Introductory Chapter

This got me thinking about when I, as a consumer, deal with salespeople versus consultants, and what my expectations might be of each:

Suppose I want to buy a car. If I enter a showroom, I would expect someone to walk up and offer to help me and I would immediately identify that "someone" as a salesperson. My expectation would be that they would ask me what my needs were, the make of the car, model, color, features, etc. -- then show me cars that might match those needs. Since I have a high regard for good salespeople, I would have the expectation that they would deal with me honestly and not misrepresent themselves, the dealership or their vehicles. However, I would harbor no illusions that they were working for anyone other than their dealership and themselves.

But suppose that when I entered the showroom, someone came up and instead of showing me cars, whipped out a contract and said, "Before I start showing you around, I'd like you to consider signing this contract. By doing so, I can represent your interest rather than that of the dealership. And even though I'm paid by commission, signing this contract will allow me to negotiate the best deal on whatever car you decide to buy." If this happened, I would be really confused, and frankly, a bit skeptical. "This person wants to represent my needs and negotiate the best deal for me on a car, yet the amount of their compensation (or whether they get paid at all) is wholly dependent on my decision. And how is it that he will use his skills to negotiate the lowest price when he is paid as a percentage of what I end up paying?"

That got me thinking about another scenario:

Suppose I was having legal concerns regarding my finances. I would make an appointment to meet with a qualified attorney, and my expectation would be that I would pay that attorney for a consultation either by an hourly fee or perhaps a flat fee. I would expect that they would use their expertise to advise me regarding my financial issues and assist me in a resolution. And because I was paying them for their time, expertise, and experience, I would most definitely have the expectation that their counsel would be completely objective.

But suppose during the consultation, the attorney started discussing some financial products that she sold on the side: "You know, instead of paying me by fee, you can instead buy one of these products. I'll get a commission on whatever I sell you and you'll end up paying less." If this happened, not only would I be confused, but frankly, I'd be out of there! My expectation was that I was hiring a professional to consult WITH me, not to sell TO me. And I would be very skeptical about this attorney giving me truly objective advice if her pay was contingent on selling me something and on how much I spend overall.



On one hand, real estate has always been considered a sales profession, paid by commission. And the fact is that as an independent contractor, a real estate agent needs to move the "inventory" as quickly as possible and for as much money as possible, if they want to make a living in this business.

And yet, if an agent is a REALTOR® (most, but not all agents are so make sure that the one you deal with IS), they must follow a code of ethics which among other things requires them to put the needs and interests of their clients ahead of everyone else's, including and most especially, their own. Staying poised and performing in these two conflicting roles is an incredible balancing act, but I'm here to tell you that the overwhelming majority of my fellow agents walk that line every day and they walk it well.

Despite what you might hear in the popular press (more on this later), most real estate agents are hardworking, honest, and ethical professionals who strive, sometimes at great financial sacrifice, to do right by their clients.

When working with a seller, most agents will recommend a listing price that will get the seller the most money in a reasonable period of time, when, by under pricing it, the home would sell faster and they could be assured of being paid. Hence, the conflict of interest. Most listing agents will truthfully counsel a seller on what the market is doing and even suggest a seller not sell their home when the market doesn't favor a profitable sale, even though they only get paid if and when the seller does. When a seller has outgrown their home, I have known many an agent who has counseled them to remodel rather than move, even though they have just talked themselves out of a job.

Now, let's look at the other side. When working with homebuyers, buyer agents (who have a contractual obligation to work in their buyer's best interest) do every day what makes absolutely no sense on paper: to negotiate the lowest possible price for their buyer-clients even though they are paid as a percentage of that price.

The fact that the vast majority of agents routinely put the needs and interests of their clients before their own is a testament to my industry and makes me very proud, but agents are doing so in spite of the commission system, not because of it.

One of the most common questions I receive from sellers is: "How do I know that you are pricing my home for the best value rather than the speed of closing the sale?" And one of the most common questions from buyers is: "Why would you negotiate the best deal for me when you get more money from a higher sales price?" I answer both the same: "My business is built on referral and a few extra dollars in my pocket isn't going to mean beans when you find out that you sold for too little (sellers) or paid too much (buyers)." But while my answer is sound and reflects how I work, it still begs the questions of the inherent conflict of interest when you're compensated for moving product while charged with giving objective counsel and guidance.



In the same way that most agents are hardworking folks who strive to do right by their clients, my experience is that the vast majority of consumers appreciate what a good real estate professional brings to the table and have no problem with paying for quality real estate assistance...if they could just make sense of what they are paying for.

