Real Estate Compensation - Alternatives to the Commission-Based Model (and yes, we still make a good living!)

By
Education & Training with Sell with Soul

Last weekend I posted a blog that generated lots of impassioned comments (I love it when that happens).Debate The topic du weekend was the sacred cow of real estate - our compensation structure that pays us based on the price of the product we sell.

My firm belief is that there is very little correlation between the price of the product and the value of our service. In other words, my efforts on a $1M property are not worth 10 times more than my efforts on a $100,000 property (or conversely worth 1/10th on the lower-priced property). In fact, sometimes that $1M transaction is far easier than the $100,000 one... and sometimes... it's harder. But the degree of difficulty of the transaction is not simply a matter of the price; many other factors are involved. 

Some of my readers called me on my stance with an implied "Okay, Miss Smarty-Pantz, if you don't like the way it's done now, what's YOUR solution?"

Well, thanks for asking! I'm happy to share my thoughts on the matter (Really?)

First, let's talk about the difference between a Commission and Contingent Fee (they aren't the same thing!). A Contingent Fee is paid only if the outcome is successful, as defined by the parties to the transaction. That Contingent Fee could be a flat $1 or $10 or $10,000, OR it could be a percentage based on the price of the product; e.g. 1%, 2%, 7%, 15%, whatever (and usually called a "Commission").

Therefore, in the real estate industry, our compensation is traditionally Contingent Commission-based - that is - we don't get paid unless we are successful AND that pay is based on the price of the property we sell.

  • Commission = Compensation based on the price of the property
  • Contingent = Compensation NOT necessarily based on the price of the product, but not paid unless there is a closing.

So, as real estate agents, we could work on a Contingent (non-commissioned) basis - that is - we set a price for our service that we feel fairly compensates us for our time, expertise, effort and risk, and collect that fee if and only if we are successful. That fee will vary by client; some home-buying or -selling scenarios are potentially more difficult, more risky, more costly or more labor-intensive than others, and as professional real estate agents, we should be able to identify which projects merit a higher (or lower) Contingent Fee (I'll talk more about this in a future blog).

At the other extreme, we can also charge by the hour, project or service, upfront, and eliminate all risk of "working for free" (which will usually result in a lower per-transaction fee due to the lower risk absorbed, but possibly a higher overall income.).

Of course, there are hybrid plans where the agent charges an upfront fee as part of his compensation, with the remainder being paid on a Contingent basis - that is - when the property closes. (This was my business model for years - loved it!)

Or, there's Mollie Wasserman's consulting (ACRE) model where you offer the client a choice of paying 100% upfront or 100% contingent, or somewhere in between, depending upon the situation and as agreed-upon by both parties. (While I'm an ACRE, I probably just did a lousy job explaining the ACRE philosophy - for more information go here: http://www.theconsultingtimes.com/)

There's absolutely nothing sacred (or even sensical) about charging our real estate clients based on the price of the product they're buying or selling, regardless of whether it's at the low end or high end. At the low end, you probably aren't paid enough and at the high end, the pay is probably in excess of the value provided.

But just because you don't get paid on Commission doesn't mean you can't make a heck of a good living selling real estate. It'll just make more SENSE!

 

 RELATED BLOGS:
"No I Won't Reduce My Commission - Do You Expect Me to Work for FREE?"
"Why Should I Work for FREE? You DON'T!"

 

close

Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Glenn Freezman 03/31/2011 10:24 AM
  2. Jeani Codrey 03/31/2011 11:28 AM
Topic:
Real Estate Sales and Marketing
Groups:
Learn to be a Top Producing Listing Agent
Realtors®
Selling Soulfully
Silent Majority
The Ninety-ninth Percentile
Tags:
real estate consulting
real estate commissions
all blogs

Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the world to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Show All Comments
Ambassador
515,190
Cindy Marchant
Keller Williams Indy NE 317-290-7775 www.marchantteam.com - Carmel, IN
"Cindy in Indy" , Realtor, Fishers Real Estate

Interesting blog; suggested to read more comments.  I like it from the perspective that we get something to compensate us for out of pocket and time at the beginning...because we all know we will experience some %age of unsuccessful listings.  Practically though...never work. Sellers are too engrained in only paying when it benefits them i.e. sale of the house.

I look at my commission in the same way an insurance company works...commissions are paid "uniformly" and spread out over all the transactions balance out...yes, a higher priced listing might subsidize a lower priced listing...but that is the insurance model that has been around for years....

Cindy in Indy

Mar 31, 2011 10:01 AM #3
Rainmaker
99,164
Mollie Wasserman
Your Move Made Simple - Framingham, MA

Jennifer, you didn't do such a bad job in describing ACRE but let me add some thoughts:

At ACRE, we define consulting not as a rigid payment structure but rather a model that provides choices in the services the consumer can receive as well as how they can be paid for. It's a CHOICE and doesn't preclude offering commissions as one of the options. As such, when you work as a trained consultant (and I mean trained - not just calling yourself a real estate consultant because it sounds better), you do not have to worry about losing business because commissions are one of the options you offer.

