Housing News

Enough With Rhetoric. Let’s Get to the Real Issue


What I Had Hoped

Though you never would believe such a thing is possible, I treaded lightly when I wrote my post spoofing the never-ending debate over real estate commissions by comparing those commissions to the tip we pay our server when we go out to eat. What I had hoped was to spur one and only one thought – “who the hell cares what a server makes? It’s none of our business, right?”

In that respect, I believe the post for all of its brilliant wit failed.

Maybe I’m being a bit too hard on the poor little post. Maybe stopping or even slowing the debate over what real estate agents make is like trying to stop a speeding train with an elk. The elk will cause a little damage but at the end of the day the train’s going to keep rolling on.

This Time It’s Personal

I’m stealing dear Poppy’s headline but I’m certain I’ll be forgiven. The debate over real estate commissions and how they’re paid and whether they are fair and whether there will be or must be a change is personal for me, not because I particularly care what your opinion of how I conduct business might be but because there are people who feel it’s open season for debate in the first place.

Your theories are my 1099s. If you are a client (or prospective client) and you don’t agree with what I charge in my business, don’t hire me. Just like if you don’t like the product or prices in a store or a restaurant, you have the right to shop elsewhere in the mall. If you’re not a prospective client, you’re not going to pay me a cent anyway so why the hell do you care if someone else is willing to do so?

Let’s Talk About Your Salary

If you feel real estate commissions are fair game for discussion, that’s fine. But let’s be fair. Please comment below with your job description and current salary. I then will find an appropriate message board and we’ll start to discuss whether the public should have to pay your salary for the benefits we as a group recieve. If you’re not public-facing, no matter. I’ll find a way to tie it to a public product where the cost of your salary is included in the price of whatever the product happens to be.

Ludicrous? Why? Shouldn’t everyone’s 1099 and W-2 be open to public scrutiny? Is a real estate agent really so much more of a public figure that there’s a different standard for us than for anyone else who earns a paycheck and isn’t in same way receiving funding from the tax base as a whole.

Put another way, unless you’re the one hiring me you’re not paying me a cent. So mind your business.

Bluffing With Bull … er, Rhetoric

Of course, to some out there the debate is their entire reason for existence. It took a little longer than I had expected but any commission debate almost always will lead to comments from the agents who charge a flat rate that theirs is the only viable business model.

If such a model works for you, go for it. Just don’t tell me that I have to change or else I’ll be out of this business. Because that’s simply not true.

A couple of years ago, a high profile agent here in Phoenix (who even sells a home once in a while) enacted a rebate/flat rate model for buyers. I predicted that there wasn’t sufficient interest among the buyers’ set for the model to gain any traction. Shockingly, I was correct. (Still waiting for that admission to come.)

There are consumers looking for the best bargain just as there are consumers who will pay a little more if they perceive they’re receiving additional value. It’s a basic fact. Morton’s remains in business and so does McDonald’s. Different tastes for different budgets.

But you never see McDonald’s telling Morton’s that they have to drop their prices or else. Somewhere down the line, it was realized that the best way to market yourself is to market what it is you do, not what is wrong with someone else. You can be the product of choice or the lesser of two evils. That choice is yours.

Hit Me With Another Analogy, Baby

Absolutely.

Once upon a time, all stockbrokers worked on commission. Back in the 1970s rules were changed and along came Charles Schwab, who introducted the concept of “discount brokerage.” Schwab since has gotten away from the idea of “discount” because, predictably (not but not then when there was no Internet), others entered the market who could do the same thing for less.

Fast forward to 2008 and guess what? The so-called traditional stock brokers still are working on some sort of commission model, just as they always have. And there also are a number of places where you can trade your stocks for a flat rate so easily that even a creepy talking infant can do it.

There’s room in the marketplace for both. There’s a different client set for both. And both still flourish.

So What’s the Real Issue?

You mean, other than the fact that I’m tired of the idea that my tax return is open for public debate?

