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Unstoppable Forces and Unmoveable Objects: Real Estate Commissions

Some will have you believe that real estate commissions eventually must fall because the rise of the Internet will marginalize what we do. Disintermediation is the $10 word for the whole process. I personally believe this to be bunk since I never have seen someone actually purchase a home through the web without assistance but that’s another story for another day.

One of the biggest obstacles to change from downward pressure is the role of the real estate broker. It’s here were the fixed costs quickly add up. And it’s also here where the system truly is broken.

Real estate agents simply can’t go into business. They must select a broker under whose (sometimes) watchful eye they will work. Most real estate agents work on some sort of “split” – they keep part of their commission, their broker receives the remainder. This split can start as low as 50-50 and can rise from there to as high as 100% – the agent pays a desk fee, typically, and doesn’t surrender any of their commission.

Agents are not paid directly. As was astutely pointed out a couple of days ago, agents only can be paid by their brokers. Normally this isn’t an issue but when real estate companies start floating checks ahead of filing for bankruptcy or commission checks begin to bounce, agents find themselves not being compensated for the work they have completed.

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What agents must do to get paid also is at the whim of the broker. Some require a great deal of paperwork on every file – I can’t tell you how many times I’ve seen “mandatory” forms from other brokers that already are covered by the contract – others want only a bare minimum and expect the agents to keep the rest.

Don’t file your paperwork, whatever the minimum, and you don’t receive a check. Such was the plight of an agent Jay discussed whose broker wouldn’t release her check until a lender signed off on a piece of paper approving a short sale after closing already had taken place and her buyer had purchased the home. The lender’s response to the agent’s plight: take a hike. Here’s hoping she got paid.

From Dan Melson on Searchlight Crusade last week:

Be certain you understand the real costs involved. They may be large, or seem large, but doing without any of the professional services that have evolved is likely to end up being a lot more expensive in the end. If one is cheaper than another, there is a reason. Find out why; and while it may be that someone is just comfortable making less money, other explanations are such as they do not provide important services that really do make a difference are more likely to be closer to the truth.

Don’t expect them to tell you this, though, especially since most people will just believe fairy tales like “full service – discount price”, and won’t investigate why prices or loan quotes are lower. It shouldn’t surprise any adult that sometimes it’s worth paying extra.

Until a home sells, all of the financial risk for the marketing lies with the agent alone. Not the broker. Not the seller. The agent. To be able to pay for marketing, an agent needs to have a certain level of income. Marketing costs money – it’s a simple fact.

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Agents, however, tend to have a lot of hands reaching into their wallets – NAR dues, NAR assessments for ridiculous “public awareness campaigns”, MLS memberships, monthly desk or office fees – and some of the largest hands belong to their brokers. Not only does this cut into funds for marketing but also in flexibility to help a transaction get done.

From Ardell DellaLoggia on Seattle’s Rain City Guide two weeks ago:

How does a company survive?  If the company has to charge the agent more and more to survive, causing the agent to charge consumers more and more to survive, well then maybe the company should quit.  OR brokers should charge agents less, so they can be free to price their services more fairly, and maybe all will become stronger as a result.

Last summer I was contacted by a client moving to the Valley. We signed a buyer broker agreement and I showed her and her husband several homes. We remained in contact as they planned a second visit; I previewed homes in the interim and essentially knew what home they were going to buy before they ever saw it. (I was right, incidentally.)

More than a month into the process a third-party relocation company stepped in and demanded a referral fee be paid for this client that never was referred. I said no. I won.

This morning I learned that my brokerage is taking an extra 5% out of my commission for my closing tomorrow because the client was referred by agents at another Century 21 office. Their ability to do so is buried in the relocation and referral guidelines of the firm’s handbook so legally, it’s legit. Realistically, though, I’m paying my broker an extra 5% as a referral fee for a client never referred to me. Legally legit. Logically farkakt.

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(You knew the Yiddish was coming. You just knew it mein kinderlekh.)

What can I do about this? What recourse do I have? None whatsoever. Well, except to leave for another brokerage – a major pain in the tuchas.

This isn’t to say the brokers are getting rich either – look at what happened with RE/MAX 2000 locally. Or Las Vegas’ Century 21 Aadvantage Gold, which filed for bankruptcy. Or even Century 21 Metro Alliance, which did the same.

Some would-be renegades and their television cohorts would have you believe that the average commission is “sancrosanct” or other such garbage. Rather, it seems to be the tipping point between survival and the chocolate shake machine. Not everyone can get by on the surprisingly thin margins that exist. And that’s okay. There are way too many real estate agents anyway, especially here in Phoenix.

But thin margins also leave little room to maneuver on behalf of the consumer. Something needs to change. And is it easier for the change to come from brokers who can continue to streamline until they’re running at top efficiency, or individual agents who likely already are running as lean and mean (figuratively, in my case) as possible.

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I know my answer.

Written By

Jonathan Dalton is a Realtor with RE/MAX Desert Showcase in Peoria, Arizona and is the author of the All Phoenix Real Estate blog as well as a half-dozen neighborhood sites. His partner, Tobey, is a somewhat rotund beagle who sleeps 21 hours a day.

10 Comments

10 Comments

  1. Jay Thompson

    January 3, 2008 at 6:42 pm

    “Here’s hoping she got paid”

    She did — her broker finally caved (or had enough to cover) — four weeks after the title company cut her broker the check.

    “This morning I learned that my brokerage is taking an extra 5% out of my commission for my closing tomorrow because the client was referred by agents at another Century 21 office”

    How completely and utterly ridiculous. So much for being “independently owned and operated”. And of course C21 will get their franchise fee right off the top — of both your portion, and the referring agent’s portion. The referring agent broker will get his cut too — though we all know he did *nothing* in this transaction.

