Alternative Commission Structure for Realtors? Thoughts?

[bizaro86]

Hello,

There have been a few negative posts lately about the value realtors provide, and I want to start this thread by saying - not here. There are other threads for that if you want, but I`d like this to be about the method commission is calculated by, not the total amount.

Lets say I`m selling a condo, which is worth approximately $200,000. At 7/3 commission structure, my total commission would be 7,000 on the first 100k and 3,000 on the next 100k, for a total of $10,000. Fair enough.

Now, I could also choose to sell as a FSBO, but I`ll probably have to discount my price, and do a bunch of work. But I could do it. In fact, if I was willing to sell my condo for $150,000 I`m sure I could find someone to buy it in about 2 days. So most of the value TO ME (the seller) from using a realtor comes from the price difference in the sales price from $150k to $200k.

But my realtor doesn`t have the same strong financial incentive to sell the place for more money. At 200k, the commission is 10,000, and at 150k, their commission is 8,500.

But what if the commission was calculated differently.

0% on the first 150k
20% on everything over that

At a 200k sale, that works out to the exact same 10,000 commission. If the realtor does a great job, and gets full list price of (say) 205,000, the commission goes up at a much faster rate, because the realtor is getting 20% of the extra value they`ve created, not just 3%.

I understand their may be issues with this, for example the buyers agent probably shouldn`t get paid way more for a higher purchase price, and there would probably need to be a minimum commission.

How would you as an investor feel about this as an alternative model? How about the realtors out there? Seems to me it might allow the really good realtors to make more money.

Any thoughts? Fire Away! If this idea is no good, tell me why, I can take it!

Michael

 

[Lucas]

This is an intelligent post. Most people think too much about what the agent(s) rcv from the transaction and less about their own bottom line. I was in the business of flipping houses before I became an agent and I had an agreement like this in place with my agent...The majority of the commission was earned at the back end. We made sure, howevr, that we offered market rates to cooperating briokerages though. The truth is, there are many agents out there that will avoid showing properties to potential clients if the commission offered is too low.

These situations can benefit both the seller and the agent if they are structured fairly and within reason (depending on the market).

Greg Habstritt went over some options in a presentation he did for REIN. His presentation opened up my (and many of my client`s) eyes on how to create win/win sscenario`s btw agent and seller/buyer.

I`m looking forward to some creative feedback from the forum...

Lucas





QUOTE (bizaro86 @ Feb 11 2010, 11:29 AM) Hello,

There have been a few negative posts lately about the value realtors provide, and I want to start this thread by saying - not here. There are other threads for that if you want, but I`d like this to be about the method commission is calculated by, not the total amount.

Lets say I`m selling a condo, which is worth approximately $200,000. At 7/3 commission structure, my total commission would be 7,000 on the first 100k and 3,000 on the next 100k, for a total of $10,000. Fair enough.

Now, I could also choose to sell as a FSBO, but I`ll probably have to discount my price, and do a bunch of work. But I could do it. In fact, if I was willing to sell my condo for $150,000 I`m sure I could find someone to buy it in about 2 days. So most of the value TO ME (the seller) from using a realtor comes from the price difference in the sales price from $150k to $200k.

But my realtor doesn`t have the same strong financial incentive to sell the place for more money. At 200k, the commission is 10,000, and at 150k, their commission is 8,500.

But what if the commission was calculated differently.

0% on the first 150k
20% on everything over that

At a 200k sale, that works out to the exact same 10,000 commission. If the realtor does a great job, and gets full list price of (say) 205,000, the commission goes up at a much faster rate, because the realtor is getting 20% of the extra value they`ve created, not just 3%.

I understand their may be issues with this, for example the buyers agent probably shouldn`t get paid way more for a higher purchase price, and there would probably need to be a minimum commission.

How would you as an investor feel about this as an alternative model? How about the realtors out there? Seems to me it might allow the really good realtors to make more money.

Any thoughts? Fire Away! If this idea is no good, tell me why, I can take it!

Michael

 

[RedlineBrett]

Well that`s the beauty of free enterprise - you are free to negotiate any commissions structure you like and I bet you could find a realtor willing to take that deal. It certainly has it`s merits.

One thing you can`t do is a `net sale` contract. So say you needed 190k and you were happy to give your realtor anything above that. Not allowed.

 

[fumbrunner]

What about if we start here:

http://www.theglobeandmail.com/report-on-b...article1450088/


As an investor and consumer, I would be more than happy with some of the services cited in the article.

