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Minimum commission policies: good or bad business?

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With so many bargain basement deals available to buyers, some brokers are implementing a “minimum commission policy”.  They ask buyers to sign an agreement guaranteeing a commission of $X, anything less than that, the buyer makes up the difference at closing.

Many property prices have slipped so low that their position is that they need to net $X per closed transaction to cover the time and effort put forth to find, show, negotiate and close a deal.  This concept is not too different from the more traditional buyer-broker agreement, with one large difference.  Traditional buyer-broker agreements are normally written to guarantee a fixed percentage that the broker requires, regardless of how low or high the sales price is, whereas the intent of this new twist is to merely cover minimum operating costs per transaction.

The argument against minimum commissions is that it is not fair to the consumer.  The buyers wouldn’t have to pay that difference should they buy using another agent who is happy to receive whatever the listing agent/seller is offering.  The market is the market.  Furthermore, the detractors of minimum commissions would add that the people buying these lower priced properties are already at the low end of the economic ladder and it is unfair to put an additional financial burden on them.

Proponents of the minimum commission believe that their time, knowledge and expertise in finding and negotiating deals is worth a minimum of $X and any less than that just doesn’t make business sense for them to work on those transactions.  They state that the buyer can make the decision in the front end if they want to work with them under those conditions or not.  Furthermore, they state that many of the lower end properties are being bought by cash investors, not retail buyers.

The argument for and against minimum commissions is a heated one and it comes down to what makes better business?  Looking out for consumer  first and foremost which will breed good-will, now and in the future, or making business decisions based on what you need to net per transaction, to be profitable.

I’d like to hear your thoughts, pro or con!

Image courtesy of jepoirreier

Janie has been in the development, construction and real estate industries for over 20 years. She began her career in commerical construction and has slowly worked into all of the related industries and added residential properties to her resume 7 years ago. She is currently the co-owner of sister companies, Papillon Real Estate and Papillon ReDevelopment (a construction and project management firm). Janie blogs for The Coral Gables Story. In her "free" time, she is a graduate student of Atlantic History with a focus on the history of business and technology. She is a lover of geo-anything. She loves the story.

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44 Comments

44 Comments

  1. Robert Drummer

    September 1, 2010 at 10:57 am

    Great question and one that requires some thought.

    As far as fairness goes, that is a two-way street. Is it fair that an agent is only paid on contingency and that a client’s last minute decision (emotional or logical) could mean no compensation for the agent? Fairness must be a two-way street.

    Yes, the market is the market. No client is required to agree to proposed terms. If they don’t like the terms, they can hire someone else. It’s just one part of an agent’s value proposition. Agent’s have the same choice, although I don’t see enough agents saying no when they should.

    I think clients respect the agent that explains the process, including compensation. The agent that is willing to do everything for free and can’t say no to any request is probably not the best negotiator. I want agents that stand up for themselves because I know they will stand up for me.

    So, is it good business? I think any client worth keeping will understand an agent’s need to have a margin built into their business. If they don’t, let them find another agent willing to lose money.

    Until your suppliers and vendors are willing to accept “good-will” as payment, you’ve got to watch out for your bottom-line first.

    After all, if you’re not in business when they try to refer their friends and family, what’s the point?

    • Janie Coffey

      September 1, 2010 at 11:35 am

      Robert, “Until your suppliers and vendors are willing to accept “good-will” as payment, you’ve got to watch out for your bottom-line first”, great point! Good will doesn’t pay the bills.

  2. BawldGuy

    September 1, 2010 at 11:18 am

    Commissions are negotiable or not, right?

    • Janie Coffey

      September 1, 2010 at 11:34 am

      @bawldguy, sellers certainly ask the question “is your commission negotiable?” often enough!

  3. BawldGuy

    September 1, 2010 at 11:37 am

    A potential solution would be to charge a ‘retainer’ fee equal to the minimum commission. Anything received in commission over that amount would be credited to the buyer in escrow. It also would serve to separate the talkers from the doers — never a bad thing.

    • Fred Romano

      September 1, 2010 at 12:07 pm

      Good luck getting buyers to pay a “retaining fee”! They will just go to another agent that doesn’t charge one. I don’t think it’s even legal in some states to charge buyers for services “to be rendered” and not performed yet.