It’s just this – that the real issue here, what commissions the public “should” pay, is nothing more than a false argument brought to life through the Internet. Whether a question makes any sense is irrelevant in a day when anyone with a computer camera can be an “iReporter” for CNN (as opposed to just being some guy or girl with a camera.)

The question of whether real estate commissions have to come down is a non-question. What happens in my market is different than what happens from yours, and both are different than what happens in Canada.

As long as there are buyers and sellers for both flat rate and percentage models, both models will continue to co-exist … almost as peacefully as the strident hard-liners who identify more with red states and blue states than the United States.

No elk were harmed in the writing of this post

31 Comments

31 Comments

  1. Bob

    September 4, 2008 at 9:27 pm

    Ludicrous? Why? Shouldn’t everyone’s 1099 and W-2 be open to public scrutiny? Is a real estate agent really so much more of a public figure that there’s a different standard for us than for anyone else who earns a paycheck and isn’t in same way receiving funding from the tax base as a whole.

    Put another way, unless you’re the one hiring me you’re not paying me a cent. So mind your business.

    The problem with that argument is that real estate companies love to take out ads at the beginning of the year to brag about what their agents did the previous year. When an industry regularly brags about dollar volume and GCI, they have given up the “mind your own business” soapbox.

  2. Jonathan Dalton

    September 4, 2008 at 9:36 pm

    > When an industry regularly brags about dollar volume and GCI, they have given up the “mind your own business” soapbox.

    So … McDonald’s used to keep count of the burgers sold right out front of the sign. Does that mean that each individual franchisee has to defend whatever profit they make? “Why should I hire you?” “Gee, Mr. Seller, I’d love to tell you but I wouldn’t want to be seen as bragging.” Not sure that would get the signature on the paper.

  3. Ted Mackel

    September 4, 2008 at 11:18 pm

    This post will certainly raise the ire of the Barrys :0

  4. Jonathan Dalton

    September 5, 2008 at 12:04 am

    There’s no reason to bring the Barrys into it, Ted. It wasn’t them that got me thinking about this.

  5. Pilchard

    September 5, 2008 at 2:42 am

    Speaking as a member of the public and a prospective second time first time buyer (don’t ask) I don’t care what commission you charge or how much money you make just as long as I get the best deal possible.

    If you’re good enough at what you do to be able to charge high commission, make a good living and keep the majority of your clients happy, surely that is just plain old success isn’t it?

    What is wrong with that?

    Go and make lots of money. You probably deserve it.

  6. Poppy Dinsey

    September 5, 2008 at 3:14 am

    It’s such a tricky issue! There’s something screwed up about commissions in my opinion, but the way real estate works in the UK is very different and that’s all I really know. Take a £2million beautiful Surrey home, the agent take some photos, puts up details in the window, answers some calls and does some viewings then takes a fat £60,000 commission having done a few hours work. Houses like that walk out the door (at least they always did, not true in todays market). On the other hand, an agent may have a crappy £100,000 house to sell, which is overvalued, the owner never makes it available for viewings, nobody wants to see it etc etc. When that property eventually sells at £90,000 the agent gets a commission of £2700, yet they’ve worked their arses off! It seems a simple 3% isn’t fair, to the seller OR the agent.

    But then I get snarky with flat percentages with wait staff too, if you order the cheapest things on the menu then you’ll pay a much smaller tip (because it’s just a simple 15%), yet the waitress has run back and forth to your table as much as the guy who’s drinking Cristal and eating lobster.

    BUT, I will say one thing…in this world you pay for things you can’t do yourself. That’s why the dentist costs a frickkin fortune, you can’t fix your own teeth. If you think you can sell a house on your own, then do it. But if you want a professional to take care of the process, expect to pay for the pleasure. It’s not fair to single out one profession as earning more money than they deserve, and to the people who think agents are laughing all the way to the bank, go FSBO.

