The Case For Flexible Real Estate Commissions
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It’s been a very interesting few weeks in the Miller household, a time when one investment property was sold and another acquired — in both cases with the help of local residential brokers.
Going through this process as a consumer of real estate services suggests both that local brokers are hugely valuable and also that traditional relationships between brokers, buyers and sellers are in transition.
It’s always interesting to hear self-proclaimed “consumer representatives” discuss real estate brokerage. Inevitably their core issue — often their only issue — is transaction cost. In their eyes it seems expensive to sell real estate, unusually so.
Yet if you equate selling a home with raising money, which is what selling a home really is, then it becomes possible to compare the cost of real estate marketing with the expense of non-profit fund-raising. Given that the Better Business Bureau says charitable organizations should not spend more than 35 percent of their contributions on fund raising, the idea that real estate fees are somehow overpriced seems absurd.
What consumer groups do not normally address, and what might be useful for the brokerage community to consider, are changes to traditional listing and buyer brokerage agreements. With very little adjustment, it’s possible to make such arrangements both more consumer friendly and far better for the brokerage community.
How? Let’s consider some specifics:
*Listing success today is typically related to the attainment of a “ready, willing and able” buyer. But sellers are really interested in something different, the completion of the transaction. Why not avoid both litigation and bad PR and instead relate listing compensation to the sale and settlement of the property? One could then offer a standard owners can instantly understand: No check for the broker without a check for the seller.
*Buyer brokerage agreements seem remarkably broad. Why would purchasers have an interest in agreements which include an entire state? Instead, why not an agreement that’s specific to a few communities and counties where a salesperson has particular expertise?
*Buyer brokers often say their services are “free,” an expression which surely means the purchaser should not have any payment obligation. Given this view, why not have brokerage agreements that authorize buyer brokers to seek payment only from owners and listing brokers — but NOT from buyers? And like listing agreements, why allow any buyer brokerage fee to be earned unless there is a completed transaction?
*Lastly, why not have listing and buyer brokerage agreements that allow for early termination by either party without penalty? Such arrangements instantly end consumer worries about broker relationships. If broker performance is not satisfactory to the consumer, the agreement can quickly end. For brokers, such clauses mean being freed from buyers and sellers with implausible expectations.
Are the ideas above revolutionary — or merely revolting? Do they make any sense at all?
When looking for listing brokers and buyer brokers we expressed an interest in the terms above and the reaction from hugely-successful professionals was universally the same: Sure.
Why? We think the answer is that the representatives we selected are enormously successful and had confidence in their ability to get the deals done. Relating compensation to completed transactions was not an issue — that’s what they do.
But was there additional risk for our representatives? In theory, yes. We could have bought a property outside the counties where we had engaged our buyer broker — but how realistic is that? We might not have finalized the sale of our investment property — but why would we do that?
Here’s another risk for our buyer broker: We could have bought from a self-seller or someone offering a minimal fee. In such circumstances we would have had no obligation to pay a commission.
What if our brokers were wrong and there were no transactions? Part of being in business is risk, nothing is assured. No doubt if deals failed our two professionals would merely move on to the next clients. Alternatively, while other brokers might hem and haw about contract details, our brokers got the business — and hefty checks for their services.
From a consumer perspective, our modified agreements were comforting. They suggested, first, that we were dealing with professional people who wanted to advance our interests. Second, our agreements removed potential entanglements and complications that were discomforting to us.
In the end both our listing broker and our buyer broker were very well paid. The transactions were fast, straight-forward and we will make a point of recommending the professionals who served us so well. In effect, what they earned was not only a commission for particular transactions but also referrals and a potential stream of future income. Not bad for a little bit of flexibility.
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Published originally by The Real Estate Professional and posted with permission.
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