 

[gwasser]

QUOTE (bizaro86 @ Feb 11 2010, 10:29 AM) Hello,

There have been a few negative posts lately about the value realtors provide, and I want to start this thread by saying - not here. There are other threads for that if you want, but I`d like this to be about the method commission is calculated by, not the total amount.

Lets say I`m selling a condo, which is worth approximately $200,000. At 7/3 commission structure, my total commission would be 7,000 on the first 100k and 3,000 on the next 100k, for a total of $10,000. Fair enough.

Now, I could also choose to sell as a FSBO, but I`ll probably have to discount my price, and do a bunch of work. But I could do it. In fact, if I was willing to sell my condo for $150,000 I`m sure I could find someone to buy it in about 2 days. So most of the value TO ME (the seller) from using a realtor comes from the price difference in the sales price from $150k to $200k.

But my realtor doesn`t have the same strong financial incentive to sell the place for more money. At 200k, the commission is 10,000, and at 150k, their commission is 8,500.

But what if the commission was calculated differently.

0% on the first 150k
20% on everything over that

At a 200k sale, that works out to the exact same 10,000 commission. If the realtor does a great job, and gets full list price of (say) 205,000, the commission goes up at a much faster rate, because the realtor is getting 20% of the extra value they`ve created, not just 3%.

I understand their may be issues with this, for example the buyers agent probably shouldn`t get paid way more for a higher purchase price, and there would probably need to be a minimum commission.

How would you as an investor feel about this as an alternative model? How about the realtors out there? Seems to me it might allow the really good realtors to make more money.

Any thoughts? Fire Away! If this idea is no good, tell me why, I can take it!

Michael

Bring it on. As earlier mentioned, there has to be a base commission since realtors are not allowed to be working for free.
To be honest, I wouldn`t. I am all in favor to establish a negotiated base price and commission and then increase the commission along with a higher sale price. With percentage commissions getting a higher price also results in higher commission, but not significantly.

Here are some points to consider.

First of all, if you list during a boom and multiple offers, your realtor may earn a lot of extra dough without extra effort.

Second, no matter what, once a commission rate is set, traditionally or your way, the realtor is expected to do his best.
As discussed earlier, that is why in Alberta, realtors ask for a buyer-brokerage agreement that stipulates that the buyer pays the commission if the seller does not pay one or one suffuciently large. This way, the realtor can go after developer offered properties or FSBOs. He doesn`t have to worry about getting the short end of the stick.

Regarding Gerry`s link to the Globe and Mail story, you heard the response by Brookfield, which owns the Royal LePage franchise. Canada may not be large enough to support the on-line concepts offered in the U.S. Alsways the same problems no matter what industry eh?

I am concerned though about the inexperienced buyer and seller who will be tempted by cut rate on-line prices but forget that the `good-old quality MLS database is gone` and that he/she is no longer protected. An example is PayPal.

My teenage son signed up to a game distribution subscription using his mother`s credit card and false name and address.
Although it is illegal for a minor to sign a contract, Paypal started happily charging the credit card without as much as chequing the credit card`s owner name and address. When we parents found out, PayPal claimed, we`re on the hook, in the US there is no such protection. We ended up paying $325 before we could shut down the credit card and get a new one with all headaches involved. My point - moving away from the `old and by some considered obsolete` real estate model you`re opening yourself and the rest of Canada to a new `wild west`. To be honest, I don`t think that is our style.

I don`t care how I get paid as long as it is reasonable. My goal is to provide my clients with as good a service as I can. Help them on the way to their Belize. Don`t take me for a ride, and I will treat you to the best of my abilities. That simple.

 

[tahani]

Since I have been selling hardly ever clients ask me to lower the commission.
Here it seems like its "The" subject to talk about. So much hate for agents and so much negative energy.


This is how I look at it. All investors are free to do/negotiate any deal they want. As long as its fair for both side and its a
win-win for all parties. I must admit there are few great agents out there and I know that.
I have been trying to hire a buyer agent and its been interesting to say the least.
Sometimes I leave and say " wow, I would never want to work with some one like that".

BUT there are great agents out there and you have to look for them.
The money will not be an issue when you find a great agent. Just like finding a great lawyer ( the money is not an issue), or a great Hair dresser

As for this post, Yes great idea what you suggested, if it works for you and your agent then go for it.

Thanks for the positive energy you started here.

 

[RedlineBrett]

Here are some of the things I have tabled in the event it turns into the wild west.

