Last week, Loreena Yeo wrote a blog that inspired one from me, which inspired another one from her which, you guessed it, inspired another one from me - about the concept of buyer rebates and other creative compensation strategies. 
For the record, let it be known that I have no problem with real estate agents charging their clients as much or as little as they care to, nor do I have any fuss with the manner in which they do it, as long as it falls within legal limits and doesn't conflict with their brokers' policies. Oh, and, AS LONG AS 1) they're providing good value for the dollar paid, whatever that dollar amount is; and 2) they demonstrate integrity by playing FAIR - that is - not charging one person less than another as a business-buying strategy!
Anyway, a few months ago I wrote a couple of blogs about real estate compensation - specifically our traditional model where we are paid based on the price of the home we help our clients buy or sell. I questioned the appropriateness of this approach since the value of our service really isn't based on the value of the product.
You can read those ramblings here:
"No, I Won't Reduce My Commission, Do You Expect me to work for FREE?"
Alternatives to the Commission-Based Model - and yes, we still make a good living
Today I want to pontificate about the comments left on those blogs that were along the lines of "Yeah, sometimes we make too little and sometimes we make too much on a specific transaction, but it all evens out in the end..." and "50% of Something is Better than 100% of Nothing."
While quite common among real estate practitioners, I believe these two attitudes are a little dangerous, and even border on unethical in my opinion.
(Ooooh, such melodrama, Jennifer!)
Let's start with "It All Evens Out"
The fact that it "all evens out" may be true FOR US, but is in no way fair or reasonable to the person paying the bill - that is - our buyers and sellers (and yes, buyers help foot the bill of our commissions just as much as the sellers do; some might argue they're the ones who pay it).
When our clients pay for our service, they have every right to expect us to charge THEM fairly, which in their minds, has nothing to do with that $50,000 condo buyer we spend 9 months on last year and therefore need to "make up for" when we work with clients in higher price ranges.
"50% of Something is Better than 100% of Nothing"
Is this true? Absolutely! No question, if you do the math, that statement is 100% true, 100% of the time!
BUT
Again, is it FAIR to our clients?
In most cases, no.
Implied in that statement is that, if pressured, we'll give into a buyer or seller's demand that we accept less in payment than we normally would, because, shoot, something is better than nothing, especially when it comes to a paycheck.
But is that FAIR to our clients who do NOT request/demand that we accept less than we normally would? Is it ethical to charge one client your "full" price simply because he was too polite to ask for a discount, while charging someone else less because he was a little bolder? Sure, it happens every day, but is a part of the reason our industry is lumped in there with used car salespeople (who everyone knows you must negotiate with)!
Am I saying that you should charge everyone the same "rate?" Not at all. I think every real estate scenario is deserving of individual evaluation and "rated" according to its potential degree of difficulty, among other factors. But to simply discount your fee because someone asks you to while holding to your fee when someone doesn't reeks of unprofessionalism and even a lack of integrity.
Thoughts?
I think your right that is not really fair to charge more when someone does not ask for a discount. However, there are situations that you might need to bend. I really dont get buyers asking for discounts, sellers might want lower commissions...
I don't think I would just reduce my fee if someone "asked" me to. There would have to be a reason such as helping them out to close a deal.
I have often times taken less of a commission for a seller that will end up having to bring money to the closing table, again, to help them out. I have given some of my commission to help a buyer pay their early termination rental fee, to help them out. I see it as a service. I also tend to buy my clients HOA docs as here in Texas the fee can get pretty steep for some copies of paper. Either way, I enjoy helping out, but just reducing my fee...not just because they ask.
I see this becoming a very interesting conversation :)!
I believe the perception is that we do not work hard for the money. They think we work for free. It is your business. Make the call
Chuck - I think there are situations where you might charge a different commission or fee, based on the specifics of that situation itself. And I have no problem charging someone less if there are multiple transactions involved or if they're a "regular" customer. But simply capitulating to a buyer or seller's request to charge them less "Just Because" isn't fair to your other clients. Oh, I don't get mad at people who want to negotiate - not at all - after all, our fees ARE negotiable and it's probably the responsible thing to do for someone to ask...
Brenda - I've opened my checkbook many many times to make a problem go away or to compensate for a mistake I made or even one the other agent made. But I have to wonder if, by "helping someone out" they might wonder about the fluff built into your fee that they would have paid if they weren't in a difficult situation - know what I mean?
It's been a great discussion to read back and forth, and the insights into your perspective are very thought provoking. Thanks for sharing your experience.
Jennifer, you're singing my song with the comment "that it all evens out in the end". Yes, for us. No, for the consumer!
In fact, our commission system only works because those people who pay the full freight are subsidizing those that use our time and resources but never make it to the closing table. Think "free CMA's", working for hours on end with buyers that never buy, and listings that we put months of work into that never closed. When times were good, consumers didn't mind too much to pay whatever but with money tight, they are increasingly raising their hands and saying NO!
