I think a good hard look at performance-based compensation agreements in real estate brokerage has merit. Imagine, if you will, negotiating an agreement when you list a home that is akin to a professional sports player's contract. The modern day professional sports contract is laden with performance bonuses. A MLB player gets a bonus if he makes the all-star team, hits a certain number of home runs, maintains a certain batting average, or plays in a specified number of games.
In the book, Freakonomics, the authors liken real estate agents to the Ku Klux Klan in their clandestine ability to exploit the information advantage they have over the average consumer. Summarized, they conclude that ANY brokerage or profession (doctor's, lawyers, and yes, Virginia, even mortgage brokers) exploits this advantage in their ability to position themselves as "experts".
The authors illustrate the real estate agent's DISINCENTIVE to hold out for higher prices for their clients. The incremental fee increase on, say, $30,000 really doesn't translate much to a Realtor when you consider the risk that is involved for not encouraging the client to accept a subpar offer. If $30,000 extra is paid for a $400,000 home, the incremental increase is only about $400 to the listing agent (I am assuming 6% commission, split with a buyer's agent, a 70% split with the broker, and a combined 35% tax bracket). However, the lower offer of $400,000, accepted, does produce a commission of about $5500 (same assumptions) to the Realtor.
This inspires this question...Is the $5500 bird in the hand worth more than $5900 bird in the bush?
Now,
I'm certain that this very question will produce righteous indignation
from Realtors. Many will scream ethical implications and bandy about
esoteric phrases like "fiduciary responsibility". I'm going to ask you
to rethink your comments before you type. Maybe read this idea over
again, grab a cup of coffee, call your best friend on the phone and run
the idea past them before you comment.
Let's say that I have a $400,000 home listed that I agree to sell for $380,000 at the low end. The absorption rate for my market is say....90 days. You, as a professional Realtor, agree to list my home and sell it for a 5% fee or $20,000. I don't want to pay you $20,000 for a...how can I put this?...average performance. You see, I tip really well if the service is good so I want to pay you like I would a rookie quarter back who won the Heisman trophy.
I will establish a base fee of $1,000, paid upfront to defray marketing costs. For my fee, I expect exposure in the MLS, a listing on your website with a virtual tour, maybe a newspaper ad or two and 1-2 open houses. Now here's where the compensation gets really good. If you sell my home in less than 90 days, I'll give you a $10,000 bonus. Less than 45 days, that bonus is increased to $15,000. That can certainly cover the co-brokerage fee you might offer to a cooperating agent. If you sell my home for $380,000, we're done; you get the time performance bonus. I'll add 5% of the price above $380,000 as a bonus. For an offer accepted above 400,000, I'll pay you 50% of the amount above $400,000, after all, that's pure gravy to me.
So let's see how this plays out if you sell my home for $420,000 in 45 days:
Upfront fee: $1,000 + Time bonus: $15,000 + First Bonus (5% of $40,000) = $2,000 + Second Bonus (50% of $20,000) = $10,000. A Grand Total of $28,000; a 40% higher net fee than the conventional fee model. Now, if you sell the home for $380,000 in 90 days, you'll make $13,000; a 55% decrease from the conventional net fee model.
I'm sure it will require some creative incentives to pass on to the buyer's agent and someone might point out that this incentive-based fee pricing model might cause the buyer's agent to not properly represent the buyer. I don't really care. It's my house, and I want the Michael Jordan of Realtors to show up on my team.
