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In this tough market, with so many sellers underwater, there is an increasing need to work with buyers and we’re seeing even seasoned listing agents working with buyers out of necessity. But with it, the frustration is increasingly oozing out amongst agents about the lack of buyer loyalty, how no one wants to sign a buyer agency agreement, that even if they sign it, you can’t enforce it, etc, etc, etc. 

I personally never worked with buyers without a signed contract (just as I never would take a listing without one) but that’s not the point of this post. There IS much less buyer loyalty than seller loyalty but I will opine that it goes far deeper than whether a not a contract is used. It goes very simply to a falsehood that we have repeated to buyers for years and is now coming back to bite us:

“Mr. & Mrs. Buyer: don’t worry about my compensation.
My services are FREE to you!”

There's been a lot of talk of late regarding commission rebates. The consumer, squeezed by the market, is increasingly asking for them and many in our industry are increasingly providing them.

But...we sure don't like it!

From our vantage point, it feels like hands in our pockets, grabbing at our shrinking paycheck. It feels like...DARE I SAY IT?...the way we have felt for years when relocation companies offer us a coveted buyer or seller in a nice price bracket but attached at the hip to a pile of extra paperwork AND a 30-35% cut out of our check for the privilege!

From our vantage point, it feels like we're being robbed. And we are.

The newly released National Association of Realtors Member Profile report (covering 2010) indicates that things in the real estate sector are improving (at least over 2009 numbers). According to the profile, the average agent had eight transactions (covering residential and commercial properties) during 2010. While it's doubtful anybody is feeling celebratory over moving less than one property per month on average, what makes this number even harder to get excited about is that the average agent also claims to have put in full 40 hour weeks during 2010 as well (and I suspect the real number is closer to 60 hours per week for many agents).

A must-read for all those interested in the topic of real estate compensation: A new article in Inman: Conflict, confusion and risk in real estate commissions.

Up and above the fact that the author interviewed yours truly for the article, (and actually didn't misquote me!), I think she does a really good job in bringing in lots of ideas and opinions on this topic. Check it out!

A few years back in an article in RIS Magazine, Brian Buffini, founder and chairman of Buffini & Company, made a very interesting observation: although 80-90% of real estate buyers start their home search online, almost none would actually go to the next step and click “Add to Shopping Cart.”

Online technology gives the consumer a running start. But to cross the finish line, they need a flesh-and-blood Realtor® who knows the local market and the ins and outs of bringing the transaction to close.

The problem is that traditional real estate companies and associations are still telling the public that if they want the hands-on personal care that Buffini advocates, the full-service commission-only model is the only option. Those who want to take advantage of the do-it-yourself opportunities (and cost savings) OR who do want full service, but just don’t like paying by commission—are turned away.

Agent Tish Lloyd wrote a wonderful post on Active Rain a couple of days ago:

I work for YOU! It's okay to tell me what you're thinking!

For the most part, I really liked what Tish wrote: that it's vital that a buyer's agent develop a level of trust with her client - without that trust, it's very hard to do our job properly. But one paragraph gave me great pause:

"The goal of finding a home you love and can comfortably afford, is my goal -- my only goal. Sure, my salary depends on closing sales -- there's no secret there. And, the more you spend the more I make -- still, no secret there, either. But you've engaged me to represent your best interests and I have a fiduciary responsibility to you."

ACRE® Industry Partner Jennifer Allan wrote a great post on Active Rain: "No I Won't Reduce My Commission! Do You Expect Me to Work for FREE?" (Um, let's do some math)

A couple of ACRE®s have already added to over 100 comments on this blog. It's amazing  however, how so many of the comments miss the point that Jennifer was making - she isn't advocating cutting one's fee. She is questioning how a system that bases compensation on the value of a home fairly compensate you for your time, experience and expertise.

Thanks Jennifer for sharing your wisdom - as usual, you are spot on!

