I've been a real estate agent for twelve years. The entire twelve years, I've worked the traditional model... I get paid when the house closes. Sometimes I get paid BIG time, which sometimes doesn't seem proportionate (in a seller's eyes) to the amount of work I actually did.
But a significant part of why we make the money we do is that we agree to work on contingency - if we don't get our buyer or seller to a closing, we don't get paid, regardless of how hard we worked or how smart we worked. If we don't perform... we are not compensated.
Not many industries work under these conditions.
That's not really the point of this blog today, however. After all the fun a few weeks ago debating the value of our services, I got to thinking. Maybe I could offer a third fee option (I currently offer two; click here to read about them) - How about an upfront fee that is non-refundable, but significantly less than the seller would pay under a traditional commission structure?
Let's say, illustratively, the seller pays me $3,000 at the time of listing instead of, say, 3% at the closing. If my average sales price is $300,000, this saves the seller about $6,000. ($300,000 x 3% = $9,000 - $3000 = $6,000)
So, I was thinking I was pretty smart. I get paid upfront and in a world where a For Sale sign in the yard is certainly no guarantee of a paycheck in the bank, I might come out ahead. I was all ready to talk to my broker to make sure he was okay with it.
But... whoa, Jennifer, slam on the brakes.
I know how I feel when I pay upfront for something and don't get the results I expect. I'm mad, I'm disappointed, I'm frustrated. I'm certainly not feeling warm and fuzzy toward the person or company I paid upfront.
I don't want my clients to feel that way about me. If I take their $3,000 and then can't sell their home... do you think they'll be philosophical about it and happily refer me to all their friends? Probably not. They'll resent me and the fact that I took their money and didn't perform. Is this fair? Probably not, but it's how we human beings are wired.
So... I dunno. I'm kind of used to the idea of Pay for Performance and I feel good about it for myself and my business. I may not mess with something that's working...
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Hmmm... Interesting concept, but if I am a seller, why would I pay you $3000 upfront when I get 1,000 other REALTORS(R) for free and only have to pay when they succeed. I realize that you are saving them 66%, but in a slow market I would argue that it is a better risk to take my chances on having to pay full commission only WHEN it sells.
Steve - dead on... but remember, I'd only offer the OPTION - they don't have to take it. However, I believe that just having the option there helps to demonstrate to a seller how much risk we really do take on by working on a P4P basis. From our perspective, it certainly would incent our seller to want to help us out anyway they can! Under the current structure, an unmotivated seller has no real stake in the outcome.
Jennifer - many of the people on zillow, trulia and other outlets complain about commissions paid to agents; yet, they don't consider that our pay is based on risk vs reward; no performance, no pay. If we were to do away with commissions, then every buyer would have to ante up through paypal to see homes online, pay for each home they visited, each piece of information that was gathered, ect... Would the consumer be willing to do that? I highly doubt it. Therefore, the argument is a disingenuous one.
I personally agree with you and think it would be advantageous and some of those clients you have had a past relationship or a direct referral would perhaps take advantage.
I specifically inquired into doing that in California and had discussions with the California Department of Real Estate. Bottom line in California the regulators consider that an Advance Fee and must be approved by the DRE. It isn't going to happen. (It will bring your actions to their attention however and they may come out to your office to assist in reviewing all aspects of your business. They are very helpful that way). California may lead the way in a lot of things but certainly not where Realtors taking money for work not performed is concerned. Other states may have a different attitude and if it can be done within legal boundaries, why not offer it?
Jennifer, I think the clients will start to wonder if they are getting their moneys worth? You know that other agents will be planting that seed in their heads anyway. What is it we say "you get what you pay for" by giving a discount like that they might question your drive to get the deal done and where is your incentive to go out and market that house aggressively?
Hi Jennifer, you brought up a great behavioral economics topic! I want to like this idea and if you were dealing with business-to-business, commerical sales, I would say "go for it!"
But if most of your work is residential, the people in these transactions are, more often than not, making emotional decisions and justifications over business decisions.
I believe that with this customer base (residential), those that paid upfront with a discount will be delighted if the house sells and somehow feel deceived if it does not. But not because of any facts or understanding of the market ... but because the latter will believe (no matter what you say or have them sign) that the upfront payment somehow is a guarantee you will sell the house and they will have already emotionally decided what to do with the money you saved them.