    And Jonathan, any headline of mine is a headline of yours 😉

  7. Reuben Moore

    September 5, 2008 at 6:08 am

    Jonathan, excellent discussion on pricing and commissions. I particularly like your position that there is room in the market for both models. I would add that the real estate business is rapidly morphing into a spectrum of models, much like retail (a point I have previously made on your blog as well).

    But, let me ask a question: Why are there infinitely more McDonalds restaurants than Mortons?

  8. Danilo Bogdanovic

    September 5, 2008 at 9:49 am

    I say “to each his own” – there’s a market for all types of business models. Pick the one that works best for you and run with.

    Reuben – It’s called “high volume/low margins versus low volume/high margins”. And McDonald’s has to appeal to it’s shareholders – Morton’s does not. Once again…different business models that both work very well.

    On a side note…when a reporter once said that McDonald’s was in the burger business, McDonald’s answered, “No, we’re in the real estate business.” They own the land that every non-franchised McDonald’s is on. That’s one reason why there are so many of them.

  9. Jonathan Dalton

    September 5, 2008 at 9:54 am

    Simple answer is there’s greater demand of the $5 menu than the $30 steak, Reuben. And the whole thing works on two conditions – a) the burgers keep coming out every time you pay the $5 and b) your paying the $5 isn’t contingent upon you eating the burger. That’s what happens quite often in this business … people order the “food” by hiring us for our services but payment isn’t based on the service but on the resolution.

    Poppy … I knew you’d be fine with the theft. 🙂

    Pilchard … second time first-time home owner? That doesn’t sound good … best of luck to you!

  10. Bob

    September 5, 2008 at 9:58 am

    Jonathan, you can answer the seller however you like. My point was simply that if your broker makes a point of telling the world how much you did on a commission basis, then telling the world that discussing your commissions is off limits strikes me as laughable. But then i find most of the public arguments real estate agents make as laughable – bordering on the absurd.

  11. Jonathan Dalton

    September 5, 2008 at 10:07 am

    Now I see what you’re saying, Bob … but I still disagree. The GCI is simply a metric, a statistic to be twisted as needed to suit whatever purpose is trying to be obtained. If you want to debate whether real estate success should be framed in those terms, that’s fine. I’m good with that. But that’s not what I’m talking about here. I’m talking about the often personal argument that essentially says I have no right to charge what I choose to charge, even if it’s what the market will bear.

    Public corporations release their profit margins or losses every quarter. But when Safeway posts a profit of whatever dollar amount you choose to use, I don’t see public outrage that the store at 59th and Thunderbird made an extra profit by not accepting double coupons on Wednesday.

    And since my broker doesn’t talk about our office’s GCI and I don’t discuss mine, that would make us both exempt by your logic anyway.

  12. Bob

    September 5, 2008 at 10:40 am

    I was speaking in general terms, as I assumed that your office didn’t do that. Others do, though, and it puts the topic on the table. I and not defending the practice, agree that it is a metric that means little to the consumer, and would prefer that brokers would stop doing that.

    Public corporations do make an issue of it, and for different reasons. For instance, walMart was all over the TV last night advertising their $4 dollar prescriptions and they routinely make an issue of their competitors making too much profit on pharma.

    McDonalds has decided to compete with Starbucks and had press releases about the profit margins, inferring that Starbucks was greedy.

    Car dealers do this all the time. With my last car deal, the manager brought up more than once the profit he was entitled to, asking me what I thought was reasonable for him. I told him I didnt care if he made a dime, and then pointed out where his backend profit was coming from and for how much.

    I’m talking about the often personal argument that essentially says I have no right to charge what I choose to charge, even if it’s what the market will bear.

    This is where you lose me. Who is saying that – the consumer, who is told that commissions are negotiable?

  13. Benn Rosales

    September 5, 2008 at 10:48 am

    We seem to want to defend ourselves today in the terms disruptors wish us to- we’re having a conversation framed the way in which they framed it… the problem is, the frame is wrong and always had been.