There is a lot of confusion amongst real estate professionals about real estate consulting. Many mistakenly believe that it's just about charging fees. But true consulting is far more than that! Check out this three minute video to see...

Real estate professionals have lots of forums for support. Have a tough experience in real estate? Just post about it and you have tons of supporters who can feel your pain. But there's something very passive about many of the travails we complain about in our industry. It's as though things happen TO us rather than us initiating the changes needed to make things better.

For instance, a subject that comes up over and over again in one shape or another is that we're tired of providing free CMA's. Yet, overwhelmingly we accept it as a given because "everyone else does it". Charge a for a service that draws on our expertise and experience? Why would someone pay for something they can get for free?

Another View of Commission (as published in REM, February 2011)

The Guest Column (REM November 2010) did our industry a service by raising the subject of agent remuneration, but the assertion that sale-contingent commission is the best compensation method for ever and all time perhaps deserves some scrutiny.

Public response to on-line media articles around the recent Consent Agreement between CREA and Competition Bureau overwhelmingly cast real estate agents in a negative light, suggesting, among other things, that we are overpaid, under-qualified, self-serving, lazy etc. Little was said to suggest that we add much value to real estate transactions. A common thread connecting many of the negative comments was commission. Public opinion surveys repeatedly rank us embarrassingly low on the integrity scale. Our traditional compensation model only perpetuates this industry’s self-centric image in a day when consumers are demanding fairness and transparency...

I was doing errands over the weekend and on the radio was a call-in show on consumer issues. My ears perked up when I heard a consumer call in saying that they had bought a home recently and once they moved in, they found mold. So, the question is: why wasn't the presence of mold brought to their attention? The caller and host discussed several possibilities:

1. Their agent knew about it and didn't disclose it which the host was quick to say that if that was the case, the consumer could go after the agent and their broker.
2. The homeowner knew about it and didn't disclose it to the agent. If that was the case, the consumer could go after the former owner.
3. The home inspector saw it but didn't bring it to the buyer's attention since "everyone knows" that inspectors are under pressure to pass houses because it they don't, buyer agents won't recommend them to their clients.

An agent called in next to say that only buyer agents, who have the fiduciary obligation to work in the best interest of the buyer, can recommend home inspectors. The host replied that while that may be true, because the agent only gets paid if the transaction closes, it makes logical sense that even buyer agents are going to lean toward "easy inspectors" who won't flunk a house and make their work on the transaction for naught.

I hate to say it, but he has a point, if only in the mind of the consumer. As long as our compensation is tied up with "closing the deal", I fear this host's opinions will continue to be shared by the public. We can argue till the cows come home that we take our fiduciary responsibilities seriously and will always work in the best interest of the client (whether buyer or seller). But the truth is that under contingent compensation, how do we argue to the consumer that the amount of our paycheck (or whether we get paid at all) doesn't influence who we recommend or our advice in general? And even if we can argue that we personally would never let our compensation influence our advice (a difficult proposition to make since it defies logic), can we truly debunk this feeling about our industry as a whole?

How much does the 'price of doing business' affect how much you spend on your next home? Probably more than you think! Can you get MORE HOME FOR LESS MONEY

You remember those reasoning problems you used to work on in school? Here's one for you to tackle:

Let's say that you're looking to buy a new car. After doing research and checking the buying guides you finally settle on a model that is just perfect for you. You head on down to the local dealership for a test drive and when you get there, one of the salesmen agrees to show you the car and let you take it for a spin. After returning from your drive you make the decision to buy the car and start to negotiate the price of the car with the salesman. While the car is listed at $20,000 the salesman tells you that he needs to add an additional $5,000 to the final price to cover his time working with you. After all, if it hadn't been for him, you wouldn't have been able to test drive the car, now would you?

So here's the question: How long would it take you to walk out of the dealership?

I know, I know, if you're a real estate professional, the title of this post probably makes the hair stand up on the back of your neck. But, for just a moment, I'm going to ask you to take off your agent hat and put on your consumer hat. Leave your skepticism at the door for a moment and think through our present role(s) and how we are paid.