As we've talked about many times, how long before we start getting paid based on the value of our services rather than the value of a property? We would eliminate so many conflicts if we did.
Jennifer - Good points. I never liked the idea of lowering your commission because someone pressures you and the nice neighbor, relative or friend in the same area pays more because they trusted that the fee you charged is your fee.
As an ACRE who is just started to see the benefits of a fee for services approach, I am learning more about the mindset of sellers who are confused by a different approach to selling their home. It is an education process and I'm tempting to mail out Mollie's "End of 6%" before each listing appointment to start the process before I get to their home.
Jennifer, is it a lowering of a commission or is it charging the correct price? Would it be considered a "rebate" if it were originally called a reimbursement for an overpayment at settlement? Why does a buyer HAVE to pay 3% to his agent just because the seller said so?
I don't think it's even remotely unprofessional or unethical to discount our services when asked to do so although I do operate under a minimum commission percentage. I can't think of any line of business that doesn't sometimes make a special arrangement for a client in hopes of creating additional future business - i.e., I wouldn't cut my commission without reason. As you say, individual situations must be evaluated individually. If you do give someone an unusually deep cut in commission, be prepared to deal with their friends who will want the same thing. If you do this on a continuing basis, be prepared to deal with the ire of your real estate colleagues; in this sense, we, as real estate professionals, tend to be self-regulating.
I have cut my commision only one time and it had to do with a recent problem on the sellers side that the agent could not fix; to get the deal closed I relented.
You bring out some very good thoughts on the subject, I'll be interested in reading other comments.
I think that the public in general does not realize how mush work we do to get a house sold, whether from the buyer side or the seller side. They think all we do is show houses and write purchase offers and then show up at closings to collect a big check. If they were more aware of how much behind the scenes work and time we put into each transaction they wouldn't mind paying up as much.
That being said, there still is a disparity in our present commission structure between what we earn on a big sale as compared to a small one. Discounting our rate though should be on a case by case basis - but not just because someone asked. Only If there's a good reason for it, would I do it.
While I've heard of "alternatives" in compensation model, I have to do more reading and understanding about it. I'm open to fairness to consumer.
Jennifer, great discussion and I agree with you. There needs to be adjustments in our system - I don't think "it all evens out," smacks of professionalism. It's quite the opposite. (suggest)
Dropping rates gives the impression that rates are inflated to begin with - as if we will overcharge anyone who doesn't ask to be charged a fair rate.
Until we get paid an hourly wage like attorneys and get paid for every consultation there is little that can be done about the "It All Evens Out" or "50% of Something is Better than 100% of Nothing". You do the little sale to get the big sale, help on one to get good publicity, reduce commissions for a myriad of stupid reasons.
Get me to an hourly wage and I will make more money and these unprofessional agents that make a couple of large sales a year will be gone. Personally, I work my butt off in a rural market where the average sale is around $100,000. Locals listen to the people on TV say, "cut the Realtors commission they don't do anything for their mega-bucks". Yet they have no clue as to what I actually do.
Fairness to the consumer is important...
in regards to Brenda (#2) - is it your fault that they used their home as a piggy bank and already took their profit out? Does that make your job any less difficult? Why should you assume their burden?
In the mortgage world, Dodd Frank has removed any negotiations from the equation,
In my local Real Estate world I do see a Flat rate charged for inexpensive Coop's , higher end being charged a lesser commission than cookie cutters, and of course commercial seems to pay the most.. Much of this stems from the expense and time involved in each individual transaction... But look out: Senators Dodd and Frank might take a look at your pay checks next and tell you what you are allowed to charge, and that will have to be the same for EVERY client....
Actually I think that "it evens out" IS fair. Why is it fair? Think about it. If we lower commission on the more expensive properties - I for one - would have to raise it significantly on lower end properties. There are a lot of transactions in my portfolio that resulted in less than $2000 in gross commission in my pocket (before expenses) with more than six months of work involved. The larger transactions make up for the ones where we barely break even.
So why is that fair? Because for the person buying that big house or selling the family home is a 99.999% probability that they were recipients of a transaction where the fees were substantially less. They didn't complain when the agent barely covered their costs. Few leap-frog to a huge home without having a low-end purchase and sale in their background. They benefitted from the progressive nature of the real estate transaction and as such were able to pocket a bigger profit so they could move up. Also - how many potential buyers and sellers have "availed" themselves of our FREE services over the course of time without actually pulling the trigger. You don't see them complaining when we work for free. If I started getting less for the large transactions - which are fewer and further between - I would be forced to significantly raise what I charge to those who can least afford it.
Certainly - charging the same at the low end while lowering what I charge at the high end is NOT an option. The math simply won't work.