- charge flat listing fee including professional photos any other marketing material at cost + x%
- $ offered to buyer realtor. If buyer doesn`t have a realtor but uses me see fee schedule below. seller charged sum total of services below or whatever the buyer cheque is whichever is greater/lesser depending on how much I can bully the client
- $ for each showing that I have to do with no buyer realtor there with rates for weekdays, weeknights, weekends
- $ per day the listing is up
- $ for each offer I have to present with rates for weekdays, weeknights weekends

All these would be charged with a credit card pre-auth even if the place doesn`t sell, then once it does sell

- $ for accepted offer I have to do conveyancing for
- $ fee if the property doesn`t pass inspection clause
- $ commission for a completed sale either a fixed amount or a sliding scale depending on how `tough` the property is and if the client wants representation and how much I save him on the negotiations.

Then on the buy end

- $ charge for each showing with rates for weekday, week night, weekend showings, but a nice car I promise. KMs apply if you make me show airdrie or okotoks you buggers
- $ charge for each set of comparables done on a specific property
- $ for writing an offer if no agency representation requested. Cover letters extra $
- $ for relaying counter offer... no charge during weekdays but charges apply if on weeknights or weekends
- $ hourly for consultation or Q and A

Again all this is charged via credit card pre-auth even if someone doesn`t buy, then once they do

- first x$ off the listing price comes to me if I can negotiate it.
- $ fee for not waving conditions
- $ fee for walkthrough
- $ fee for co-ordinating with buyer`s lawyer
- $ for meeting and providing keys.

Are you guys ready for the next level of service for the consumer? LOL... With some of my high maintenance REIN buyers I might be better off this way... you know who you are!

If you believed some posters it looks like that`s where we`re headed. Flat rate fees though!

 

[bizaro86]

Brett,

Interesting idea. I actually really hope that`s not the way the industry goes, and I have a pretty simple reason. Charging by the service would cost me CASH. As an investor who is in the "mostly a buyer" phase of my career, I`d have to pay those commissions in cash, which is cash I could otherwise be using for a downpayment.

Even if prices came down to accomodate the lower commission charged by the seller, I`d be worse off, because commissions embedded into the price can count as part of my downpayment for mortgage purposes, and mortgage financing is the cheapest money in the world.

To all the realtor`s who have replied:

Thanks for kicking in your opinions! If I was your client and proposed this deal to you, what would you think? What downsides are there to the realtor?

The biggest upside I see as the client is incentives. If the Realtor gets 3% of every extra dollar, they have less incentive to bargain for that last $1000 than if they get 20% of the last dollar. I know (as Godfried pointed out) that Realtor`s have a fiduciary duty to do their best job possible. But in my experience people do things they`re incented to do better than things they must do.

Best regards,

Michael

 

[RedlineBrett]

QUOTE Brett,

Interesting idea. I actually really hope that`s not the way the industry goes, and I have a pretty simple reason. Charging by the service would cost me CASH. As an investor who is in the "mostly a buyer" phase of my career, I`d have to pay those commissions in cash, which is cash I could otherwise be using for a downpayment.

You are absolutely right... but if we end up in a world where sellers choose to list for $500 plus a la carte services this is what agents will have to do. If the industry stops building fair buyer commissions into their listing fees then that`s what it will be. And you are 100% correct that it will just be a bigger burden on the buyers.

QUOTE The biggest upside I see as the client is incentives. If the Realtor gets 3% of every extra dollar, they have less incentive to bargain for that last $1000 than if they get 20% of the last dollar. I know (as Godfried pointed out) that Realtor`s have a fiduciary duty to do their best job possible. But in my experience people do things they`re incented to do better than things they must do.

This I agree with and you can get around this with a carefully crafted buyer brokerage agreement. You can do this on your next deal in the current system too if you wish.

 

[OntarioInvestor]

QUOTE (RedlineBrett @ Feb 11 2010, 05:05 PM) You are absolutely right... but if we end up in a world where sellers choose to list for $500 plus a la carte services this is what agents will have to do. If the industry stops building fair buyer commissions into their listing fees then that`s what it will be. And you are 100% correct that it will just be a bigger burden on the buyers.



This I agree with and you can get around this with a carefully crafted buyer brokerage agreement. You can do this on your next deal in the current system too if you wish.

I said in another post, my main problem is that buyers` agents have a vested interest in making sure the property sells for as much as possible. I`m not sure what the solution is, but I think there should be one.

I`m sure lots of buyer`s agents are ethical and will do their best to get the lowest price for their clients, but it`s naive to think there isn`t 10 times as many agents out there who are happy to ensure that a property goes for as much as possible to maximize their payout.