On one hand, real estate has always been considered a sales profession, paid by commission. As an independent contractor, a real estate agent needs to get homes sold as quickly as possible, and for as much money as possible, to make a living in this business. And thirty years ago, when an agent's sole responsibility was to "move the inventory", contingent commissions made total sense as they do for anyone else that is in a sales capacity.

The problem we have run into has come about with the advent of agency. Starting in the 90's, our national and state associations asked us to now to wear a second hat - that of a trusted adviser who's job is to provide fiduciary counsel that is in the best interest of our client, not ourselves, without taking a serious look at how we are compensated.

The Value, The experience and The knowledge that Realtors bring to the table shouldn't be discounted. During the past decade, more and more prospective home buyers have started taking advantage of the information and tools that are available to them on the Internet -and why not? The abundance of sites and information that allows home buyers to thoroughly do their homework before even stepping into a home on the market is tremendous For example, prospective buyers can now virtually tour dozens of homes by looking through photo slide shows, virtual walk-throughs and tools like Google maps, which allows buyers to virtually wander through the neighborhoods or view entire neighborhoods. Overall, it's a pretty easy way of getting the skinny on any house on the market before you decide to go and see it for yourself.

From a buyer's perspective, this access to all of this information and capability often questions the value of paying a Realtor for these services if you can do them yourself. After all, why should they end up paying a Realtor® a high commission when they can do most of the legwork themselves?

From the buyers standpoint this value equation seems to makes sense. However, from the standpoint of what buyer's agent actually does that leads up to the closing, it's a great deal more than being an on-demand tour guide for people looking for a home.

A recent post in Active Rain asked very simply "When Do Realtors Stop Working for Free?" She mentioned that she: "got an email today from a colleague who is a real estate investor. He is very savvy and someone who "gets" it. His advice can be summed up in a couple of snippets. If we are as smart as we think we are and we give great advice, why are we giving it away?"

The comments were overwhelmingly from agents that agreed with her premise but questioned how they could get paid in any way other than by commission. But there were a few responses that blew me away - one actually said that she "hated this conversation" because she maintained that we are (I guess she thinks we always have to be) commissioned salespeople without ever letting her mind expand that practices change when businesses do.

"Don't get too close to me...I have a cold!" We have believed for so long that breathing the same air will spread germs, that it's almost a given. But if you talk to medical professionals, they will tell you that colds and viruses are rarely spread by breathing the same air. It's the exchange of body fluids that spread the germs.

In our profession, we have been told, and continue to tell the consumer, that a commission is a payment for services rendered. We've repeated it for so long that, almost universally, we believe it to be true. But logically, it's not. The consumer knows this and with a tight economy, they are increasingly asking some very logical questions:

Yesterday's Toronto Globe & Mail Report on Business grabbed me with an article about the duties of financial advisors to their clients and how they are paid. It's hard to miss the parallel to our business as this piece explores the need for the financial services industry to assume their appropriate fiduciary duties.

The takeaway from this is that if consumers want transparency from the financial services industry they want it from the real estate industry as well. Consulting is clearly the way to deliver it real estate clients!

Here's the link

If you scroll down far enough after reading the article,

Homebuyers sometimes believe that since sellers pay the commission in most real estate transactions, their agents are really working for them for free.

But is that the case?

Agents and consumers often tap-dance around the topic of how much a buyer's agent makes (or nets, for that matter). Often, the commission - or any bonuses offered - are a bit of a secret. In many real estate purchase contracts, the amount the brokerage and agent make are omitted.

In a recent post on Active Rain, an agent posed this question and her answer was "Sometimes you need to make adjustments." Of course her "adjustments" were to simply cut her commission when a deal was threatened. She included an image of a tightly fitting corset.