  4. Benjamin Ficker

    September 1, 2010 at 11:51 am

    When I first got my license in 2005, I remember agents telling me how to get my full commission on listings. One script they used was something like “Our commission is based on a percentage, when the market does well, we do well too. But when the market goes south, we make that much less.” It wouldn’t seem right to charge a minimum but no cap (Especially if you were an agent that used that script). That being said, if an agent needs to make $X per deal, don’t work with a buyer when they say they are looking at a $50,000 home.

    • Janie Coffey

      September 1, 2010 at 1:08 pm

      it’s a tough call, especially if someone did use that script for sure!

  5. Matt Thomson

    September 1, 2010 at 11:56 am

    In many markets, I don’t think it’s a bad idea at all. Like you said in the post, a buyer doesn’t have to choose to work with that agent. They can hire an agent who won’t charge that premium.
    Our market still has a fairly high average sales price, so it’s really not necessary, but if you’re selling $50k houses, that may become a necessity.

    • Janie Coffey

      September 1, 2010 at 1:10 pm

      yes, here in Miami, where homes were once MINIMUM $200K, you can now find homes for $25K, etc. it’s a big difference in earning potential for the same amount (or more) of work….

  6. Fred Romano

    September 1, 2010 at 12:11 pm

    Why not just charge the buyers a “flat fee” for use of your services. You might be able to charge for 1/2 upfront (non-refundable), then the other 1/2 only upon successful closing. If you earn more from the sale, give it to the buyer as a rebate for using your services.

    You could even break it down… more homes I show, longer time it takes, higher the flat fee!

  7. BawldGuy

    September 1, 2010 at 1:03 pm

    It’s all in how you do the retainer fee, Fred. Been doin’ it since Carter was in office. 100% of my buyers still do it. Mine is for services already rendered. Of course, my clients are confident what I’m gonna do, I actually do. They tend to be results oriented.

    • Janie Coffey

      September 1, 2010 at 1:12 pm

      It certainly is a way to cut the wheat from the chaff!

    • Fred Romano

      September 1, 2010 at 2:47 pm

      Yeah well from what I have been able to see of you, you work with investment buyer types. I doubt regular agents working with typical residential buyers will have any luck with a retainer.

      • Janie Coffey

        September 1, 2010 at 7:04 pm

        I know an agent who does here in Miami all day long, with res buyers, mostly out of towners, to separate the looky loos

  8. Danny Nappi

    September 1, 2010 at 1:04 pm

    Are agents reducing their commission on high end homes? It all works out in the end. I would never charge my buyers a fee, sometimes you need to suck it up in the name of business.

    • Janie Coffey

      September 2, 2010 at 2:36 pm

      this is certainly a valid point, a $2M home doesn’t cost that much more to market than a $1M home, yet will yield a considerably higher commission

  9. James Malanowski

    September 1, 2010 at 1:39 pm

    If agents treated real estate as a business they’d all have a minimum fee regardless of buyer or seller. Sit down and figure out what your expenses are per transaction and set your price. I’ve set a minimum fee at the brokerage level. If an agent can’t get a buyer to agree to it after explaining how real estate brokerage works then they’re doin’ it wrong or the buyer isn’t serious.

    • Janie Coffey

      September 1, 2010 at 2:42 pm

      well said, James. I think too many agents don’t realize that they are business owners and if you did, you’d look at your business a little bit differently.

  10. Liz Benitez

    September 1, 2010 at 2:41 pm

    I wasn’t a Real Estate agent in 2005 so I can’t say my commission has dropped dramatically like some of you. I take the commission percentage the seller is offering and split that with my broker. If the buyer is only looking to get a 50,000 condo and I don’t want to put out the work for that low of a commission, than I don’t take the client.

  11. BawldGuy

    September 1, 2010 at 2:51 pm

    I think you make an excellent point, Fred. It’s likely only those agents who can demonstrate they consistently produce results who will succeed with the retainer approach.

  12. Rob McCance

    September 1, 2010 at 11:00 pm

    I say Realtors invented this 6-7% idea and are happy to stick that to everyone as the “norm,” whether it’s a $200k home or a $20M home, as ridiculous as the latter works out.

    Given that, they (we) should stick to the plan on the low end as well.

    I realize this does not add up because 6% of $25k is hardly worth anyone’s time, however it is often times the same amount of work.