But for commercial deals, I think this has possibilities.
I have been 100% commissioned for 21 years now, (yikes that's a long time) and I cant imagine it any other way. I really think the world should have some type of performance based pay... Think how much better the world would run...
I guess the carrot dangle of the lower upfront commission would be a good thing to offer up when there is a resistance to a typical commission. But from being in a position to see the average guy's finances, the truly scary part is they do not have the money to pay up front. The average American lives pay check to pay check and only have wealth because of 401ks and equity in their homes. Scary but true.
Okay, so you all are in agreement with me, pretty much. Now I will say that my upfront marketing fee in exchange for a lower overall commission is wildly popular - almost all of my sellers select that option. So, is it the dollars involved? That a $500 upfront fee is palatable, but a $3000 one is not?
And yes, I also believe the whole world should be P4P. This blog was inspired by an experience I had recently where I paid for something and didn't get the results I expected. Instead of "understanding" how these things work, I was pissed.
I see this argument a lot. I think that a combo is OK....maybe like $500 against the rest of the commission at close....but aren't you still left with ughhh if you select a bad person?
I love the way you think Jennifer, but you are right it's like a catch 22. Also, if the property does sell you will always think about the full commission you could have received.
yvonne curry remax preferred new jersey nj
Not to rain on anyone's parade but I teach this stuff. Discussing specific numbers with agents or brokers from another firm could be cause for an antitrust suit. As crazy as it sounds this discussion could be construed as an invitation to fix prices. Please don't shoot the messenger.
Jennifer, people do what they are incented to do. Works on clients, employee, kids, strangers, etc. So, pay (or other incentive) for performance is a great way to get things done and have motivated people involved, moving things along.
Now about your specific question.... I think if you were pissed (as you admitted) despite a logical result, then you have your own answer here about what will happen when a house does not sell. You okay with that??
As far as the amount that is something that is market and customer dependent. Different neighborhood, different target audience, different dollar amount will be palatable. Does that mean you have different pricing? Perhaps if you have a different level of service.
People tend to price what the market will bear. The challenge for you would be explaining why the price is the same for all clients or why it is not the same.
Larry, I believe you are likely more of an expert than I on the subject of antitrust. However, I would submit that a discussion with people across the country about pricing strategies (which does require discussing amounts to have a valid context) is far different than three agents in the same market agreeing to set minimum pricing structures. The difference is even more pronounced when you consider that the people from across the country deal in different markets, different business customs, different prices, different state laws and different personal strategies.
Discussion of pricing, money, strategies is a common business discussion. I submit that not all discussions of money are conspiracies nor qualifications for antitrust examination. But, you are welcome to tell me I am wrong and I appreciate your post. It did make me think about the topic.
Glenn,
In my research to teach on the subject I have been amazed how easily people fall into discussions that cross the line. I understand your feeling about the participants being from across the country. The problem is that antitrust is federal law so if you're in the US you can be prosecuted. As for what constitutes a conspiracy, I had an attorney in one of my classes a while back. He made a very interesting point. Many countries do not have conspiracy laws because a conspiracy is so easy to accuse someone of and so difficult to defend. Unfortunately in the US we do have such laws. In addition, conspiracy to fix prices is a "per se" offense. In such a case the defendant does not have the right to introduce evidence showing the reason for the discussion because the courts have ruled that engaging in the discussion is itself unreasonable. Again, I've had people get very angry with me in class. I'm only the messenger.
Interesting concept. It's definitely an option to offer a client if they are negotiating hard for a discount on the commission percentage. A comment was made about the California DRE not allow this -- I guess this isn't an option I'll be able to offer MY clients anytime soon! Bummer...I like it.
Jennifer, I like the lower upfront fee idea... it gives the agent some cashflow to market the house, the Seller has a buy in and motivation to listen to the agent and they are "buying" a lower overall commission... Not a bad idea at all....