I would answer the question totally differently: maybe it's time that we abandon the corset and start wearing underwear that fits with our times. In other words, maybe the adjustments we need to make are with how we're paid rather than continuing to loosen the corset more and more till it's lost it's usefulness.

A recent post on Active Rain initiated a wide ranging discussion of how REALTORS® get paid. Two ACRE® colleagues, whose judgement in such matters I respect, happened to notice my little contribution to that discussion and suggested I reproduce it here...

To me, our method of remuneration is inextricably tied to how we see our role and how we practice. Perhaps adding a little context will usefully extend the discussion in this thread.

There was a post this week on Active Rain from an agent explaining how when asked, he will not cut his commissions. By weeks end, there were nearly 200 comments to his post, some agents cheering him on for his stand, others arguing the opposite, some comments from lenders, appraisers, and home inspectors arguing for and against.

But of the 200 some odd comments on the subject of cutting commissions, only two brought up the idea that maybe there is a choice other than cutting or not cutting commissions - from ACRE® Ron Stuart and myself.

Here's what I said:

The problem with discussing commissions as payment for services is that the consumer doesn't buy the reasoning. If it's a million dollar home, can you honestly say that you do four times as much work as you do on a $250k listing? We, in the industry defend it because what we make on an expensive listing makes up for all of the work we do with homes that don't sell and buyers that don't buy. While that makes perfect sense from our vantage point, you can't blame the seller for saying "What's in this for me? Why am I subsidizing the deals that don't close?"

We're having a great discussion on our private ACRE list serve, The Coaching Exchange, about consulting. It's clear from the discussion that there is still a lot of confusion about the role that a trained consultant performs and how they are paid for their services.

As we've said many times, consulting is not about a fee schedule! Consulting is a practice that provides quality, transparent choices with commission being just one of the choices offered. You can do 100% of your business by commission and yet practice as a consultant because you have the tools in your toolbox to offer other choices, both in the services you offer and how you can get paid. Providing choices is a wonderful thing - it brings you the business regardless of how they ultimately pay.

...whether they are dealing with Health Care or Real Estate Services.

I was chatting with a friend of mine last week when he admitted that he had been without health insurance since he got out of college. Given that he's a real estate agent, that's not so surprising: as an independent contractor he's on his own regarding health insurance and many in our industry have simply taken their chances, especially when they are young and healthy like my friend Jack.

But as part of the approximately 15% of Americans who are uninsured, Jack has a window on a phenomenon that few of the rest of us ever see: what health services actually cost. You see, Jack was playing softball one Saturday a couple of weeks ago and sprained his ankle. As luck would have it, a member of the team was a physician and offered to take a look at the ankle at his office. After his ankle was wrapped up, Jack offered to pay him.

There has been a lot of discussion of late on real estate blogs regarding buyer agency and the plusses and minuses of working in a buyer agency-only firm (Exclusive Buyer Agency) versus practicing buyer agency in a brokerage that also includes seller agency.

The main theme around these threads is how to get the consumer to trust, and thus demand, their own representation. The proponents of Exclusive Buyer Agency argue that the problem of trust would be eliminated if the public could understand the advantages of having an entire office that just practices buyer agency. Practitioners of buyer agency in traditional brokerages (those that have both buyer and seller agents in the same firm) argue that with the advent of designated agency, practicing buyer agency in a traditional firm no longer presents a conflict of interest.

Despite years of advertising by the National Association of REALTORS® and an increasing number of required ethics courses, most recent polls continue to show real estate agents at the bottom of the consumer trust list behind insurance agents and barely beating out stockbrokers. When asked in the most recent Harris Poll "If you were getting professional help or advice from each of the following, how much would you trust them to give you advice which was best for you?", only 20% of respondents indicated that they trusted the advice of real estate agents completely.

But why in the world should this surprise us? As long as we insist on being paid exclusively by commission, what we are asking the consumer to believe is that we can provide objective counsel that is in THEIR best interest when our compensation is wholly dependent on an outcome that we're advising them on!