    The thought I have on both articles is that I’m not paid to wait a table, I’m paid to build a strategy that will bring the most possible cash to the table in the shortest amount of time at my expense. I don’t take orders, I’m paid to give them- if anything, I’m the manager, not the waiter, and you pay top dollar for great managers, in fact, great managers are head hunted, given a sign on bonus, an expense account, and are given great latitude in the dynamics of operating their business using their (owners)philosophy. I as that manager decide if I agree and can get behind their philosophy- that’s why we turn down many listings.

    I think if someone equates themselves with a waiter, they probably should be having the conversation of lowing their commission because waiters are a dime a dozen. The disrupters framed it exactly this way, for exactly this outcome.

    The frame is wrong.

  14. Reuben Moore

    September 5, 2008 at 12:49 pm

    Benn, I would point out that great managers can be found at Mortons and at McDonalds; at Nordstroms and at the greatest disrupter of our time, Walmart. But let’s assume for a minute that Nordstroms and Mortons take all the best managers and Walmart is left with the second-raters. Or perhaps Sears and JCPenney’s get the second-raters and Walmart is stuck with the third-raters. Question: Will people continue to shop Walmart? Even more interesting, will a vastly greater number of people continue to shop Walmart over Nordstrom?

    Jonathan, I realize that the contingent nature of our business leads to higher-than-otherwise fees (at all levels). But remember, what you said about the burgers coming out every time you pay, is also true for every order placed at Mortons. It is not fair to only compare the low service/low price model with our contingent fee driven business. My point is that the real estate business wants to believe it is immune to the demand curve….Well, it used to be.

  15. Jonathan Dalton

    September 5, 2008 at 12:55 pm

    > My point is that the real estate business wants to believe it is immune to the demand curve….Well, it used to be.

    Where’s the evidence, Reuben? Show me a real estate brokerage on a percentage basis that has gone under and I’ll show you a flat-rate business that has done the same.

  16. Reuben Moore

    September 5, 2008 at 1:11 pm

    Jonathan, even if all flat-fee firms fail, the demand curve still applies. Just in the last few years we have seen average commission rates fall. Perhaps driven, some, by the flat-raters. But I suspect, more driven by simple price (percentage) competition.

  17. Jonathan Dalton

    September 5, 2008 at 1:15 pm

    I’ll grant you that, Reuben … but I also believe there’s a second demand curve in play. Not every licensed agent knows what they’re doing. Low supply, high demand. For those agents, the normal demand curve may not apply. Which is another reason the whole debate is based on a flimsy premise. The industry, as it were, does not have to do anything. Individual businesspeople need to make the decisions that make sense for them.

  18. Benn Rosales

    September 5, 2008 at 2:06 pm

    Reben- there is no scale difference for GMs, it’s based on volume. There is no such thing as a discount executive.

  19. Reuben Moore

    September 5, 2008 at 2:35 pm

    Benn, great agents deliver value. Value equals Service/Price. Value can be found at any price point and at any service-level.

  20. Benn Rosales

    September 5, 2008 at 3:04 pm

    Great agents sell substance, not adjectives. Ask Russell Shaw when the last time he sold hand holding.

  21. BawldGuy

    September 5, 2008 at 7:19 pm

    After reading the post, (Thanks Jon) and the comments, I’m elated we’ve been experiencing the cyclical flushing of moronic agents. (Is that last phrase redundant? My bad.)

    Though I agree with Jon, and Benn’s point of incorrect framing is also on the money, I go a step further.

    This discussion (not the post) and the direction it’s taken, sickens me.

    I know that’s harsh. But it reminds me of what happened to me a few years ago. I was workin’ in a large firm with 150 agents. One afternoon while in the kitchen makin’ coffee from my own private stash, mindin’ my own business, a relatively newly arrived agent said hi to me. As I’d not met her before, I introduced myself. There were about 8-10 agents in the kitchen room kickin’ back with coffee/snacks.

