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

Jul
2011
02

posted by on Consulting & Compensation

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!”

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