Coach Unlimited

In previous posts I have said that I think the the standard 5 to 6% commission or success fee is a holdover from a previous era that will sooner or later disappear because there are better ways to pay real estate professionals. One of the main reasons that I think compensation will change is because in many ways the current system is unfair to all parties. I will acknowledge that “fairness” is hard to examine. You and I may look at the same set of circumstances and you will say it is fair and I will think it isn’t.  Generally speaking anything that works to my advantage is fair from my perspective and anything that puts me at a disadvantage is obviously unfair.  Having said that, lets look at some of the reasons that the percentage of sale price or success fee model of real estate compensation as practiced today through the MLS is unfair to the parties.

• Real estate agents spend lots of time working with clients in transactions that don’t close (often because of the choices made by the client) and the agent doesn’t get a penny for their work.  In fact usually agents work harder and put in more time for these clients than on those that do close. Is this fair to the agent? It is only fair if we agree that the agent’s job is to make a sale.  Most of the agents I know see themselves as consultants and not as “salespeople”. If you are a consultant then tying your compensation to a successful transaction is clearly unfair. You can do an excellent job and the client’s actions make a sale impossible so you gave away your services.
• Because real estate companies only get paid when there is a sale and they work in many situations where a sale doesn’t take place, the cost of those unsuccessful transactions must be built into the fee. If I am going to work without compensation in one transaction, I have to make up the costs somewhere else and in real estate that means my commission must reflect the losses I suffered in transactions that didn’t complete. In other words the seller, who commonly writes the compensation check, is paying for their own transaction plus several others. Is that fair to the seller? If everyone, buyers and sellers, paid for their own services no one would ever pay more than 1% or 2% of the sale price as a fee and the real estate companies would still be properly compensated for their services.
• Because the commission is based on the sale price, the more a buyer pays for a property, the higher the commission. Is that fair to the buyer? You might say, “But the seller pays the commission so it doesn’t matter”, but that is not really true. Technically speaking the seller usually writes the check, but because the commissions are built into the sale price, both the buyer and seller contribute.  The higher the cost of the house is the more dollars the buyer and seller have to contribute to the transaction to compensate the agents. So, I ask again, is this fair to the buyer?
• The higher the sale price, the more money paid out in commissions. Does this mean that agents work harder selling higher priced homes so they deserve more money? Does it mean that as sale price goes up the cost of marketing increases proportionally?  I don’t think so. I would buy the argument that it costs a bit more in time and marketing to sell a $2,000,000 property than it does to sell a $500,00 property, but it certainly does not increase the cost by a factor of 4. So is it fair to clients that they have to pay significantly more money in commissions just because their property is valuable?

So if the system is so unfair why hasn’t it changed?  In fact it is changing, but change is hard and usually comes slowly. Agents don’t want to upset the apple cart. They say, “If it ain’t broke, don’t try and fix it.”  Change is a little bit threatening so we avoid it unless we can see a clear benefit to changing. The change in compensation is coming slowly, but it is happening. We are seeing more and more companies trying different compensation systems. I should mention that this is where I usually hear someone scream, “People want full service brokers.” I agree that this is true for most clients and I am not talking about reducing service at all; I am talking about giving the full range of real estate services and pricing it in a way that is fairer to all parties.  The new systems are slowly evolving. Some brave companies have taken the leap and are using pricing other than a percentage success fee. They charge retainer fees, and/or hourly rates or flat fees or some combination. Some companies are offering a percentage fee and another type of compensation to clients as a way of easing into a newer system. The bottom line is that they change is not only coming, it is happening now.

“Reflect upon your present blessings, of which every man has plenty; not on your past misfortunes, of which all men have some.”

Charles Dickens

Of the three time periods (past, present & future) the present is the only one we can be sure of. The past is fact. It was here and now it is gone and we can’t change it. Having said that,we can change how we perceive it so that it is a source of knowledge and, hopefully, strength. The future is our dreams. We may get there; we may not get there. It too can be a source of strength and courage. Today is here and now and while we can’t control everything about it, we can control a lot of it. The to take charge of the present is to maintain a positive attitude and keep taking little steps (or big ones where possible) in the general direction of the future we want. It doesn’t matter so much whether you have a full clear picture of that future or just a feeling about what you want; keep moving in that direction and the picture will get clearer. We take the valuable lessons from the past knowing that what has happend to us did so for a reason. Our past was put there to help us get where we want to go if only we have the enlightenment to take the good from our lessons and leave the pain and blame behind. Living in the present, in the now is a challange, but one that is possible for all of us.  Eckhart Tolle in his book “The Power of Now A Guide to Spiritual Enlightenment” provides a lot of guidance on this path. Living in the now of our lives means living our lives to the fullest. So take from the past only the beautiful memories and the lessons and use the future as a beacon or goal, but live life fully and richly in the present moment.