    She noticed I’d avoided the company coffee, opting to grind my own and brew it myself with a 1-cup setup. Out of the blue she asked me if the office coffee wasn’t good enough for me, whereupon I responded that it was orders of magnitude below my standards — and therefore it indeed wasn’t good enough for me. I said this jokingly as I never suspected she was serious. She took umbrage, and began to lecture me, (no really) about what a jerk I was to bring my own, blah blah.

    When she was finished, I asked her if she was married. She was. I asked her if I reminded her of her husband. I certainly didn’t, she huffed. Excellent.

    See, Ms. Bully, the question here isn’t whether I should drink the office coffee or my own. The question here is who decides, and it ain’t you. Now since I’m not your husband, you don’t get to decide for me. And since I don’t remind you of him, you’ll remember this the next time we run into each other, right?

    As a broker, I can charge whatever the hell I choose, until the market decides the results I deliver don’t merit that amount. Furthermore, if I choose, and I do, not to make what I charge per transaction, or make in a year public knowledge, there won’t be any sleep lost because others thinks I should.

    You see, others, including you, whoever you are out there, don’t get to decide that for me. When it comes to my business, and how I run it, and what I charge, you get to shut the hell up.

    See how easy that was? 🙂

    You and me, Jon.

  22. Russell Shaw

    September 5, 2008 at 7:48 pm

    Correct. We sell no hand holding. Everything Jon, Benn and Jeff said is correct (as usual). 🙂

  23. Antoinette Scognamiglio

    September 5, 2008 at 8:43 pm

    As old as it is, always the perpetual topic…what do you do to earn your commission. The fact is that the “job offer” from listing extends to expiration of listing. Should the agent be effective enough (either via effective pricing counseling, marketing or market exposure), the agent gets paid. If not, the homeowner gets another shot with another agent if they so desire, with no financial obligation to the original agent.

    Here is the bugger that haunts me…if you are NOT involved in real estate marketing and sales 24/7 as I am, how do you dispute the value that an experienced realtor brings to the table if you haven’t even hired one? You can’t, and you place yourself at a disadvantage because you can’t possibly speak or negotiate from the point of an agent who has seen or sold in your market area. If you don’t have your marketing handled by an intelligent, aggressive and knowledgeable realtor, you’re coming into the game with half a team.

  24. Jonathan Benya

    September 5, 2008 at 8:59 pm

    Yes, there has been a downward trend of falling commission rates. It’s possible that improved communication and understanding of our industry has helped consumers push down commission rates, but we still see flat-fees continuing to fail (RedFin has had multiple cash infusions, anyone see them operating in the black yet?).

    It’s like the coke vs. pepsi debate: Everyone has an opinion, and none of them are necessarily “right”.

    What I have noticed is that as the market turned sour, my partners found increasing pressure to cut the commission to get the deal. We were constantly being underbid by our competition, and found we were forced to expand our service further in order to stay one step ahead.

    Here’s what I find fascinating: In the last 6-9 months, I’ve had NO PROBLEM with negotiating commission. I’m finding less and less low volume agents competing for the business (I can only assume it’s related to dropping membership in the local association)!

    We get to set our own rates, and I fully believe that my service is worth 6%. Clients in my area seem to be less concerned with getting a “deal” on their commission rate than they are with getting an EXPERT to work for them. It’s become a monthly tradition to hear clients say “I chose you over agent X because you seem to be more of an expert even though he was willing to charge 5%”. That alone is proof positive for me that full commission agents are in this for the long haul.

    It’s very easy to marginalize an agents expertise, when the market is hot and houses sell instantly. When things turn cold it brings back to light the reason that we charge what we do. I fully expect to see discount brokerages come and go, hell I wouldn’t be surprised to see a few actually gain traction! I will not be worrying about future significance, however. Discount concepts and traditional models need each other, much like coke needs pepsi.