Increasingly, ACRE grads are proving what I always found in my consulting business: providing choices gets you MORE business, not less and you make MORE income, not less than sticking to the same-old, same-old structure. For those consumers who are more comfortable paying by commission as Rob and Cindy mentioned, they can continue to do so, with you as their agent but they will often choose you over the competition because you provided them choices. Plus, offering choices will greatly guard you against the dreaded commission-ectomy, because if they choose a commission, they understand that high risk must be paired with high reward - if they want you to carry the risk, compensation to you will be higher.

At the same time, for those consumers who would rather pay for the services rendered rather than a convoluted percentage of the sale price, you can accommodate them (I strongly disagree with Cindy - more and more consumers ARE opting for new options as proven by our ACRE grads). And this is just buyers and sellers. Consulting also opens up a wealth of new business with folks such as homeowners and investors who aren't necessarily buying or selling or not doing so right now. Our industry has lost a FORTUNE over the years because we didn't have the structure to work with consumers who weren't involved with a transaction.

To those in our industry who say that real estate has always been a sales profession paid by contingent commissions, I would remind you that history is replete with examples of those who could not envision the future and ended up missing the boat. I point out tons of examples in the video Intro to Consulting for Real Estate Professionals.

Mar 31, 2011 10:30 AM #4
Rainmaker
433,934
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Thank you, Mollie- you said that WAY better than I could! So, yeah, what Mollie said.

Mar 31, 2011 10:34 AM #5
Ambassador
1,817,690
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

As I incorporate more choices in my real estate business it continues to grow.  Not every seller (my main focus) needs the same level of service.  I'm also not a FSBO basher which I think can hurt agents who publically say to a FSBO you will never sell your home on your own.  I'm working on my second FSBO transaction right now where the owner wanted to sell to their tenant but had no idea about the pricing, contracts and settlement.  I've been paid a fee for the CMA, an hourly fee billed for services to date and because the owner is out of the area will get an additional fee to attend settlement.  95% of what I've done is from the comfort of my home office so I'm saving gas and the homeowner the worry of not getting it done correctly. 

Mar 31, 2011 10:52 AM #6
Rainer
198,419
Jeani Codrey
Jeani Codrey Referral Broker & Instructor - New Braunfels, TX
Jennifer~ I loved your last thought and comment provoking post and believe that this is an excellent follow up to that. I think you do a great job of explaining alternatives to conventional real estate compensation. I think, like anything, change in real estate compensation is inevitable but will be resisted for some time. But I believe that the consumers are ready and ripe for it and that the agents who incorporate alternative compensation and service methods will be the most successful as the shift in thinking about this subject comes to pass. I earned my ACRE and have been implementing consulting into my business model and I must say that the clients LOVE it! Some take advantage of the consulting and appreciate the options and others choose a traditional commission listing program and are now in full understanding of the value I bring to the table. Thanks again for another thought provoking post about a very hot topic!
Mar 31, 2011 11:26 AM #7
Ambassador
1,688,785
Margaret Rome, Baltimore Maryland
HomeRome Realty - Baltimore, MD
Sell Your Home With Margaret Rome

This is such a good topic to be be discussing on ActiveRain..Give Yourself a Gift of Education..Consider Real Estate Consulting!

Margaret

Mar 31, 2011 07:25 PM #8
Rainmaker
825,819
Nicholas Goglucci
South Florida Real Estate & Development, Inc. - Pompano Beach, FL
The Listing Whisperer

Very interseting post - thanks for sharing it with all of us in the Rain - Suggested!

Mar 31, 2011 07:44 PM #9
Ambassador
1,284,782
Loreena Yeo
3:16 team REALTY ~ Locally-owned Frisco TX Real Estate Co. - Frisco, TX
Realtor® | Frisco TX Community Ambassador

I think this is a great concept and I believe that businesses need to be open to changes made to business models to adapt with the times. I, for one with be open to the idea. But I would just say at least to just park the thought.

Mar 31, 2011 10:23 PM #10
Rainer
4,933
Jean Marie Ragus
American Dream Realty - Santa Cruz, CA

I think Canada had a variable commission structure. I'm not sure its still in practice but inthe under $300k market, it was  around a 7% commission. I think it eventually went down to a 3% model. However, in the uppertier of the luxury market, 4% is common. Of course, all commissions are negotiable and there is no set standards.

Mar 31, 2011 10:37 PM #11
Rainmaker
227,167
Edward Peterson
eDrake - Hamden, CT
eDrake; CT

Very few people including so called real estate professionals will not buy the milk if they have a cow in the barn. Many client's do not have money to pay us and most agents can't explain the entirety of a P&S, buyer broker or a listing contract let alone a good concept as this and one with which I agree.

