The Evolution of Real Estate Fees
Realtors today are often faced with this line of questioning from sellers: “Will you accept a lower commission?” It’s not that the seller asking wants to undercut their realtor. The seller is asking because realtor commissions are hard to understand. In order to get a good sense of how the commission system works, let’s start with the basics.
The industry norm for realtor sales commissions is 5-6% of a property sales price. With a commission-based system, the person being compensated for his or her services takes a high risk in exchange for a “high” reward. For realtors, the risk is not making a sale and earning nothing, no matter how much time, money, or effort a realtor puts into the transaction. The seller is therefore paying a “high” reward in exchange for the high risk the realtor takes on for a guaranteed outcome. The assurance to the sellers is that if the desired outcome is not received, the seller pays nothing.
As most Geo friends know by now, in a former life I was a practicing attorney. As a lawyer I was paid, depending on the case or client, in three different ways (well, 4 different ways, if you include the occasional free drinks and apple pies as a means of compensation from my nearest and dearest). The first was by commission. Personal injury, wrongful termination, discrimination cases and the like would be paid by commission upon a successful settlement or trial. We would take 30% of any monies paid to our client. On a good case, that 30% would be obtained after a few months of settlement negotiation. On a more complicated case, it would be received (maybe) after years of litigation.
The second way I was paid was by an hourly fee. With certain clients, such as contested divorces and custody disputes, amongst many other cases, I would keep meticulous record of how my time was spent in 6 minute increments. I would then bill my clients for every minute of my time on their case, including every phone conversation, email response, and meeting time. On top of that, they would usually be responsible for reimbursement of all filing fees and other expenses incurred.
The third way I was paid was by flat fee. This form of payment was well-suited for standard document preparation, contract review, or non-adversarial work such as basic real estate closing title work.
The point is that, depending on the client and the services being rendered, a different fee structure would present itself as most appropriate. There were options. I was not a “salesman,” of a product; I was a consultant and a representative of my client. It was my responsibility to zealously advocate on for my clients best interests every time. Today, as an agent, I expect the same standard of care of both myself and of everyone else here at Geo.
So back to the problem. The problem with a commission-based payment system is that in today’s market, cookie cutter services and uniform commission rates no longer satisfy sellers OR realtors. Let me explain why.
Commissions are not always the right fit for a seller. Let’s say Jane Doe is thinking about selling her home, but given her personal circumstances and the market it may be best for her to stay put and make improvements or maybe even rent. She needs professional advice, not only to establish her home’s value as is, and if improvements are made, but also to help her decide what she should do. How can she trust a listing agent, one who is pushing for a quick sale of the house, to be acting in her best interests when they only benefit financially if a sale is made?
Let’s take another example. John Roe just purchased a bank owned property. The city’s assessed value for the home is astronomical, 100K over what he paid for the house. He wants to get his taxes lowered but has no idea who to talk to. He would love to continue working with his realtor, but he does not want to take up the agent’s time without figuring out a way to compensate them for continued representation after the purchase transaction has closed.
Most realtors, at least the good ones, are always going to act in their clients best interests, regardless of whether or not that means they end up doing a lot of work for free. But the above two examples, out of countless other scenarios we have been faced with in recent months, highlight a deficiency in the one-option-only payment system that is currently the norm in our industry.
Commissions don’t always make sense for the realtor either. Back in the “old” days (not that I am old enough to have experienced it myself!), realtors put their sign up and started their wheeling and dealing with prospective buyers. Nowadays realtor responsibilities are drastically different. Online marketing alone is both time consuming and expensive. Technology has considerably increased the time invested into each listing. To give you an idea, today my assistant was creating a QR code for one listing, discussing website format changes with our web designer, posting rental ads to craigslist and about 10 other rental sites, and resizing digital photos for online publication. And that was just within the last twenty minutes. By the end of the day, hours will have been invested into marketing our properties in dozens of ways that did not exist 30 years ago. And that is before we even get face to face with consumers! There are endless other services, such as property staging, that are provided nowadays as well. For a home in a higher price point, the final payday seems worthwhile. But what about affordable condos and starter homes? Well, we provide the exact same full service to those sellers as we do to million dollar listings. Needless to say, small paydays are less rewarding after the endless hours are expended. Sometimes, in my head, the attorney side of me can’t help calculating my hourly wage earned. It is not uncommon for that number to come out to mere cents per hour.
Without a doubt, the commission or nothing realtor compensation system has become archaic. And if you ask around about why such a system is still in place, the answer you are likely to get is, “well, that is the way we have always done it.” Not good enough for me. Probably not good enough for you either.
We understand that every seller in today’s market has different needs. And paying for exactly what you need can be a preferred, straightforward solution to many sellers’ hesitations about paying convoluted percentages of their homes’ eventual sales price to an agent.
As professional consultants collectively experienced in all aspects of real estate, our team is always committed to providing a thorough needs analysis to all clientele, and only afterward offering responsible options to address those needs. Unlike the industry norm, persuasive tactics have no place at our company. Our mission is to provide expert advice and to serve your best interests. It is never simply to “sell.” In order to share our services with a broader pool of consumers, and to reach those of you who don’t like the current system (yes even you, FSBO’s), we are making some changes.
Over the next several months Geo Properties will be launching a new system of consultation services and compensation alternatives for its sellers. Our commission-based approach will remain intact. If, upon discussing all your options you decide that a traditional commission is the best choice for you that is perfectly fine. But we want our sellers to make that choice because it is the right one for their circumstances, not because it is their only option.
To learn more about how we can best serve you, contact a Geo Team member at 401.273.7777. We look forward to working with you.