I think we have the question the wrong...People are asking "if you are making a profit for that $150k coop, why are you charging so much for that big house." The question should be - "how can you afford to charge so little for that $150k coop that took so much advertising for 6 months to sell?" The answer is that those are virtually gratis.. by the time I add in expenses - or at least below minimum wage. Around here commissions are a lot lower then they are in other parts of the country - so the average agent walks away with less than $1500 on such a transaction after splits and you can forget a referral fee.
Great discussion, I have personally wrestled with this issue in my mind for years. Thus far, i operate on a case by case basis and of course within the standard procedures my brokerage requires. Im interested in hearing more on this issue!
Hi Robert, (and this is not to hijack your post Jennifer :) ), I don't understand your question. Where did the seller use their home as a piggy bank and take their profit out? I will, every now and again pay for my sellers Home Owner Association Documents and Resale Certificate. This can run the client up to 200 dollars for a few peices of paper. Because I have a hard time explaining why the HOAs charge this price to a seller, on top of charging the buyer a cost of such and such for transfer fees, I will usually front it.
Jen-I haven't ever had a client come back to me and wonder about the "fluff" in my pay. I don't think it's fluff that I can just throw away and in fact, I claim it on taxes :). I do look at it as helping out someone that may need it. If I have made a mistake, then it is definitely my responsibility to pay.
Hey Robert, Your skating with the facts on the FFrank-Dodd Act that limits the amount of monney Realtors and Brokers will make, I am not convinced they know that yet?
Jen,
I believe that the essence of your article has been lost in talks of rebates and discounts. IT IS NOT!
Best to use your brain and screen out the customers and their deals that are going to be too much time and effort for too little pay. Focus those time and efforts for the easier deals and the bigger paychecks. If you show your customers just how professional you are, you will end up earning more in the long run anyway.
Brenda, maybe I miss understood your comment about a seller bringing $ to the table. I just feel that you should be compensated for the job you do, and should not have to pay their expenses. And from what I see on a regular basis (on the mortgage side of things) the sellers that are under water are very often the ones that pulled cash out of their homes and now owe more than they paid for the homes initially, That is no ones fault but their own...
Glenn, Dodd Frank Act is just an example of how our friends in DC might step in and remove that "negotiable" piece of commissions for agents... it hasn't happend to Realtors yet, but it has happened in the mortgage world.
And JAH, Sorry for any hijacking of your post! You know me, I look at each deal as another referral source and the dollars do not matter much, it is never about the pay check it is about the relationships we build that will make us stronger and more successful as we move forward!
Sorry I was missing in action here yesterday - I got buried in a project and didn't pick my head up til after hours...
Anyway, thanks for all the comments - both pro and con... and Rob, Brenda and anyone else - hijack away! That's what we're here for - to generate discussion. I've been enjoying the conversation.
I made the same assumption Rob did on Brenda's comment - that because one person has less (or no) equity in their house, we should adjust our fee to help them out. I don't remember ever doing this or being tempted to, although I certainly opened my checkbook dozens of time when the situation called for it. And I happily worked for a lower fee when working with repeat clients and good friends (which, for the record, very few of my friends ever asked for it; I just offered it to honor the relationship).
Anyway, Brenda - I have absolutely no issue with your business model at all - just making conversation, really ;-]
Ruth Marie - your arguments are valid, of course, but the disparity between time worked and money earned is inherent in the current commission structure - and I believe there's a better way to fix it than to simply shrug and say "it all evens out in the end." And I, for one, am adamantly opposed to charging someone more just because they can afford it, if I don't feel I'm providing a higher level of service for the higher cost of that service. Will I help someone out who really needs my help? Sure. But it's not my business model to "punish" those who have more money by charging them more just because they have more, if that makes sense.
Good stuff, my friends!
Hi Jen, (and Rob :) )-Just came back to look. I guess I can see your point on seller's bringing money to the table. A lightbulb sort of went off. I know you aren't downing my business model at all :).
Hi Jennifer,
As I've said many times, too many people, including many real estate agents, don't really understand money or business. And they don't like to talk about money, especially THEIR money. So some dodge the topic, some "dig in" to a structure without flexibility, and still others cave in to pressure.
Add the momentum of a well established business model (i.e., commissions), and too many people will just "do what everyone else does," without considering the clients, the impact to their business, or alternate ways. Sometimes thinking is hard for people.
Thanks!! G
Jennifer, I couldn't agree more that the commission model is flawed and is the primary cause, whether direct or indirect, of the negative perception of our industry. It never sat well with me, so I took the ACRE course and opened up my own brokerage to be able to offer services and payment methods that are more in line with what I believe is fair to, and needed by, the consumer. My clients are loving it.
Excellent blog and discussion...one that needs to be had!
great conversation...really enjoying the different views