Author Topic: Let's invent a new commission structure  (Read 928 times)

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Offline Cornflakes

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Let's invent a new commission structure
« on: February 11, 2021, 11:44:40 PM »
Seems there are plenty of voices on TI to comment on how the current commission structure for a real estate transaction is dated. Why not bounce around few ideas here to invent a new model? Who know, in few years there might be a startup/movement that picks up an idea from the bright minds here.

Offline Cornflakes

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Re: Let's invent a new commission structure
« Reply #1 on: February 12, 2021, 12:00:01 AM »
To start off, I will borrow from an executive recruiting business model. There is an employer, a candidate, and a recruiter. At times, employers decide to pay for services of a specialist and hire them to find a candidate. Job seeker do not pay a penny.

How about there are no buyer agents. Only selling agents and it is their job to advertise, cold call, do whatever it takes to find an interested and capable buyer. How do buyer ensure that the agent is neutral and not taking unfair advantage of buyer's lack of expertise? Well, set up a due dilligence service business that buyer subscribes to at $100/month - join anytime, cancel anytime. THe sole purpose of this business is to vet the deal, the agent, history of the home etc and make a disclosure to buyer.

Just like there are recruiters that charge a flat fee and there are the fancy ones that charge a year's salary, There could be a super agent that will charge 10% or a neighborhood agent with $1000 flat fee. Let sellers chose what they want to pay. Like selling a used car. Some go to dealer and and the keys, others open up craigslist ad.

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Offline lnc

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Re: Let's invent a new commission structure
« Reply #2 on: February 12, 2021, 07:21:19 AM »
One change I would like to see....   Buyer pay for buyer agent’s commission not pay the seller.

It’s fine if buyer uses an agent of their own, but don’t force the seller to paid for their commission. 

Offline someguy

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Re: Let's invent a new commission structure
« Reply #3 on: February 12, 2021, 08:51:11 AM »
Home price growth has outpaced cost of living and wage growth, yet the amount of work to sell a home has arguably remained the same or decreased thanks to today's computer related tools, so agents have seen quite a relative increase in their compensation over the past decades.

The fact that agents commonly rebate commissions is an indication that the current model is broken.  Agents should charge what their service is worth and keep the money.  Don't overcharge the seller and pass it on to the buyer.

I think a sliding commission scale (i.e. commission % decreases as house price increases), a flat fee, or even hourly rate would be more appropriate.  The amount of work to sell a $500k house isn't much different than selling a $3.5M house.

Want to stage the house?  Fine, let the seller pay for the service.  Mark it up a bit for the convivence.  Want to hire a professional photographer?  Same deal.

It's in agents' best interest to modify their pricing strategies to remain relevant.  Refusing to do so will only further incentivize the move towards using platforms like Redfin and Zillow to transact property.
« Last Edit: February 12, 2021, 09:53:05 AM by someguy »

Online nosuchreality

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Re: Let's invent a new commission structure
« Reply #4 on: February 12, 2021, 10:10:26 AM »
There are a few basic problems in SoCal.  Million dollar homes are basically commodities. Liability exposure is proportional to deal value.  The buyer pool for those million dollar homes is in financially risker position than other million dollar deals.

Offline daedalus

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Re: Let's invent a new commission structure
« Reply #5 on: February 12, 2021, 10:32:45 AM »
Home price growth has outpaced cost of living and wage growth, yet the amount of work to sell a home has arguably remained the same or decreased thanks to today's computer related tools, so agents have seen quite a relative increase in their compensation over the past decades.

The fact that agents commonly rebate commissions is an indication that the current model is broken.  Agents should charge what their service is worth and keep the money.  Don't overcharge the seller and pass it on to the buyer.

I think a sliding commission scale (i.e. commission % decreases as house price increases), a flat fee, or even hourly rate would be more appropriate.  The amount of work to sell a $500k house isn't much different than selling a $3.5M house.

Want to stage the house?  Fine, let the seller pay for the service.  Mark it up a bit for the convivence.  Want to hire a professional photographer?  Same deal.

It's in agents' best interest to modify their pricing strategies to remain relevant.  Refusing to do so will only further incentivize the move towards using platforms like Redfin and Zillow to transact property.

Agree with all this.  A few years back my mother decided she wanted to sell her inherited home to some vulture because he made an offer and she had no idea what else to do with a home 4000 miles away.  I reached out to a local agent who was extremely responsive, and didn't bat an eye at working with a seller from a distance (years before Covid) to sell some podunk shack in the woods.  It turned out there was some kind of issue with the title because some paperwork wasn't done correctly when my grandmother passed...."don't worry, I know a great title agent who can fix this"...and we never heard about it again.  The whole transaction barely perturbed my mother, who finds logging on to her computer to be an ordeal and who would find the logistics of ordering a pizza for 2 people challenging.  She got 3x more for the house than what the vulture had offered her, and for all her amazing work and service, the agent grossed about $700, of which she got to keep some fraction.  The word "unfair" doesn't begin to describe it.

