With the Buyer agency coming to the forefront of discussions about real estate purchases, there’s been a lot of criticism about the amount of Commission earned by a real estate professional on a transaction. The claim is that agents are overpaid because the commissions on most properties are so generous. (There is an extra claim that this somehow impacts house prices but let’s not waste time on that myth because it’s just not true. I have been licensed to appraise property for over 40 years. Factually, the presence or amount of commission paid to real estate agents in no way impacts the value of real property.) Most of these criticisms about the size of agent compensation are made by people accustomed to going to work and being paid for every hour they work. Real estate professionals aren’t paid that way, and the critics need help seeing the entire agent compensation structure.
Success Based fees
Unlike their critics, real estate agents most commonly earn their income through a success-based fee. By that, I mean that the real estate brokerage and the agents that work for them are not paid anything unless they provide a successful result for their clients. That means that typically, the agent is working far more, and earning far less than might appear at first glance.
Real estate professionals often work for buyers doing research, providing neighborhood information, showing property, etc., without getting paid because a transaction is not consummated or, sometimes, even entered into.
Consumers benefit from the thousands of hours of professional service for which they do not have to write a check. That work never becomes part of the compensation discussion. Before we dismiss these services provided by the agent tainted by the rationale that they don’t deserve to be paid because they didn’t achieve a successful (or acceptable) outcome for the consumer, I suggest that no other service suffers in that manner. An accountant who does a lousy job or makes a mistake is still paid. The attorney who loses the litigation is paid. The Doctor who fails to diagnose or cure an issue is paid. I could go on and on, all the way to the meal you paid for but it was not what you wanted it to be, or the teacher who failed you when you were in school, but you get the point. In considering whether a real estate agent is overpaid, you must review and consider all their work before making that judgment.
Even Success Isn’t Always Enough
Even when someone gets paid for a successful outcome, there are many who do not. Recently, one of our newer sales agents got their first listing. The market has been very competitive, and she got 13 offers on that property. All 13 agents performed the same job. They showed their clients some properties, including the one she listed. They met with their buyer clients and had a consultation about their needs, wants, and desires. They discussed their financial situation and alternative financing solutions, directed them toward appropriate financing, shopping for rates, terms, and a good loan originator.
They showed the subject property one or more times, reviewing the features and benefits of the property, discussing the neighborhood, possibly discussing the schools, the homeowner’s association, the construction, layout, and the condition of the property. They discussed the benefits and drawbacks of the property. They reviewed the pricing and what competitive properties sold for or were asking. Reviewed other properties on the market. The agent drew up a contract for the buyers to purchase, explained the contract to them, and discussed contingencies like home inspections, termite inspections, and other concerns that the buyers might have. They reviewed the taxes and special assessments and discussed homeowners’ insurance. The agent discussed the appropriate deposit amount, how the price would be paid, the terms required by both parties, and the dates the purchaser and seller wanted, and delivered that agreement to the listing agent once the buyer had executed it.
There were probably some additional tasks that varied from customer to customer, but all 13 agents did the same job essentially. Only one of them got paid. The other 12 agents moved on to the next property to do all of that work over again, hoping that this time they would be successful and actually get paid for all of that work.
In an inventory short market, it is not uncommon for real estate professionals to submit agreements of sale on more than one property before the buyer has a successful result. Considering it briefly, it becomes evident that even the successful agent who earned a fee did the same job four times. That means the amount paid needs to be divided by four to calculate the cost. This amount is reduced even further when we calculate the time the agent probably spent working with consumers who didn’t have a successful result. And remember, that’s the agent’s gross income – taxes still need to be paid, and they have incurred costs or fees of their own that have to be deducted.
Alternatives Might Hurt More Than Help Consumers
The alternatives, like some fee-based compensation, a retainer basis or an hourly basis, or even on a task-based fee basis, are problematic. They might cost an individual consumer less per transaction, but given the example above, the consumer would have had to pay four times to achieve one positive result, and consumers who didn’t achieve a positive result would still have to pay fees they don’t pay today to sustain the professional services consumers are accustomed to. A quick bit of math on a new company that only schedules showings and prepares contracts for the consumer could cost that average consumer $2,756, but provides no other guidance or protection for the homebuyer. The business discloses that they are not a brokerage and denies the consumer the protection that regulators have built into state laws to protect people buying the most expensive and important purchases of their lives.
Frankly, I believe that they may run afoul of licensing laws in many states, and I for one, would be uncomfortable with a contract performed for fee by an individual who is not licensed as a real estate professional using standard forms for my state, or was an attorney licensed in my state. There are reasons real estate is a regulated activity, with consumer protections, standards of care, and legislation governing the process.
This high-risk, low-return model does nothing to save money for the consumer. In fact, it exposes them to extra costs and denies them crucial expert advice, the protection of a fiduciary, the experience of a local professional, the benefits of working with a REALTOR (a member of their local, state, and national Association of REALTORS) and many other safeguards. Simply put, it might cost an individual consumer less per transaction, but it would most likely cost all consumers far more in fees and risks than it costs now for the same services. The risks far outweigh any possible savings for a single consumer.