Part 2. New Models will Pop Up. The Rapidly Evolving Real Estate Compensation Situation.
Part 2 of a 4-Part Series.
You can count on brokerages and agents trying a myriad of compensation options until the norm settles in. No matter what, there is likely to be commission compression. Additional companies may offer an inexpensive way to transact as a buyer (I say ‘additional’ because many discount brokers already exist, which is the irony of this entire lawsuit).
Does a high-cost market mean more work?
Attorneys often get a percentage of the winning settlement that they help generate. I am unclear how that makes attorneys any different from real estate agents whose payout is based on a percentage of the deal. The hypocrisy is deafening. However, I will say that agents who sell homes for $250,000 may not work harder or incur more expenses than those who sell a home for $750,000, particularly depending on the market.
It all comes down to the market in which you sell. This is where these changes may make some sense. California agents don’t necessarily work harder than Oklahoma agents, but they make a lot more money because of the California sales prices. Are the deals more challenging in CA than in OK? Maybe. The expenses and cost of living are certainly higher in CA.
Uncoupling and unbundling.
Instead of the listing commission being a percentage of the sale price, fees may be dictated by a combination of the unbundled tasks performed, such as the length of time to sell, the experience of the agent, the percentage amount above (or below) the estimated sales price, amount of promotion of the property, an hourly rate, etc.
Frankly, it sounds like an accounting and tracking nightmare, but if it makes the consumer feel like they are more in control of what they pay, then so be it. It will mean meticulous record-keeping, and the burden of proof will rest upon the agent that they completed the expected tasks. The good news is that tracking apps seem to be popping up for the very purpose of tracking agent activity.
Right now, a buyer’s agent whom the seller pays gets paid less if they negotiate a better price for their buyer because it is based on a percentage of a lower sales price. That seems like a definite flaw in the existing structure. They should be rewarded for saving their buyer money.
Buyer’s agents might be paid one or a combination of these ways:
1. Out of the seller’s proceeds from the sale as agreed upon outside of the MLS. The listing agent credits an agreed-upon percentage of the sales price to the buyer’s agent at closing (as it is today). Or the listing agent pays an agreed upon ‘referral fee’ or ‘credit’ or ‘concession’ to the buyer’s agent at closing out of their commission (could be based on various elements).
o Percentage of the sales price. Nothing changes, and the seller continues to pay the buyer’s agent's commission through a concession, credit, or referral fee. A seller can state a seller’s ‘concession’ to be offered to the buyer in the public comments on the MLS if they choose to pay it. It is likely that the MLSs will add a ‘concession’ field as a workaround. The MLS is no longer supposed to be a cooperative compensation portal but a communication portal.
2. Or the buyer’s agent charges the buyer an agreed-upon amount at closing, which could be based on a sliding scale.
o Sliding scale. Agent compensation could end up with the consumer paying fees based on a sliding scale range, for example, with a sales price from 0 to $250,000, $250,001 to $500,000, $500,001 to $750,000, etc. I hate sliding scales. The person whose sale is $250,001 has to pay significantly more than the person in the bracket below them who bought at $250.000. That is why percentages have worked the best previously. Listing agents aren’t going to charge the same ‘marketing’ fee for a $300,000 house as they do to sell a $5 million dollar house.
o Flat fee. Agents may hit upon some sort of flat fee for any size of transaction. I am unsure how that makes sense for the agent or the consumer. I suspect it will be high enough to cover all of their expenses, services, time, expertise, etc., plus add in profit, which may make that price out of reach for lower-end customers and higher than what a percentage of the sales price might have been. It also can be bad for an agent when handling a higher-end transaction or one that is particularly challenging and takes much more time and expertise than a run-of-the-mill buyer transaction to manage.
3. The buyer’s agent charges fees concierge-style to the buyer based on various tasks performed or goals achieved throughout the house hunting and escrow process while factoring in hard costs incurred.
o A la carte concierge. An agent could have a base charge determined by actual activities performed or services delivered. Every showing, document read, call made, open house, research hour, contract negotiated, etc., could be an a la carte menu with a base price that might vary based on the estimated time and expertise needed to deliver those activities. Accounting nightmare.
o Cover hard costs. They could charge based on the actual hard costs of the photography, staging, promotion, advertising, general business expenses, gas, mileage, etc. But somewhere in there, you have to factor in the time, expertise, and connections the agents bring to the table. We also can’t forget their general personal operating expenses as 1099 independent contractors, such as Errors & Omission insurance, taxes, health benefits, entertainment/networking expenses, car insurance, business expenses, etc. Those are hard costs whether you sell a small or big house. It isn’t just about what expenses they incur. Their expertise is what brings them value.
4. The buyer’s agent charges an hourly rate or a retainer that has been established based on skill set, experience, expertise, reviews, and negotiation success rates.
o Hourly rate. The agents could also set an hourly rate to justify their expertise. So, no matter what your sales price, agents might charge the same hourly rate. Lower sales prices could mean homes cost the same to sell or buy as higher ones. A challenging deal could cost the consumer way more money based on the unexpected assistance needed and time accrued by the problem-solving agent. Btw, the average hours spent by an agent on a buyer is between 80-100 hours per client. The consumer believes it to be about 20 hours. Major disconnect.
o Retainer. Some agents may charge a buyer a retainer, which could be credited back at the time of closing if the seller covers the commission.
o Specialized by price. Maybe leveling the playing field of the under-a-million sales price makes sense on the surface as far as the agents go. However, the lower-end consumer may pay more because the agent performs the same tasks as they do for a home with a $500,000 spread in sales price. Many agents currently work all sales prices. You may see them begin to specialize in specific price ranges to ensure they can charge fees that cover their expenses. There are already agents practicing today who only work the high-end. We may see more targeting specific price ranges.
5. Brokers may hire in-house agents.
o W2 employees. They may work on a salary with an incentive or a reduced commission based on certain tasks performed. The broker may have set fees for working with those agents to assist buyers. I kind of like this model, particularly for company-generated business. It allows for quality control. More on that in an upcoming blog post.
6. Or maybe there is another crazy way it could happen that I haven’t thought of.
In the short term, it may be a race to the bottom, with agents getting very creative to capture business. Some agents and companies may seek out ‘work-arounds’ to avoid compliance. Confusing models may end up costing the consumer more than the previous pay structure in the end. Consumers expect good service and expertise when making the largest purchase of their lives. So, along the way, they will figure out that you get what you pay for. I don’t believe anyone denies the value a solid real estate professional brings to a real estate transaction. Hopefully, time will clear the field of bad actors, leaving room for quality agents and companies to thrive.
What about relocation?
The mobility industry can’t wait for the local buyers and sellers to determine agent compensation trends. We must continue to push the dialogue so that decisions regarding benefits packages and referral fee structures are made based on the facts and various possible scenarios.
Stay tuned for Part 3 for more discussion about how the changes might affect the referral and lead business.