Offline eyephone

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Re: Let's invent a new commission structure
« Reply #6 on: February 12, 2021, 10:52:17 AM »
There is something new in the industry. Zillow and Reding are buying and selling homes.

I know RE agents and brokers don’t like it. But I don’t care. Lol

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Offline the.irvine

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Re: Let's invent a new commission structure
« Reply #7 on: February 12, 2021, 01:23:27 PM »
There are few agents who do a lot of work to attract potential buyers.

Not all home locations are desirable either, hence required some effort from the agent.
 
Again, when i search homes, i dont need help from any agent. I can check online and define my own search criteria on Redfin, Zillow etc.


Offline USCTrojanCPA

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Re: Let's invent a new commission structure
« Reply #8 on: February 12, 2021, 01:37:26 PM »
The commission structure in place is broken and that is why I came up with the unique commission rebate model for both buyers and sellers.  The inherent problem is that the agent's interests are not aligned with the agent.  On the buy side, the risk to the agent is that they will show dozens and dozens of homes to a buyer who may or may not end up closing on a home.  The way to solve this problem is for the buyer to pay the agent to show them homes and then once a purchase is made the amount paid to show homes is provided as a credit by the buyer agent towards the sellers closing costs.  The problem here is acceptance to pay these showing fees to agents by buyers.  My solution is that I provide a rebate is that based upon how much work that I do.  For example, for new homes which require a lot less work I provide a significantly higher rebate vs. for a resale home purchase.  Then for a resale purchase, if I only show a few homes to a buyer I'll provide them a higher rebate % than a buyer where I spend showing them dozens of homes (thing of this as a work/effort model). 

On the seller side, the agent incentive needs to be aligned with the incentive of the seller (to sell at the highest price possible in a timely manner).  The risk for an agent is dealing with an unreasonable seller and/or an undesirable property that may not sell so that agent is out both time and money (staging, photography, marketing, etc).  One way to solve this problem is to have the seller pay for the staging, photography, and marketing costs and then provide the listing agent a flat fee to list the home.  If the home sells, then there is a bonus given where it's higher the higher the price is.  If the home doesn't sell, the agent keeps the flat fee.  I think this suggestion would eliminate many sellers are who are not serious about selling a home.  My solution is to reduce the commission and provide a pay-for-performance listing commission struction model where I get paid more as I get a higher sales price for my client.
Martin Mania, CPA
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Offline USCTrojanCPA

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Re: Let's invent a new commission structure
« Reply #9 on: February 12, 2021, 01:38:58 PM »
There is something new in the industry. Zillow and Reding are buying and selling homes.

I know RE agents and brokers don’t like it. But I don’t care. Lol

And Zillow, Redfin, Opendoor, etc typically deduct 5-8% off their offer price to the seller so the seller ends up better off selling the home with an agent most of the time, especially when that agent has a more reasonable commission structure.
Martin Mania, CPA
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Offline eyephone

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Re: Let's invent a new commission structure
« Reply #10 on: February 12, 2021, 02:01:48 PM »
There is something new in the industry. Zillow and Reding are buying and selling homes.

I know RE agents and brokers don’t like it. But I don’t care. Lol

And Zillow, Redfin, Opendoor, etc typically deduct 5-8% off their offer price to the seller so the seller ends up better off selling the home with an agent most of the time, especially when that agent has a more reasonable commission structure.

I hear different stories. I hear sometimes the offer are lower, I hear people like it because they don’t have to do open houses, I hear that you don’t have to fix anything and as is. Some people are sick of the whole game with the traditional RE agent. (Your house is worth x and I guarantee it will sell.

Offline Soylent Green Is People

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Re: Let's invent a new commission structure
« Reply #11 on: February 12, 2021, 02:32:27 PM »
This is a nice theoretical discussion, but given the strength of NAR's hold on the California Legislature, no changes will ever occur. Even the disruptors like Redfin, etc are winding themselves back into the more traditional structure of selling and commissions. I'd love to see changes made, but will they?

