I read an article today titled "Is it Time to Pop the Hood on Real Estate" posted on www.propertywire.ca
. It discussed the controversy over commission amounts and the public's perception with regards to those commissions. It asked the question of whether or not consumers would understand the business if they could have a look from the inside out.
I have so many thoughts on this topic, I hardly know where to begin. So, I am going to make my point now and then spend the rest of this blog, telling you why I feel this way.
THE CONSUMER WHO SELLS THEIR HOME AND SELLS THEIR HOME QUICKLY IS PENALIZED UNDER TRADITIONAL COMMISSION MODELS.
Even upon entering my sixth year in the business, I cannot grasp the logic of my own industry. It makes absolutely no sense to me that someone who sells quickly likely pays the same amount of commission as someone who takes a year to sell. Why would we penalize the wrong consumer? This is totally backwards to me.
We, real estate agents, have designed a business model that does not compensate us for the work that we do. Rather, we play this "game" of telling a consumer that they don't have to pay us anything now (which sounds great to the consumer and makes it easy for us to get a contract signed) but then we charge the consumer an arm and a leg when they do sell because our overhead costs include hours upon hours of services we provided to their neighbour who didn't sell. This doesn't seem fair to me at all!
This is exactly why Lime Green Realty Inc. decided to change things up and try a different commission model in May 2010 which we call our $1499 program. Rather than making the seller pay a large amount of money when and if they do sell, we have been offering the consumer the option to pay a smaller "non-refundable advertising fee" upfront for the listing portion of the commissions. We still offer full services and we still offer typical commission rates to the buyer's agent (in order to ensure other agents are just as eager to sell our listing as they are another brokerage's listing). We also give the consumer an entire year on the market for the $1499 they pay.
We have learned a lot from consumers since we introduced our $1499 program, the most valuable lesson is that consumers do not like the traditional commission structure and are more than happy to pay an up-front non-refundable fee if it means that when they sell, they will save money with regards to commissions. Consumers do not want to pay for the mistakes of some other consumer, nor do they want to feel like they are overpaying for a service hence where the notion of feeling "ripped off" comes from.
So, if we popped the hood on real estate, would we see that the issue with the amount of current commissions is strictly due to all of the hours that a real estate agent is not getting paid for or could it be something else? Maybe it is a portion of the unpaid hours but maybe it is based on the culture of the real estate industry. What do I mean by culture of the industry? I will take the definition of our real estate culture from a You Tube video that I was watching by a real estate trainer who referenced that real estate agents were no longer white haired, retired teachers. That is what I am talking about when I am talking about our culture. There are endless jokes at sales conferences about making sure the picture on your card is a picture of what you look like now and not when you were in your early twenties. So when I entered the business in 2006, I had no idea that many real estate agents entered the business more for a lifestyle than a career. I decided to join real estate because I was looking for a career that would utilize all of my previous career experience, that would be intense & exciting and most importantly that was my own business, my own creation. I wanted to invest my time and energy into my own business rather than someone else's. Little did I know, not everyone was in the business as a career, some were in the business for a lifestyle and as I have learned since 2006, this makes a big difference to the consumer.
Anytime commissions are discussed, there is always a direct link to the number of deals an agent completes. In this particular article I am blogging about, there is reference that "the average agent only sells 8 houses a year." So the argument becomes, if you multiply a selling commission by 8 deals and then subtract all of the expenses an agent incurs from those 8 deals, is an agent really making all that much money? The logical answer is "well of course not." Now the more analytical thinker will say, "wait a minute, why is the average agent only completing 8 deals a year?" The answer could be culture. Maybe the culture of the real estate industry entices individuals that enter the business for lifestyle rather than a business career. If an individual can sell 8 houses a year and average $6,000 a deal, grossing $42,000 a year for those 8 deals and it requires only 80 hours of time invested per month to complete one deal (80 hours includes time that was not compensated for) and gives that individual 4 months off a year, then why not only complete 8 deals a year if you are in the business for lifestyle? So IF all of these assumptions I have made are correct, then this is precisely why the consumer has a problem with current commission models.
I BELIEVE THE CONSUMER IS ASKING FOR THE REAL ESTATE INDUSTRY TO CHANGE THEIR CULTURE.
I don't believe for one second that the consumer does not feel we have value. The consumer values what we do as an industry and is willing to pay their proportionate share but they are expecting a different type of service.
In a perfect world and based on the different commission models Lime Green Realty has offered Inc. to consumers the last two years, I believe both the agent and the consumer would benefit greatly if real estate services were a pay as you go service. The fee structure would be more evenly distributed between consumers and agents would be able to significantly reduce their fees.
Of course I would CAUTION ALL CONSUMERS from running out and signing up to just any commission program that offers a smaller, up front non-refundable fee to save you commissions. Based on our experience with our $1499 program there are some very CRITICAL questions you need to ask before signing up to this kind of program. See our next blog on MAKING A SMART DECISION ABOUT COMMISSIONS WHEN LISTING YOUR HOME.