    So, if that’s not worth your time at your current station in business, then don’t go there. The market is efficient and someone will step in and take that business. Someone who needs it and wants it.

    So, my vote is stick to the norm we created and only take business that makes sense for YOU.

    Simple.

    • Glenn in Naples

      September 3, 2010 at 1:37 pm

      Rob – you make an excellent point what does an agent think their time is worth. After all, time is a non-renewable resource. If an agent can invent his/her time which will pay back dividends in the future then it makes sense not to work the lower end properties.

  13. Nadina Cole-Potter

    September 2, 2010 at 6:11 am

    As a commercial broker, it has become my standard practice to require buyers to make up the difference in a commission that is no less than X% on the buyer side. There are sellers’ brokers currently taking $10+ million listings whose confidentiality agreements with buyer principals say out front that there is no co-broke in the deal and the buyer will be responsible for his/her/its broker’s commission.

    When I team up with another broker (generally from out of state) who is bringing the buyer, my Mutual Non-Disclosure, Non-Circumvention, Cooperation and Fee Agreement lays out the requirements and that broker is bound to get the same agreement from his/her buyer. In these economic times investor buyers are used to paying all or part of the commission especially if it gives them access to opportunities they would not otherwise be exposed to.

    I won’t work with a buyer who won’t guarantee a minimum commission and has said out front they won’t sign an exclusive representation agreement. Instead, I use a MNDNC and Fee Agreement which binds them only to the properties I present to them. My specialization is to research and target off-market multifamily properties (not listed by another broker) and to make unsolicited offers so in order for this to work, I keep a log of what properties I present to whom and when.

    My goal with each buyer is to be so good at what I do in my niche in my market (greater Phoenix) that even if another broker presents a property to the buyer, the buyer will request up front (before property information is delivered) that the broker work as a team with me. I am happy to collaborate with both local and out of state brokers. In commercial this works better than making a referral and depending on the other broker to get the deal done.

    My suggestion to residential agents: charge investor buyers and charge second-home buyers. Decide if you want to even serve homeowners who are buying at the very low end. While home prices have gone down, except for screaming loss-leader specials, other prices have not. There are agents who have made a big business of volume at the low end. Leave that business to them.

    Real estate is about the last bastion of 100% contingent compensation. Maybe life insurance? It can be a sucky, draining, anxiety-provoking model so one must do everything to protect one’s self in difficult times.

  14. Joe Loomer

    September 2, 2010 at 7:18 am

    It has been my experience that my buyers and sellers always wanted the same level of service, regardless of the price of the property or the amount of the commission. I knew what my hourly rate was, and my response was typically “I’m sorry, my commission is non-negotiable.”

    When listing agents approached me in terms of reducing my commission to make a deal work, I pointed them to the ethics regulations and told them they were breaking them. I have made concessions to get to the closing table, but it is alway my absolute last resort, and usually happens about 30 seconds before the buyer or seller walks out of the closing for good.

    I also like what Rob said – I was perfectly happy to list luxury properties at a lower rate, and NAR statistics prove there is no seller benefit to a higher comission to make it more attractive to agents. Having said that, anything below 75K or so I’d do a flat fee that is typically higher than 6% in order to make it worth both my time and the buyer agents’ time.

    Navy Chief, Navy Pride

  15. Greg Lyles

    September 2, 2010 at 12:21 pm

    Our listing agreements have a clause that allows for retainers. I’ve thought seriously about charging a minimum fee that covers my expenses associated with listing a home and then crediting the seller the amount if we make it to closing. I already require sellers to get a professional appraisal and home inspection prior to listing and credit them back the costs at closing – it would not seem that difficult to sell them on the value of a retainer for my other costs.

    As another person mentioned, sellers (and buyers) often make illogical decisions to terminate a brokerage relationship and we are supposed to bear the cost.

  16. Erica Ramus

    September 2, 2010 at 1:41 pm

    Commissions are negotiable. As a professional you state your FEE to the consumer, in writing (buyer or seller). Buyer or seller can agree or disagree.

    If they disagree with what you charge either you can negotiate the fee or the buyer can MOVE ON to another agent.

    Simple.

    It does not matter if you agree or disagree with any one agent’s policy. The market (consumer) will decide whether the fee is too high or not. If it is, they can just move on.

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