Choice: Risk Vs. Reward

There is no question that when you pay for real estate services either by a flat fee or by the hour, you can save a lot of money. But unlike using a discount agent who agrees to cut their commission, you don't have to sacrifice the number OR the quality of the services you receive. Why is this? Because by choosing a flat fee for a bundle of services, or paying by the hour, you are receiving and paying for only the services or the time received. You are NOT receiving a guaranteed outcome, but, you also do not have to pay a premium for that guarantee - the "insurance" that if you don't achieve the desired outcome, you pay nothing. Therein lies the savings.

Actually, paying for services by fee or by the hour isn't that radical an idea. If you think about it, fees or hourly are how most professionals and service providers are paid.

Real estate professionals have traditionally been paid contingent on an outcome, even though no matter how skilled they are, they cannot control that outcome. The simple fact is the initial pricing of a home and the economic climate is what will determine how fast and for how much a home sells for.

Yet, with the traditional commission system, agents are paid as though they could control the outcome and that "insurance policy" of only paying if the house sells is what makes this method of compensation so expensive to the consumer.

When I explain to a potential seller how they can save a lot of money by paying for the time or services of an agent, rather than the outcome, the response I often get is "But what if the agent doesn't do a good job?" By that reasoning, you would have to question whether any service provider would do a good job if there pay was not contingent on the outcome.

As an example, a dentist is paid for their services and expertise, regardless of what dental issues come up. No matter how skilled the dentist is, he cannot control whether you only need twice-a-year cleanings or an abundance of root canals, bridges or implants. He might influence your future dental health by making suggestions on the care of your teeth, but he certainly cannot control what ultimately happens with your mouth; that depends on factors such as heredity and how diligently you care for your teeth. So if the dentist is paid for his services regardless of what comes up, how do you know that he will do a good job? The fact is you don't have a guarantee. That's why you usually don't pick a dentist from the phone book; it's far better to get a referral from someone who is already a content patient.

School teachers are paid a salary regardless of how many of their students ace the SAT's. They are paid, and promoted, based on their teaching skills, not necessarily how many students go on to college.

And so it is with most service providers. Obviously, if you pay for someone's services by non-contingent fee or by the hour, you need to have confidence that that provider will do quality work.

Although some consumers believe that a real estate agent will work harder knowing that they will only be paid if the house sells, the reality is that top-notch REALTORS®, like any other good service provider, work hard for their clients because they have a reputation for quality work that they want to protect and because they want to continue to receive a good share of their business by referral.

Now, I want to be very clear: paying for real estate services by non-contingent fees is not for everyone! As my Mom likes to say "That's why they make chocolate and vanilla." Some people (like my Mom) are risk-aversive, and they are better off paying for real estate services by traditional commission. There is nothing wrong with that as long as they understand that they are paying a premium to have no risk. At the same time, there are a growing number of folks, once understanding that the outcome is not controlled by the agent, whom are willing to forgo the guarantee and pay a lot less by fee, while still getting quality services and counsel.

Note: the above article is an excerpt from my book Ripping the Roof Off Real Estate.