time.
Happy 2007 to you and others reading this blog entry
Mark
Mark,
I'm glad you don't recommend all parts of our job being charged at an hourly rate.... but it seems to me that accountants, attorneys, psychiatrists don't face similar situations.. they have offices where clients come to them for varous increments of time.. ( they rarely leave that environment with the exception of trial attorneys) which make calculating fees very easy. You see the psychiatrist for one hour @$150. 00 per hour. ( actually 50 minutes) and then the next patient comes in.. all is very orderly. The same goes for my accountant.. I bring in my figures for the year he plugs them into the computer, we chat a bit and I get the final copy in the mail.. again very easy to caluculate.. even for more difficult client portfolios.. Real estate just isn't a particularly orderly business. I see real problems with your # 2 suggestion of rates for services that vary widely... consumers want some type of standard service model for fee schedules.. How else can they compare apples with kumquats? The fees really can't be can't be similar or we could be accused of price fixing.. yet the consumer needs to have an idea of what services are offered and at what price. Docs may have a set fee but they don't break it down on an hourly basis other then office visits.. Brain surgery is $_____________.. it isn't billed at $_________ for 10 minutes for using the A scalpel or $__________ for 30 minutes to remove skull cap and $____________ for 50 minutes spent tying off blood vessels. It's $_______ for surgery which may or may not include patient followup. As for your # 3 suggestion.. just what is an incentive based fee.. ask 4 people and you will get 4 different answers. I had a client who swore they wanted to sell their home but evey time it was listed they changed the price upward and/or made it impossible to show. If you talked to them they would tell you they were always available to show the home and were ready and able to buy a new one. They could have offered me a million dollar incentive but it would have been worthless.
I notice you did not include the idea of a non-refundable retainer as most attorneys require and I'm curious why this price model was left out of the equation. If we are changing methods of compensation then let's also get rid of the idea that the agent take all the chances with no expectation of pay unless the home sells. So let's really make things equitable with... If you die from the operation the doc still gets paid. If you lose in court attorney fees still get paid... if IRS challenges your tax return the accountant doesn' return your money. So why, with all the talk of new methods of compensation for agents, does eveyone still want to stick us with the the whole bill?
Maybe I'm dense or not getting the big picture by not agreeing with your price models. But it still seems as if you are complicating a rather simple method with a needlessly cumbersome model.. ( and by the way broker fees do vary widely.. CA fees are generally less then those charged in other parts of the country). I also wonder how it would work to have so many different fee schedules and if each contract would need to be checked by an attorney to be enforcible should one party decide to default. It took many years and lots of legalise to get wording re compensation as part of our contracts in CA.
Thank you Mark for taking the time to comment on my questions.
Happy 2007!
Kaye
Kaye,
I appreciate your concern with ensuring that my proposal is truly practical with both the standard and unusual transactions that real estate agents/brokers face.
1. I agree that billing is relatively easy for most professionals who charge by the hour: they can just look at the clock. Tasks that are not attributable to any particular client, but rather to multiple clients - such as training or visits to some open houses - are treated as overhead and are factors in setting a reasonable hourly rate. In the short time that I worked for a law firm, I billed in 6 minute increments, since some billable tasks involved only a short phone call. I think that we agree that flat fees for routine tasks often make sense and that many clients prefer a set fee to a variable rate, because they prefer not to assume the risk of above-average costs. I am still unclear why a real estate agent cannot use a clock to determine how much time to charge directly to a client for work done specifically on that client's behalf, whether it is done at an office, in a car, via a cell phone or email, etc. I would appreciate it if you could please give me an example of what situation you believe is not amendable to hourly billing.
2. I also think that the current practices of competing law firms and medical practices, among others, demonstrate that competing firms, like brokers, can set menus of fixed prices for some tasks and hourly rates for others that enable consumers to compare prices (and expected quality of service) in a market. I never claimed that my proposal is SIMPLER than the current system, only that I believe it is a more economically efficient way to serve the economic interests of consumers. I agree with the principal of Occam's razor - that the simpler explanation (or solution) is usually the best - but I do not think that the simplicity of a percentage of sale-price-fee justifies it as the right way. In fact fee is even simpler fee system.
3. I have identified at least 3 simple types of incentives:
A) for listing agents - once a buyer and seller agree on a benchmark price that they think SHOULD be available in the market (this is not an easy task, but rather is comparable to agreeing on an initial asking price) both agree that the listing agent receive (not shared with other agent or broker) a substantial, e.g., 40%, of any amount ABOVE that benchmark as an incentive to motivate the agent to take exceptional actions to raise that selling price, as by (1) doing additional staging, (2) identifying and soliciting potential buyers who might not be aware of why the property might fit them so well, (3) doing research to identify previous occupants who may have become famous - giving the property (or street) additional psychic value to some buyers. I expect that there are others.
B) for buyer agents - once a buyer has selected a home s/he wants to bid on, agree upon a benchmark price and then offer the buyer agent a substantial share, e.g., 40% of any amount below that price the agent can negotiate.