As for personal experience: I've recently become an executor for a family member's will. They have a home to sell in another state - one where Redfin and other disruptors are thriving. Because a traditional "6 percenter" agent is a market king within this 500 unit SFR development, we're going with that agent. So far, I'm not seeing the sort of value expected when paying full fare. The "Name on the Door" agent is a pro, but the staff below that agent have been extraordinarily weak. I'd rather suffer through a high expense in the short run rather than save a buck or two with a lower cost Agent. I don't want the risk of this listing stalling out for 6 - 9 months due to using a lower cost but also lower production realtor.

If there were meaningful commission changes, this "Name on the Door" agent would still thrive. I'd bet those below would be given opportunities elsewhere due to legislated commission income reduction. That's not a bad thing from the customers viewpoint (sucks to be shown the door, unfortunately) but with extraordinary income one would think it should translate into extraordinary service. Unfortunately, high income often will make top producers take their eye off the ball. A restructuring of the traditional 6 percent tends to make someone re-focus on the important things. Those who then become customer service focused will grow business, replacing any temporary income loss from a rule change.

Real estate sales is a big portion of an industry that has escaped meaningful reformation - as title companies, appraisers, lender's have. Some of the suggestions here would be nice to implement in a perfect world.

My .02c
My .02c

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Offline JadedOne

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Re: Let's invent a new commission structure
« Reply #12 on: February 12, 2021, 03:21:22 PM »
I'll go in a slightly different direction. I'd like to see, and I think we will see, a more "for sale by owner" shift in the years to come. Many above have already said it - younger folks that are comfortable with a computer are happy to search zillow/redfin and review the details/pics of a home on their own.

If you're selling your home, how hard is it to get staging and professional photos done on your own? As others suggested above, it's a good idea for the Seller to bear this cost anyway. Yes, it takes work on your part. And as with most things, if you don't want to do the work, you have to pay someone else to do it.

The biggest issue with this would be how to conduct actual tours, because at some point we need to see in-person what we're making an offer on. Negotiating terms could also get too complicated for many, so assistance would be needed with (at least) these two items. I think that's where an agent is still needed. I'd say that's worth more in the 2-3% range in terms of commission.

With all that being said, I think it's more likely we'll see a hybrid model. There will always be buyers that are from out of town/state/country that actually need their hands to be held through the process. Or, more complicated transactions that need more time to handle from a paperwork/negotiation perspective. That's when a "full-service" agent would come into play.

My dad was a realtor, and he always said "90% of real estate commissions go to just 10% of realtors, because they work the hardest." Whether that's true or not, that 10% (or whatever %) will likely always have business.

Offline USCTrojanCPA

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Re: Let's invent a new commission structure
« Reply #13 on: February 12, 2021, 03:57:23 PM »
There is something new in the industry. Zillow and Reding are buying and selling homes.

I know RE agents and brokers don’t like it. But I don’t care. Lol

And Zillow, Redfin, Opendoor, etc typically deduct 5-8% off their offer price to the seller so the seller ends up better off selling the home with an agent most of the time, especially when that agent has a more reasonable commission structure.

I hear different stories. I hear sometimes the offer are lower, I hear people like it because they don’t have to do open houses, I hear that you don’t have to fix anything and as is. Some people are sick of the whole game with the traditional RE agent. (Your house is worth x and I guarantee it will sell.

Yes, I've done that a few times for my clients who were contingent buyers where I bought their home and then sold it after they moved out.  But the 2 benefits of my offer is that it only goes into effect once my client secures a property on the buy side and I provide a profit split above a certain ultimate sales price level unlike the iBuyer companies out there.  More to come on this later...
Martin Mania, CPA
AgencyOne
CA BRE License # 01799007
CA CPA License # 107675
mmania001@yahoo.com
714-747-3884 cell

Often imitated....Never duplicated!

Offline Soylent Green Is People

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Re: Let's invent a new commission structure
« Reply #14 on: February 12, 2021, 05:47:48 PM »
The FSBO issue is one of documentation (It's not easy to gather up all of the forms needed to legally contract, advise, and transact a sale) and litigation. One of the biggest expenses that a realtor has is "E&O" - Errors and Omission insurance. Why is this such an expense relative to other costs? America has become a society of litigants. The window screen is cracked and not disclosed to the buyer OK!!! IT'S GO TIME for some attorneys. A FSBO is at risk in this present environment.

At some time perhaps a "LegalZoom" of official documents company, paired with a limited timed E&O insurance offering will be structured for the FSBO seller. Yes, there are FSBO "helpers" (FSBO.com ForSaleByOwner.com, etc ) but they are a disorganized mess relative to low cost services like a discount brokerage.

Finally, of the FSBO's you do see out there, price discovery by the owner borders on the unhinged. There area also quite a few "FSBO's" also listed with traditional agents so the deal a buyer might see could only be wishful thinking in the end.
My .02c

SGIP

 

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