Property listed for $300,000

Buying Agent to selling agent - my client will offer $285,000, but I`m sure I can get them up from there, probably to $290,000

Selling Agent to buying agent - I know my client would take $285,000 if it came down to it, but I`ll get them to sign back at $295,000 and we`ll get this thing done ultimately at $290

Cynical perhaps... but I`m sure stuff along these lines happens

 

[gwasser]

QUOTE (OntarioInvestor @ Feb 11 2010, 06:12 PM) I said in another post, my main problem is that buyers` agents have a vested interest in making sure the property sells for as much as possible. I`m not sure what the solution is, but I think there should be one.

I`m sure lots of buyer`s agents are ethical and will do their best to get the lowest price for their clients, but it`s naive to think there isn`t 10 times as many agents out there who are happy to ensure that a property goes for as much as possible to maximize their payout.

Property listed for $300,000

Buying Agent to selling agent - my client will offer $285,000, but I`m sure I can get them up from there, probably to $290,000

Selling Agent to buying agent - I know my client would take $285,000 if it came down to it, but I`ll get them to sign back at $295,000 and we`ll get this thing done ultimately at $290

Cynical perhaps... but I`m sure stuff along these lines happens


Not cynical, but erroneous. No realtor is allowed to reveal to their non-clients, how high or low their clients are willing to go. Exception, if they have written consent from their clients to do so.
That would be a breach of confidentiality.

 

[Lucas]

I mainly act as a buyers agent and to create a SUSTAINABLE business, I always try to get the LOWEST price possible in every deal I do with clients. As well, I enjoy negotiating with my collegues and have never thought about the 150$ earned by "giving up" 5k at the back end.

Honestly, the vast majority of Realtors tend to fight tooth and nail at the end of the deal for that 5k...atleast the ones I end up submitting offers to...lol

.

Lucas

QUOTE (OntarioInvestor @ Feb 11 2010, 07:12 PM) I said in another post, my main problem is that buyers` agents have a vested interest in making sure the property sells for as much as possible. I`m not sure what the solution is, but I think there should be one.

I`m sure lots of buyer`s agents are ethical and will do their best to get the lowest price for their clients, but it`s naive to think there isn`t 10 times as many agents out there who are happy to ensure that a property goes for as much as possible to maximize their payout.

Property listed for $300,000

Buying Agent to selling agent - my client will offer $285,000, but I`m sure I can get them up from there, probably to $290,000

Selling Agent to buying agent - I know my client would take $285,000 if it came down to it, but I`ll get them to sign back at $295,000 and we`ll get this thing done ultimately at $290

Cynical perhaps... but I`m sure stuff along these lines happens

 

[TheVancouverMarket]

QUOTE (OntarioInvestor @ Feb 11 2010, 07:12 PM) I said in another post, my main problem is that buyers` agents have a vested interest in making sure the property sells for as much as possible. I`m not sure what the solution is, but I think there should be one.

I`m sure lots of buyer`s agents are ethical and will do their best to get the lowest price for their clients, but it`s naive to think there isn`t 10 times as many agents out there who are happy to ensure that a property goes for as much as possible to maximize their payout.

Property listed for $300,000

Buying Agent to selling agent - my client will offer $285,000, but I`m sure I can get them up from there, probably to $290,000

Selling Agent to buying agent - I know my client would take $285,000 if it came down to it, but I`ll get them to sign back at $295,000 and we`ll get this thing done ultimately at $290

Cynical perhaps... but I`m sure stuff along these lines happens


What sort of buyer`s agents are you using ?! I hope this has not been your experience. You might want to vet your buyers agents more carefully. If you think about it the financial incentive (or marginal benefit) for a buyer`s agent to do this is minimal to non - existent. It does not compute.

 

[OntarioInvestor]

QUOTE (TheVancouverMarket @ Feb 12 2010, 09:34 PM) What sort of buyer`s agents are you using ?! I hope this has not been your experience. You might want to vet your buyers agents more carefully. If you think about it the financial incentive (or marginal benefit) for a buyer`s agent to do this is minimal to non - existent. It does not compute.

I`m quite happy with the agent I use now, and I don`t think that my agent would ever do this.

But I think it`s foolish to think that there aren`t agents who do this. Someone else said that the agents who come to this board are truely professionals; unfortunately there are hundreds upon hundreds of agents out there who are out for number 1 and to make maximum profit on each deal, even if that is short term as opposed to long term thinking.