Brilliant minds think alike! ;)
Hmmmm....my first thought was, "well, if I get paid upfront, there will be someone unmotivated...me!" LOL
It makes for an interesting option, though, and DOES perhaps get the client thinking about how we are paid (or not) and helps them see the risks we take and the expenses we incur, every day, without compensation or any guarantee of compensation. From that standpoint, I like the idea...because I would imagine the majority of clients' reaction would be, "wait a minute. I'm going to pay you thousands UPFRONT to sell my house with no guarantee it will sell?" Well, we take listings all the time with no guarantee they will sell, yet we pour money and time into them, regardless. The shoe is now on the other foot.
I do believe the average person is risk-averse, though, at least when it comes to risking THEIR money. And when they do risk their money, they want guaranteed results or they want someone else to bail them out. ;-)
Jennifer,
The lower upfront fee is a good idea, but I have to agree with you that if it didn't sale you could have some very upset clients. And if you re-list are you going to charge the fee again? That is probably unlikely but I was just asking. But like you said it is just another option you could offer. Who knows it could be a good thing.
You bring up a very interesting take on this. However, I think getting paid after closing is the best way it should be handled. It can be tough getting an agent to return your call when inquiring about a listing. (Not that I wouldn't enjoy the upfront payment).
Melody & Susan - I wonder myself if being paid upfront would lessen my motivation? I really don't think it would because, while I like my paycheck as much as the next guy, I really have internalized the mantra that "I sell real estate every day. Sometimes I even get paid for it!" So it's hard to imagine myself slacking just because I've already been paid. But I'm sure it would be a objection to overcome if I wanted to push this approach.
J&K - Yeah, it's hard to imagine a scenario where the house didn't sell... and the clients were actually happy with your efforts.
Robert - The theory of it is beautiful... just unsure if it would go as planned.
My California friends - interesting that somehow it's wrong to pay for a service ahead of time - what a concept!!!
Larry - Bang Bang! Just kidding.
Jennifer, My guess is very few sellers would be willing to pay that amount of money upfront. The "pay at closing" plan works because it motivates the salesperson to perform. And we get paid well because we are willing to take all of the risk. In my area there are many companies that are happy to take a listing for an upfront fee of about $500. As a seller I would be concerned about their possible lack of motivation to price the house right. Pricing and selling doesn't make much difference if we get paid upfront.
Okay, but I gotta be argumentative here for a moment. There are VERY FEW industries who agree to be paid "at closing" yet they offer no guarantee of performance. Doctors, lawyers (those not working on contingency), veterinarians, publicists, copywriters ... how is selling real estate so different? Are we so pathetic at justifying our value that we can't convince anyone to pay us until we actually prove our value?
I have NO PROBLEM with the concept - believe me - I'd rather Pay for Performance all day long. But all these objections to the concept of upfront payment have really made me think about how we ended up being one of the few who work this way.
If the Seller pays an upfront fee, the motivation for the agent may be referrals since the agent will have to make up, in volume, what they are lacking in commissions per transaction. However, the prevailing mindset or conventional wisdom is that agents will do an excellent job for referrals anyway.
I have paid for way to much stuff "up front" to really like the idea for real estate sales. Web site designers and various other marketing marketers, etc.
There's a restaurant vs cafeteria analogy. In a restaurant, you sit down, have a nice meal, get waited on hand and foot and then pay the bill at the end (plus tip!). In a cafeteria, you select you're food, pay for it (up front) and then eat. It's still food and you still eat it but the experience is different.
Speaking of restaurants, I actually use a "menu" of sorts. A kind of sliding scale depending on...
Jennifer,
I think the concept is fine as it makes sense. However, to me it would not be if the house sells or not, I think the value (and of course YOUR value) would be much higher than the $3,000.
Personally, I would much rather work on the contingency for the higher payout than to take the money upfront. $3,000 would not really be worth it somtimes for the tricker and harder properties to sell.
Something to think about...
Chris
Philadelphia Real Estate
The boutique firm I worked at prior to my current office rolled out an almost identical option on a companywide level while I was there. It was $3500 up front + 2.8% (for the selling side) at close. The catch of it was that it wasn't an agency relationship, it was more of a facilitator thing. The agent/office did all the property marketing, set showings, and received offers on behalf of the seller so that on the surface it looked like an ordinary full service listing, but behind the scenes there was no fiduciary duty other than confidentiality...the offer went from the agent's hands to an attorney's for review and consultation with the seller, the attorney and the seller decided whether to accept/counter/reject, and the agent forwarded the response to the buyer. (The seller could waive the attorney review at the time of listing and receive a reduction in the upfront fee.) Considering that the majority of the listings this office handled were lake homes over $500K, there was the opportunity for substantial savings for the seller. I don't think it ever really got off the ground, though, and I'm not sure why (and on an unrelated note, the company got absorbed by Big Brokerage about a year later).