    It’s just stoopid.

    Makes a good case for starting your own brokerage and truly working for yourself….

  2. Colorado Online Mortgage

    January 3, 2008 at 10:21 pm

    You can’t buy a house online. Just the marketing can be done online. Buyers will increasingly find homes of interest and agents online, but the rest of the transaction will remain as it always has. So my opinion is that commissions will remain standard. In my own experience in selling homes, I was reluctant to pay a full commission until the broker educated me about what was involved in selling a home. I think educated sellers are willing to pay full commission, but they don’t want to pay a big chunk to an agent who only lists the house on MLS. I think educated sellers will continue to gladly fork over full commissions. They just have to be educated about the finer points — like houses with lots of professional photos sell for thousands or even tens of thousands more, haggled commissions result in lower buyer agent fees which results in much, much less foot traffic, etc.

  3. Chicago Real Estate

    January 4, 2008 at 2:22 am

    I believe there is another nifty little law or adminstrative rule in Illinois regarding disbursement of compensation.

    Brokers must disburse all funds within one business day after receiving notice of the consummation of a transaction.

    Don’t wait to turn in that HUD closing statement!

    Again, I am not a lawyer and I’m not advising anyone about any laws. Go get a lawyer’s opinion if you are in need of advice on the law in your state. Having been licensed in Nevada also, I can tell you from experience that the laws can be very, very different from state to state.

    ======================================

    Disbursement of Escrow Moneys

    The sponsoring broker must keep escrow moneys in an escrow account until the transaction is consummated or terminated, unless the sponsoring broker is instructed by the principals to do otherwise. The sponsoring broker must disburse escrow moneys upon consummation or termination of the transaction, in accordance with the terms of the contract or at the direction of the principals. Disbursement, including disbursement of commissions, cannot take place before the day the transaction is consummated or terminated nor
    later than one business day after the sponsoring broker receives notice of the consummation or termination.

  4. Teresa Boardman

    January 4, 2008 at 4:51 am

    I have thought about this issue a lot. Consumers do not understand that Realtors sell houses and that real estate companies do not. With some brokerages the agent is constantly marketing the brokerage which reinforces consumer opinion that one company is better than another making it harder for independents to gain traction. Because of technology I am not all that sure we need real estate offices. The easiest way to lower consumer costs and have more freedom is to get a brokers license and go out on your own. I think real estate companies need to become more efficient and provide more for agents and consumers of be disintermediated. I will be interesting to see what they do to survive as the agent population decreases. They will have to make some changes.

  5. Athol Kay

    January 4, 2008 at 6:20 am

    Farkakt = “fluffy bunnies” in Yiddish?

  6. Jim Duncan

    January 4, 2008 at 6:51 am

    Two thoughts –

    1) One of my approaches has been to transparent in my fees and expenses.

    2) Virginia has a law that requires disbursement within three days of closing; I have faxed a copy of this to settlement companies before to speed them up a bit.

  7. Chicago Real Estate

    January 4, 2008 at 9:43 am

    I think working for a good broker fixes any compensation issues you may come across.

    I’ve been blessed to work for a truly great broker who I trust completely. There are two of us over here at WeRockChicago.com, and even in the “down” year of 2007, we did about 30 transactions – never a single hitch with getting paid by our broker.

    As with everything in this business, from both a consumer’s and practitioner’s perspective, everything comes down to trust.

    The good brokers will never have an issue with paying agents in a timely manner, and the poorer brokers will be out of business if they don’t stand by their agents and use proper business practices.

  8. IBR Broker

    January 4, 2008 at 12:51 pm

    “But thin margins also leave little room to maneuver on behalf of the consumer. Something needs to change. And is it easier for the change to come from brokers who can continue to streamline until they’re running at top efficiency, or individual agents who likely already are running as lean and mean (figuratively, in my case) as possible.”

    In this case there is a thin line between self promotion and actually offering helpful information, so, with that in mind, I will try to keep a healthy balance.

    I am the Broker/Owner of a 300 agent real estate company in Minnesota. Most of my agents have their primary office out of their homes, but we also offer full office access for agents on an as needed basis. There is no charge for copies or faxes and we have several high-speed workstations. We plan to go paperless this year and will add high speed scanners to get rid of printers/faxes.

    My agents keep 90% of their commissions and can negotiate their fee with clients without brokerage interference. We charge a monthly fee of $125 which covers E&O, 30 hours of CE, Zipforms, use of company signs, Showing Solutions appointment desk, access to two trainers, and all the other usual brokerage-supplied benefits.

    Agents are responsible for the bulk of costs associated with building their business and the emphasis is on agent promotion, not company branding.

    My full time staff of 4 handles accounting, (agents get paid the same day they bring in the HUD 1) and operations (every file is audited twice.) We outsource whever we can, as long as the quality of service doesn’t suffer.

    We don’t affiliate with Title or Mortgage and all our revenue is generated by real estate activities. We are a financially solvent company, even in this market.

    I assume there are other similar business models that combine virtual office and brick and mortar philosophies. It’s all about controlling costs and using technology to streamline the process.

    For us, it has given the freedom to offer more value to our agents and more flexibility for them to grow their businesses. So far, it has been a win-win arrangement for everyone involved.

  9. mark schwartz

    March 3, 2008 at 4:01 pm

    The whole payout and commission issue is one reason I hung my license with a company that has no deskfees and pays out 97% to the field (namely agents).

    No “bricks and mortar” to pay for Connect Realty – The Big Breakthrough in Real Estate

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