Thanks for the comments on my commentary here – they were interesting. I’m enjoying writing here and getting feedback from folks.
I found some more interesting thoughts on the New York Times article over on the Freakonomics blog. “Chubin,” one of economist Steven Levitt’s readers proposed a novel approach – the hourly realtor.
Lastly, the 6% commision model is little incentive for agents to get the highest price for the seller or lowest price for the buyer. I continue to think an hourly fee, based upon actual work provided, is the fairest of all. I just don’t think the public is ready to accept that model.
If consultants and lawyers can do it, why not real estate agents. Has anyone heard of agents trying this? Any reason this would be a non-starter from the gate? I don’t think it would take over the industry, but I could imagine some buyers and sellers really liking it. The comments are open…
I have been using an hourly and fee for service model for over a year now. My clients love it! http://www.hourlyagents.com
Unless the lawyer is part of the MLS, the consumer will still be leaving 3% commission laying on the table for the real estate agents.
Galen,
You’re covering a really interesting topic… I think that there is a genuine benefit to having agents work on a commission basis… I’m still partial to a situation where listing agents get a huge commission (maybe 25%), but only based on the difference between the sale price and the appraised value. In other words, revise the structure somewhat to ensure that a real estate agent has a huge incentive to ensure the owner gets the most money for their home.
But then again, maybe this structure is too complicated for most people? What do you think?
I can’t believe that I forgot about http://fsbomadison.com I lived in Madison when I caught the real estate bug and used to visit that site quite a bit.
Alternative commission models are interesting. Recently, an instructor of mine told us about a system that he came up with a few years ago and tried out with a few clients which was basically a base retainer plus an hourly rate. I’ve got enough on my plate as it is, the last thing I want to have to worry about is to keep an additional tally of hours worked.
An abundance of easily accessible information + new technologies indicates to me that unbundled services might be the way things are headed.
As an attorney and a real estate broker, I find it fascinating that almost all of my real estate clients (all of whom are purchasers) opt to go the commission route rather than trying to save money by paying an hourly rate. There are a couple of important reasons for this, from my perspective.
First, compensation by commission is contingent upon a purchase/sale actually closing. If the purchase/sale does not close, generally speaking nothing is owed to the broker. By contrast, my hourly fee charged as a real estate broker is not contingent upon a closing. In some cases, the possible reward to the client by opting to hire me on an hourly basis can be very high. However, even when the risk of a sale not closing is low, consumers are still hamstrung by the misconception that the sellers, not the buyers, pay the real estate commission.
For this reason, clients will opt for the commission route (because they believe that the commission is paid by the Seller, even though the purchase/sales price includes the total commission), rather than obligating themselves to pay me on an hourly basis. This has almost everything to do with irrational fear and misperception, and almost nothing to do with the economic realities of a transaction.
In my opinion, participants in the real estate market (specifically referring to buyers) are not rational actors when it comes to the payment of real estate commissions. This has much to do with the historical structural compensation model established by the real estate industry, namely, the offer of compensation made by the listing broker through the MLS. Until commissions on both the listing and sale side of the transactions are separated, and purchasers are empowered to go out and shop for and hire their own agent on whatever terms they choose, buyers will continue to act like lemmings and allow sellers and their brokers to dictate the terms by which their buyer’s agents are compensated.
p.s. – Great job on the blog, Dustin! You are a true innovator and quite an inspiration.
Our entire business is based on the concept consumers only need to pay for the serives we provide. We developed a business model that customizes services for both buyers and sellers. We unbundled it and then put it back together based on a clients unique situation or need.
Our selling clients can choose between hourly rates, fixed fee or commissions. Over half our clients choose to pay a fixed fee as a retainer and monthly payments until paid or the unpaid balance at settlement. This works because we develop a high level, trusting relationship through education, our technology and market data.
On the buying side, we have clients that agree to a fixed fee for a range of services and they get the difference back at closing. If they can narrow their search down using the internet or other means and are not running us all over creation looking at inappropriate (for them) properties, it saves us a ton of time and time is money.
Finally, I have buyers of new construction paying us a monthly professional services fee for the duration (usually 9 months to a year) of the construction, we manage all aspects of the process with the builder, including change order tracking, walk throughs, closing, settlement and post occupancy punch lists. The entire builders commission is credited to the buyer at closing.
Bottom line: our clients love it and we get paid for the work we actually do. It works and consumers (especially the younger, internet savvy ones) recognize real value in it.
PS: Most clients opt for fixed fee services. None choose hourly. The rest opt for a negotiated commission rate. The important differentiation to the historical model is the power of choice.
More info at Choice3 Realty
While the FDBO and flat fee markets have grown over the last few years, I believe that is in large part due to the fact that it has been a seller’s market for a long time. As the market changes, sellers will need better marketing than just a sign and a website listing. Also they will need to offer more to buyers and their agents.
Just watch over the next year if the market shifts in favor of buyers even more than it has here in Hawaii, you will find sellers gladly paying the 6% just to sell it. Why should a buyer’s agent go to a FSBO or discount broker if there are 20 available listings for that buyer?
Great comments! So, hourly agents do exist now (I had no idea), I do like the concept of a very high commission for the seller’s agent on only the price over the appraised value (but if appraisals are correct, do 50% of sales not get paid? would there be a penalty for taking too long?), and unbundled services really seem to be the way to go.
I also really like Stephan’s concept: “In my opinion, participants in the real estate market (specifically referring to buyers) are not rational actors when it comes to the payment of real estate commissions.
Dustin,
Do you accept track backs…. I don’t see a link here, but would like to link to one to add some thoughts to this discussion.
If anyone is headed to Inman’s conference in NYC, January 11-13, 2006, and I’d like to pick up this discussion in person.
Bill,
Normally, the site picks up trackbacks just fine… The only reason trackbacks wouldn’t work would be because a site was labeled as “spam” by my spam filter. With that said, I doubt your site is labeled spam and I’d definitely like rain city guide to be part of your conversation! Let me know if it doesn’t work!
Regarding Tony’s comment regarding the FSBO market. First, no matter what REALTOR you use, it’s the properties that are competing against each-other, not the REALTORS. If you have a good property, priced right, it will sell. FSBO’s can actually have an advantage in a Cold Market, as they can price their home 1-3% less than the other properties listed with an agent. This would make their properties more marketable and desirable. Also, because their property is more desirable (being the cheapest listing) they will get more offers, and will be able to get offers closer to the actual asking price since it was already discounted. Sellers are becoming much more savy at “pricing” than one may assume, with experienced learned from the hot market where many learned the value to under list to cause a bidding war. Additionally, buyers are getting hip to trying to get a discount on a property as more and more are contacting the listings agents directly and asking for a price reduction based on the fact that the agents are double-ending the deals. So as the market cools, these same buyers may actively seek out FSBO’s for those same discounts especially they become easier to find with free FSBO websites using the latest technology like google maps and rss feeds.
6% is a standard almost all over the world. No one would work for free and they have calculated their money long time ago. Speaking about per hour basis I do not see the way how the time spent can be calculeted.
The agent I was using had a 4.5% rate, however after months no luck. So I’m trying the FSBO for a bit. 6% is just too much I think.
Has anyone come across any third party (non-NAR statistic) articles on the difference in sale price between FSBO vs Realtor sales. Please point me in the right direction. Thank you.