If you're like most consumers, you probably have never really understood how the commission system works. Today, with housing prices having risen so fast, a 5, 6, or 7% commission can sometimes amount to more than the equity in your home. When the economy is good, home sellers may silently wonder about the commission system, but when the economy tightens, they increasingly become vocal and start asking agents some very logical questions:

If I price my home where you tell me to, get it in tip-top condition, and make it easy to show, why am I paying the same thing as the guy down the street who does none of these things?

When my $600,000 home sells, I will be paying twice as much as my cousin across town who is selling a $300,000 home. Why is that? Do you do twice as much work? Or put in twice as much time?

When agents complain to their brokers that it's getting more and more difficult to justify their commissions to the public, brokers overwhelmingly just tell them to show them how much they do for them. And while I would agree that much of the public has no earthly idea of how much work is involved with selling a home, trotting out a list of the "450 Things That an Agent Does" misses the point.

As we'll see in a later chapter, paying by commission has nothing to do with compensating an agent for time or services. Commissions are all about mitigating risk. And until we, as an industry, are willing to call it what it is, and provide choices, we agents will continue to see our compensation erode and our value undermined while consumers are increasingly left on their own without necessary services, expertise, or representation when selling what is and will be for the majority of people, their largest financial asset.

Let's face it -sometimes consumers have real estate needs that don't lend themselves to the traditional full-marketing-package-payable-only-by-commission model. For example:

• Maybe the consumer happened to find an interested buyer on their own, but they need expert assistance in negotiating, troubleshooting, and managing the transaction until it closes.

• Maybe they've outgrown their home (or their house has outgrown them) and they need objective counsel on whether to MOVE or IMPROVE.

• Or, maybe they have no desire to play REALTOR®, and they need a full package of services, but would like to pay the real estate professional for their time and services rendered, the way they pay for most other service providers.

I believe it's high time that the consumer, be offered real choices in what services they want and how they would like to pay for them, as long as they understand three basic economic realities which I'll detail more later:

1. High risk means high reward. If you, as a consumer, want the agent to take all the risk (i.e., you only want to pay an agent if you get your desired outcome), then you're going to have to pay a premium for that safety net.
2. On the other hand, if you would rather pay for an agent's services, expertise, and time rather than a convoluted percentage of your home's sale price, you can't have that compensation be contingent on the sale. Just like any other service provider, if they provide the services and time, they need to be paid for them.
3. If you only want to pay for a six pack of beer, don't expect to receive a bottle of champaign. You get what you pay for. And in real estate, it's very easy to be enticed to go cheap, and becomes evident that when you do, overwhelmingly, you will save pennies, but drop dollars.

At the same time, I also believe that it's high time that hardworking agents stop working (and advertising their services) for free. Nothing in this world is free; not a market analysis advertised in the paper nor the "tour guide services" that agents routinely provide buyers with no assurance that the buyer will actually buy a home, and if they do, buy a home with them. Unpaid hours of work need to be made up somewhere, and under the commission system, they are made up by the transactions that actually close.



No matter how it's presented or dressed up, there is an inherent conflict of interest when an agent is expected to act as a fiduciary agent providing objective, unbiased counsel to clients, while at the same time being paid by commission. This unspoken reality, combined with a lack of choices in the real estate services offered and how they can be paid for, is the elephant in the room. The real estate industry knows it's there because the consumer keeps pointing to it, but no one wants to acknowledge it and certainly no one wants to talk about it.

Our industry has instead become expert at creating diversions, such as skimming a percentage point off the commission when the consumer complains, or charging an "administrative fee" to try to cover their costs, but these diversions are temporary and beg the very real questions.

The industry nibbles at the corners because resolving the real issues requires a major paradigm shift in how we define ourselves as agents and as an industry. It means a new way of thinking and acting, and developing a whole new model in real estate. Dealing with the real issues means looking the consumer in the eye and telling them the truth: that yes, commissions are high - they have to be! It's the price a consumer must pay if they want the agent and their broker to take the risk.

The elephant is growing and to continue to ignore its presence is to see a future of continued decreasing compensation for hardworking agents while leaving the public priced out of vital services and representation and at the mercy of hucksters who would have them believe that selling a home is no more difficult than selling used clothes at a yard sale.

One of my favorite books is, "Sacred Cows Make the Best Burgers" by Robert Kriegel and David Brandt. If there was ever a Sacred Cow, it's the current real estate industry. I didn't write this book so bookstores would have another real estate how-to on their shelves. Frankly, there are enough real estate books on the shelves already, and sadly, most of them are either useless or downright misleading, written by people who have no clue as to how real estate really works.

No, I wrote this book because it's time that we talk straight and clear and lay our cards on the table. It's time that the public is given a clear picture of what it's really like to be a real estate agent today. Conversely, it's time for the real estate industry to start really listening to what the consumer is saying and what they're asking for.

It's time that agents stop selling and start consulting. The public deserves it and so does the hardworking agent.