Apr 01, 2011 08:58 AM #12
Rainmaker
77,688
Matt Thomson
Managing Broker/Owner--Keller Williams Realty - Gig Harbor, WA
Gig Harbor, WA Real Estate & Relocation

Ya had to mention the pay by the hour method.  How would that work?  I am a great agent, have a fantastic web presence, and sell your home in 6 days for top dollar.  The agent down the street has a Twitter account and a website, but doesn't know how to use either.  He sits open houses each weekend, but does nothing other than an A-board to announce his open house.  Doesn't invite neighbors, nothing.

Finally, mercifully, he sells his home 3 months and 2 price reductions later.  On the pay by the hour method, he should get paid a LOT more than I did because he spent lots of hours on open houses and designing fliers for the flier box on Publisher, and all I did was put up a rider with an automatically generated QR code that went straight to a single property site designed by Realbird.

He probably worked 50 more hours than I did.  I got my clients more money in less time, but he deserves more?

Apr 01, 2011 01:45 PM #13
Rainmaker
433,934
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Matt - the scenario you present is interesting! And of course, not a reasonable compensation structure. But we're smart people ;-] - so there's an answer that works that doesn't involve being paid based on the sales price of the home. Maybe part hourly, part contingent? Based on the overall project, therefore motivating the agent to get the house sold quickly to avoid investing more hours than necessary? The point is that there are alternatives to a system that doesn't make sense - in fact, the scenario you describe makes about as much sense as the one we have now! LOL

Apr 01, 2011 02:40 PM #14
Rainmaker
218,518
Tom Bailey
Crystal Coast Realty & Home Services, LLC - Atlantic Beach, NC

JA, Great topic?  Lots of great comments. I am not sure where I stand on the issue. I do not like low priced listings because you are right they are usually more work for a lot less money. Maybe we need a system that pays higher % commission on lower priced listings and gradually reduces the % as the price goes up.

Apr 01, 2011 04:43 PM #15
Rainer
4,933
Jean Marie Ragus
American Dream Realty - Santa Cruz, CA

Matt, 

Good response. I had an experience in the mid-1990's when we were in another recession. I had just listed a home- that had been previously listed for the past 18 months by two different brokerages-and within 1 week I received a full priced offer. At that point, the Seller expected me to rebate a portion of commission back to him.  The offer came as a result of my marketing agents on all my listings, a more intensive process before email blasts etc.

I explained to the Seller that  the commission was paid for a result, not time invested. I further pointed out that the other agents had likely spent thoudands of dollars with no compensation for their time and monies invested.

Apr 01, 2011 07:27 PM #16
Rainer
4,933
Jean Marie Ragus
American Dream Realty - Santa Cruz, CA

We could embrace Denmark's compensation. The commission is 7%, the clients pay for all advertsing except a web site. No dual agency is permitted, and buyers hire their own agent/lawyer for representation.

Apr 01, 2011 07:31 PM #17
Rainmaker
848,801
Fred Carver-Top Realtor Victoria, BC
Re/Max Camosun Victoria BC Real Estate - Victoria, BC
Accredited Victoria BC Real Estate Consultant

Hi Jennifer..another Great post. Consumers have been asking for Choices for some time. Why not give then some Choices and be a true professional.

Cheers

Apr 03, 2011 02:48 PM #18
Rainer
20,986
Treva Fox-Christy
GOLDEN DOOR REALTY - Farmington, NM

Hi Jennifer, I just finished your first book and OMG, if only I had read it when I first became a Realtor. I am now starting your second book and can't hardly wait for the third. Keep writing girlfriend. I LOVE it!

Apr 03, 2011 06:18 PM #19
Ambassador
1,284,782
Loreena Yeo
3:16 team REALTY ~ Locally-owned Frisco TX Real Estate Co. - Frisco, TX
Realtor® | Frisco TX Community Ambassador

I came back here because I'm in the growth phase of my business that opening my heart and head to this idea is not a bad one. One can only do so much. If it's not in "people" ie by sponsoring agents, I may need to consider this.

In prayers about this right now.

Apr 06, 2011 08:11 AM #20
Rainmaker
433,934
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Loreena - I think a consulting model would be perfect for you... absolutely perfect. Let me know your thoughts when you're ready!

Apr 06, 2011 08:17 AM #21
Rainmaker
605,581
Michelle Cooks
Charles Stallions Real Estate Services - Pace, FL
Pensacola, Pace & Gulf Breeze Property Management

We are moving in the direction of some upfront and the rest at closing 

Dec 25, 2013 08:20 PM #22
Show All Comments
Rainmaker
433,934

Jennifer Allan-Hagedorn

Author of Sell with Soul
Ask me a question
*
*
*
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the scissors to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase: