Part 3. How will Sources of Business Adapt? The Rapidly Evolving Real Estate Compensation Situation.
Part 3 of a 4-part series.
Let’s explore how changes in compensation models might affect the various types of company-generated business lines. These are my hypotheticals, and they may shake out quite differently from what I am exploring here. Or they may not.
What about eLeads?
It is ultimately up to the sources of business to determine what they get as a result of delivering that lead. These leads might be from online lead gen aggregators such as Zillow, Realtor.com, or OpCity or from a source that delivers leads from mortgage entities such as HomeStory, Rocket, or NewZip to name a few. Some of these sources also have rebate programs built in, which adds to the complexity. Will they require their agents to pay the same referral fees as in the past? It might be hard to justify their referral fees, as some are based on percentages of the sales price if the models begin to vary in how agents get paid. We may see some moving back to the ‘pay to play’ model, where they charge for leads that haven’t signed a buyer’s rep agreement yet.
Online leads are of significant concern because if a buyer has signed an exclusive buyer’s representation agreement and then hops on a portal and starts clicking around, that lead cannot be given to an agent on that portal unless the consumer signs an explicit consent form. We cannot assume the consumer will understand that being bound by a buyer’s agency agreement with another agent will not allow them to view properties with an online lead source agent. Lead gen sources might explore hiring in-house staff to handle their leads … Redfin style.
Oh, Zillow.
Zillow has already come out with one showing non-exclusive buyer representation agreements so they can send their listings out to agents from their portal. In a blog post, Zillow Group’s chief industry development officer, Errol Samuelson, wrote that “buyer agreements can provide transparency, promote open conversation, and foster alignment between the two parties. However, insisting that a buyer sign an exclusive, long-term agreement with an agent, perhaps before even meeting the agent, feels premature. That’s why Zillow has created a non-exclusive touring agreement, and we’re making it available for use to the entire residential real estate industry,” Samuelson added, “We believe any negotiation of compensation and what it will look like for the buyer and agent to work together should happen after both meet and feel ready. At the time when an additional agreement is signed, the buyer and the agent should be aligned on all terms and expectations, including compensation, with no surprises.”
Wait a minute, I’m not sure that is ok. As I write this blog, several state associations have already advised their members to deliver any agreements and forms they are going to use to their broker for legal review to ensure they are in compliance with state law. “Before members use any agreement that does not include compensation, such as the Zillow touring agreement, they should check with their exclusions and omissions insurance carrier,” a notice from the Virginia Association stated. “There are reports saying that some E&O policies will not provide coverage in any instances where no compensation is paid.” It appears that there may be information missing from the Zillow agreement that is required in many states. I understand that Zillow is slowly rolling their agreement out, and they are working to ensure compliance in each state. Expect more of these types of forms that present themselves as workarounds possibly jeopardizing the broker and agent, not the source of the lead that is encouraging the use of their forms.
What about broker-to-broker referrals?
Buyers may be less inclined to let agents refer them cross-country to another agent if they think they might save some money seeking out a self-serve or discount model on their own. It’s pretty easy for consumers to do their own research to find an agent, especially if it is going to be driven by price. I suspect the discount agents/brokerages will make their fee structures well known, even if the consumer doesn’t particularly understand them.
As I said in Part 2 of this series, the new potential fee structures may end up costing the consumer more in the long run than a percentage of the sales price because of hidden fees or add-ons. I suspect there will be a fair amount of smoke and mirrors instead of clarity and transparency at the beginning. Agents who do receive referrals will face the challenge of presenting the need for the buyer’s agency agreement remotely before the customer comes into town. If disclosures must now include letting the client know about the referral fee due to their referring agent, consumers may request that the fee be returned to them instead of to the agent in a cost-saving effort. The strain on broker-to-broker referrals could do some damage to referral networks that depend so heavily on referral fee sharing. Everyone is going to have to step up the buyer value game in the referral process.
What about local affinity programs?
In the past, buyers participating in an affinity rebate-type program didn’t have to pay their own commission. Now the dialog with buyers in affinity programs becomes a bit more complex. Where it is legal to receive a rebate reward, we would just tell the buyers they would receive X from their side of the commission upon closing. The rebate was a bonus. Now, if they end up paying their agent's commission, do we reduce the amount paid by the customer by the amount of the rebate, or do they pay the commission and we rebate the reward amount? The allure of the rebate loses some sizzle for the buyer since it may not be an actual reward; it may just be a reduction of expense as it is currently for the seller. It will take some of the pain of the expense of the commission if the buyer does end up having to pay it.
What about the broker-owners?
Not many people are discussing how the broker-owner of real estate companies will get paid if many services are unbundled. They typically get their share via a split of the commission with the agent that may possibly also include a monthly desk fee, transaction fee, or a cap on the commission to be shared.
Under the current commission split structure, it is already challenging for brokerage owners to budget and make financial projections. Many brokers could suffer greatly as we enter the trial-and-error phase of reimagining compensation. It could burden them significantly to try and track the various potential compensation structures the agents offer unless they create a framework that their agents must comply with. Will the onus be put on them to help provide the tracking models to ensure the agent and brokerage are paid correctly if services are unbundled?
Over time, referral fees for leads delivered to agents and brokerages from outside sources have continued to rise. The quality hasn’t necessarily improved. Some tout that they heavily scrub their leads. There would be a much higher conversion rate if leads were properly scrubbed and nurtured. But since the referral fee isn’t due until closing, we are willing to take a chance on referrals with exorbitant referral fees since it doesn’t cost anything until closing.
What does all of this mean for corporate relocation referrals?
Corporations will have to face the fact that the cost of relocating buyers has just increased in some scenarios. Just do the math. Look at the past five years of data and determine how many US buyers you relocated. Based on that data, figure out the worst-case scenario if every buyer happened to buy a home where the seller did not pay the commission. Then, calculate the potential gross-up amount. That way, at least, you have a benchmark. The lump sum folks aren’t going to want to use their entire sum to cover their agent’s commission and the taxes incurred, so be prepared to have to up the ante. But you may save money on some listings where you won’t have to cover the buyer commission because the buyer of your transferees’s property is paying it. It may all come out in the wash.
Starting in August, when a buying transferee signs an exclusive buyer’s representation agreement that outlines a specific pay structure for their agent, the transferee needs to be sure that either they can pay the commission (if it is a lump sum) or that their benefits will cover the agreed-upon amount. Buyers can no longer bank on the seller, covering any or all of their agent’s compensation. Check out the if this…then that scenarios to see some thoughts on how it all might play out.
As commissions are likely to compress, does a 38%-42% referral fee due to an RMC even make sense anymore? The margins are growing smaller and smaller while the broker's work and liability increase. A flat referral fee amount per file might be something to explore. I do know this. RMCs should be very nervous right now and working double time to convince their corporate clients to adjust their policies.
My biggest concern is that global mobility professionals keep saying they want to wait to see what happens with commissions. Corporations and RMCs cannot wait to see what the local buying and selling public will do. If they do, every transferee will deal with the unknown about how they are compensating the agents they work with on a case-by-case basis. This will bring a lot of chaos, failed relocations, and exceptions into an already stressful and expensive process. Assuring a good employee experience includes ‘how’ the agent is getting paid and ‘who’ is paying them before the househunting referral is delivered to the broker.