Looks like you have gotten many opinions here. This is something that agents in my market have done, but not all that successfully. They (the agents) seem to disappear after awhile.
I have to wonder the same thing Fiona does, where is the fiduciary duty? What happens if you bring the buyer? What happens if the listing expires and the house doesn't sell? Is the seller going to call you again?
We have an MLS disclosure that says you are offering limited services and you must disclose which services you are providing. When I see this I know I'm in for alot of work on both sides. Just today I saw new listings for 2 houses. The only thing the "listing agent" did was put it on the MLS. The sellers phone number was included.
This would work in only a specific price range. The $250,000 and under would have a hard time coming up with funds to pay upfront. From my experience, in this range the sellers are using the equity in their house to pay commissions, title fees, closing costs & down payment on their next house. If they are like most Americans, they don't have much in the checking account.
Interesting post. I would have t say it would be best to get paid at closing but charge for some services like print advertising that we wll credit to them at closing.
Jennifer- I like the two options that you offer all ready. I have to agree with you about the upfront fees. Some clients could take this as owning you and dictating your services. Best of luck and let us know what happens.
Interesting concept, but I'll stick with the traditional way of compensation. My average commission to date is 9%.
There is another issue besides how the Seller will feel if it doesn't sell: How will you feel?? I'm guessing that it will bother you. You will offer to renew the contract at: full $3,000 fee again??? I think not. Reduced fee? Maybe to bring it up to original commission of 6%?
A reduced fee second time around means that you haven't fully transferred the risk to the Seller. So taking a smaller flat commission, without full risk transference, may not make sense.
For most people, this is not a good business model. Yes, YOU would do your utmost to sell the house. Perhaps work harder as a point of pride or because you feel obligated. But many (most) people do what they are incentivized to do and there will be less incentive when you have been paid BEFORE performance.
Lastly, no matter what you do, even if you execute a flawless marketing plan, if the house does not sell, the Seller will think that you are out working harder on new & other listings, and not his listing. This is in spite of what you may do or say - his feelings are human nature and not within your control. And this is a performance risk that you retain. It is a significant performance risk that will affect future business. All for less commission.
It doesn't work for me. The only way that it would work for me is if the entire industry went that way.
Hi Jennifer,
Hmmm... as a seller, I guess my first question would be, "What exactly am I paying for?" Would this be an actual 'fee-for-service' type of arrangement, with an itemized list of services to be performed? Or, is it just a reduced flat fee, if I pay it all upfront.
If it's the later, I would most likely decline that option. Even if I knew the agent extremely well, and trusted them completely, I still don't know that I would do it. If, for whatever reason, the home didn't sell, there would always be that 'coulda-shoulda-woulda' thing going on. And it could definitely put a strain on the relationship, if the agent was also a friend.
Just my first reaction.
I've done both ways. Paid after it closes and paid with a small upfront fee and smaller commission after it closes. This has nothing to do with "business" but those properties that I had charged an upfront fee end up not selling. I just decided to do away with this "policy" since my job is to make that change for my sellers, I feel that doing this upfront fee- just in case it doesnt sell policy is setting myself and my seller up for failure. Just bad omen I wont repeat.
It sounds good at first, but it appears to be a useful tool for weak agents. The good ones have faith in their ability to perform.
I offer both ways in my office. HOWEVER I only do this with builders! I have a builder program, a flat fee that they pay upfront whether or not I sell it. It helps to even out the slow times.
I offer both ways in my office. HOWEVER I only do this with builders! I have a builder program, a flat fee that they pay upfront whether or not I sell it. It helps to even out the slow times.
Jennifer--I agree that a certain level of client cannot/won't be able to pay upfront. So it's best suited to a particular niche, with rules attached (what you will/won't do for this fee).
Yep - I agree 100% - great way to put it, RpR!