  25. Tom Hall

    September 5, 2008 at 9:09 pm

    No two agents/brokers are created equal yet the marketplace perceives the value of the services of any agent to be equivalent. The key isn’t what we charge, the key is the value we deliver.

    If you can’t differentiate the value and service you provide, you’ll continue to be caught up in the discussion regarding what you “cost” versus the value you deliver – two very different concepts.

  26. Reuben Moore

    September 6, 2008 at 12:54 pm

    Benn, great agents sell substance. Sure. But much of what passes for “substance” in this business is designed less to move the property and more to justify our high commissions. Why can’t the ever increasingly well-informed consumer choose to forego some of this “substance” with a concomitant reduction in fees (be it a flat-fee or a lower commission percentage)?

    We do not have to agree on this and that is my point about the real estate market morphing into a spectrum of different business models offering more choice than ever before to the consumer. This is healthy – for the consumer and for the industry. Hopefully, Jeff Brown will be the only one sickened by this concept.

    Finally, I did not realize I was stepping into the lion’s den here, but I appreciate the opportunity to “dissent.”

  27. Jonathan Dalton

    September 6, 2008 at 3:18 pm

    The assumption, Reuben, is that commissions are high to start with. I personally don’t feel my commissions are too high, looking at the expenses that accrue as part of doing business. I’m not in the business of bilking people … I run my business on fairly thin margins as reflected by what I charge.

    As I’ve said before I have no problem with a flat fee but in that case I would want payment up front to make sure my basic expenses are covered. I’ll take the risk for the higher fee but not for a fee at a break-even point.

  28. Russell Shaw

    September 6, 2008 at 9:02 pm

    Regardless of what one might read in the paper, there is no downward pressure on commissions from the public at this time. The normal downward pressure on commissions stopped when the market changed from a seller’s market. The only downward pressure on commissions I’m seeing at this time is from banks: what they will pay for commissions for REO sales and short sales.

    Anyone who isn’t an agent who thinks my commissions are “too high” should list their home with someone else. Anyone in the business who thinks my commissions are too high should charge the lower “correct amount” they feel is fair for their services. They will get no resistance from me – I promise I won’t try to stop them or explain why they are wrong for charging that amount.

  29. James Malanowski

    September 9, 2008 at 11:20 am

    Funny how this is true even though the folks who argue for buyer rebates, etc base their debate on the statement that the buyer is paying the commission and not the seller.

    Someone else above stated that if you’re not paying the fee, it’s none of your business … Amen. I’ve said the same elsewhere and been blasted for it. If you didn’t hire me, what I make is my business. If you want a say in what I’m getting paid, hire me and pay the bill.

    Regarding the REO statement … Very true. This is because we are not in a Buyer’s Market as people like to say, but in an REO market. This is the Golden Rule in action … He who has the gold (low-priced inventory) makes the rules.

    – James

  30. John Kalinowski

    September 14, 2008 at 7:59 am

    I’m not arguing either way, just wondering why it’s always assumed that lower rates lead to less service or marketing. What happens one day when a company actually offers more service and results for a lower price, wouldn’t that be an advantage? Wouldn’t they squash the competition?

    This whole idea comes from a Seth Godin article titled “The 7% Solution”. Not sure how to embed the link here, so here’s the complete one:

    https://sethgodin.typepad.com/seths_blog/2007/11/the-7-solution.html

    Here’s part of it:

    >>>>>>>>>>>>
    The 7% solution

    Okay, it’s a simple idea:

    If you’re a real estate broker, you work in an industry where everyone used to charge the same fee: 6%. Now, though, discount brokers are turning up the heat on fees. Lots of brokers are unhappy with this.

    The challenge is… what if you had to charge 7%. What if you had to charge more when everyone else was charging less?

    What would you do? How could you make it worth it?

    Now, just imagine what would happen if you did that at 6% or even 5%? You’d be unstoppable.
    <<<<<<<<<<<<<<<<

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