C) bonuses for meeting a deadline of finding a buyer or home to purchase that the client is able to close on. Here, there might be variations on the clauses used to protect an agent against a client who tries to sabotage a deal simply to avoid paying the bonus, but I would expect that a client who is truly in a rush and has many reasons to want to close quickly will be happy to pay the bonus to a deserving agent.
I think that it would be relatively easy to formulate a simple enforceable clause in a listing agreement or BBA to handle these.
4. I do not talk about "retainers," specifically, but I believe that brokers should offer clients listing agreements that require the seller to pay the listing broker's flat fees and hourly rates even if a home does not sell, although that amount due might not be payable until the home actually sold, whenever that was, but irrespective of the listing agent used when it sold. I support the same terms for BBAs, although I realize that that might not be as practical, since it might not be possible to expect a mortgage lender to allow the buyer to roll additional prior brokerage fees into a mortgage. Thus, for BBAs, I would support the requirement that buyers agree to pay at least some minimum amount even if they did not purchase a home with the broker they were working with.
Thanks again Kaye for focusing on some of the specifics concerning my fee proposals.
Mark
Hi Mark,
Ok.. you are beginning to get my attention toward the positive side...
I 'm not real crazy about #3.. boy that looks like a real can of worms in more ways then one..While I can see part C of #3 being a good example of an incentive A & B seem problematic.. B is more easily definable but A.. l I think I got lost with A.. you start with it as a listing agent variable then put in a note about both buyers and sellers agreeing to a benchmark price and incentive for listing agent... 1)what would a buyer have to do with deciding listing agent compensation 2) the actions you note ( 1,2,3 of Part A) would have been done far in advance of an offer being negotiated and 3)why on earth would a buyer agree that the agent should be soliciting other buyers... first it is't legal to accept other offers while you have an accepted offer other then as back-up offers in the event the original offer is cancelled.. ( I know I'm being picky but this is often the problem with ideas about real estate.. they are neither practical, ethical or often legal.) I have worked with many attorneys who specialize in a field other then real estate and have found that what works in their part of the law does not apply to real estate.
I like your ideas on #4 .. I do believe that it is time for both buyers and sellers to realize there are costs associated with selling or purchasing real estate. Too many consumers never think about what it costs market a listing or to have a buyer make an acceptable offer.
Well Mark, you have given me much to contemplate and I appreciate you taking the time to clarify your thoughts.. so for now let's put down our dueling keyboards and agree to disagree about some things and perhaps find a point or two to agree on about others..
Many Thanks for your thoughts,
Kaye
wow, alot to catch up on...I have been travelling quite heavily over the past few weeks (Im in Dallas TX right now), but plan to catch up on all the rain and comment appropriately.
Thx Brian and Mark, for 'holding it down' for me :)
And a blogging celebrity joins the mix, welcome ARDELL! :)
Kaye,
I think your problem with 3A in my previous post is that I mistakenly wrote "buyer" when I meant to write "broker." That is, the benchmark price would be agreed upon by the seller and the seller's broker/agent. Sorry for the confusion.
Thanks for the discussion and best of luck in 2007.
Mark
Mark, Yes that was certainly part of the problem.. but not all. Yesterday I caught up to this discussion on Broker Bryant's blog and thought it interesting that most good (hard working and honest)agents have similar views for almost identical reasons.
Again it occurs to me that unless you are employed in real estate as a profession you just don't understand what is involved in completing a transaction. Many of the things you talk about are done when a listing is first taken as a matter of course. One of the discussions from BB's blog that caught my eye was how free you are to tell agents where to spend their funds while complaining about the fees paid to agents. I guess it's always a case of who's ox is being gored... hmmmm wonder where that gem came from..
Mark.. sorry I can't seem to stop my fingers from straying..
Kaye
Just because I havent been commenting doesnt mean I haven't been reading....and any comments I would make would be secondary to Marks.
Mark, I appreciate your taking the time to engage all the great folks here on Active Rain, Im sure it has enlightened you a bit more to the collective conscience of the Realtor community.
The reason I make these posts is not to sling mud, but rather propose alternative ways for professionals to consider doing business. Although 'alternative' Realtor business models have been around as long as the profession is old, I strongly feel that the combination of a few factors:
Recent disintermediating technologies
The huge disparity between the gross # of agents and actual 'producers'.
Increased consumer awareness and education
More and more agents are choosing to distance themselves from the NAR's 'Big Business' policies, when they have traditionally rallied beside it. While there are over 2 million members, less than 5% of them produce enough income to warrant full time status. This leaves alot to be desired by the other 95% and thus feel that soon will come the time when an alternative representing body could rise up and/or the NAR as we know it will simply crumble out of lack of necessity. Their arrogant and dismissive attitude has finally caught up to them. Lets face it, the Top Producers will remain at the top with or without 'the Association'...
Did you mention competitions? Well, I know of this great site that has stacks of weekly comps that anyone can enter:
<a href="http://www.femail.com.au/">Femail.com.au</a>
It’s an online mag, with lots of useful articles and product reviews as well..
Cheers
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Found this blog topic at the dying end but if it is still alive and anyone wishes to answer I have a question to throw out.
How did 6% become the standard commission on residential real estate deals? Very curious as to the answers.