Recently the US Department of Justice got into a legal battle with the National Association of Realtors over whether some of the association’s practices constituted a restraint of trade and one of the issues that came up was the commission charged to clients. It wasn’t the main issue, but it is one that deserves some consideration. Consumer groups have long stated that they think real estate agents overcharge for their services and yet most real estate agents make a rather modest living to say the least.  Should the agents make even less money or could it be possible that the way real estate firms price their services no longer makes sense?  Is the commission system a dinosaur that has outlived its usefulness. I certainly think so.  Let’s look at some of the issues with this way of doing business.

• The concept of paying a commission or success fee was based upon the idea that the real estate agent’s job was to sell the property and if the property didn’t sell, the agent didn’t get paid. Most real estate agents today see themselves in the consulting business, not the sales business. They are hired to advise and guide clients through the rather complex processes of a real estate transaction. They have very little control over whether a sale actually happens. Often the clients unrealistic expectations or demands make a sale impossible. Why then should the agent only get paid when a sale happens?
• Why is the commission so high? The average commission today is a little over 5% nationally according to Real Trends, a trusted source of information on the industry.  On a $300,000 house a 5.1% commission would mean the real estate agents got $15,300 in commission. That is usually divided between the agency that listed the property for sale and the one that found the buyer. Assuming it is divided equally is $7,150 a reasonable fee for this service? The number of hours the agent actually put in is usually between 10 and 20.  Assuming $2,000 was spent on marketing (a very high figure for a $300,000 property) then the remaining $5,150 divided by 20 hours means the company earned over $259 per hour. What did the agency do to earn that money?  One of the things they did was work with other clients who did not complete a transaction. Since the agency only gets paid when there is a sale, when there is no sale they work for free. How do they make up the money they lose on those transactions? They have to build it into the fee for the successful transactions.  A really good agent might be successful 50 % of the time; an average agent maybe 25% of the time. So the client that is paying the commission is also paying for the transactions that didn’t work out.  I pay for the sale of my house and the costs of 2 or 3 or 4 others that didn’t sell. How fair is that?
• The original system evolved over 100 years ago when all of the real estate agents in a transaction worked for the seller. Today much of the time the buyer is represented by their own agent. So how is that buyer’s agent paid? Usually by the seller as a percentage of the sale price. Does it make sense for the buyer to pay a higher commission when the price they pay goes up? I think not.
• Is there any relationship between the sale price of the property and cost of the services; in other words does it really cost twice as much to sell a $1,000,000 property as it does to sell a $500,000 one? Of course not.

Because of these inconsistacies and some others we are starting to see a shift in the industry away from commission based pricing and towards other methods of payment such as flat fee, retainer fees and hourly rates. The majority of sales are still commission based, but I expect to see this changing substantially over the next 10 years for the simple reason that commission based pricing is really not in anyone’s best interest. It is unfair to both the agents and the clients and like the dinosaurs, it will become extinct.

When I look at much of what is being written about the so-called sub-prime mortgage crisis I have to scratch my head in disbelief because much of the blame is centered on appraisers. We saw this same thing happen when we had our last “adjustment” in the real estate market in the 1980’s.  Prior to that appraisers were not licensed. Then as now many of the banks that got into trouble had real estate in their portfolios that was over appraised. In fact it was often appraised at figures that were substantially above market value, so of course that must be the appraisers fault. After all they are the ones who drew up the appraisal. As the song from “Porgy and Bess” goes, “It Ain’t Necessarily So.” It is true that in the 1980’s and today the appraisals were high, but we need to look a little farther and see why they are high.  I know a lot of people who are appraisers and they are honest hard-working people.  Why would they lie about value and inflate prices? Because their jobs depend on it. Let me explain.  Appraisers get much of their work from lenders. To be a successful appraiser you need to have lender clients who send the appraisal work your way. So the lender sends you an appraisal and you, the appraiser, get back to the lender and say, “I have examined this property and it is worth $350,000.”  The lender then says. “That won’t work. We want to lend $400,000. I’d like you to go back and take another look.”  The appraiser says, “I don’t need to take another look. It is worth $350,000.” To this the lender replies, “We want to make this loan. I need you to give me an appraisal that says the property is worth $400,00. If you can’t do that I know other appraisers who will and they can have all of my banks business.”  Sadly this is not an unusual scenario.  Now you may be asking yourself, “Why would the lender want to make a risky loan that they may have to foreclose on?” There are two reasons this happens. In a hot market like the one we have just been through (and the one in the 80’s) there is a feeding frenzy mentality. The pressure is on the mortgage originator to make mortgages, lots of mortgages. In order to do that the properties have to appraise. The other factor is that if the loan does eventually go bad it will be someone else’s problem because the mortgage lender will have sold the mortgage to an investor or a government agency like Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginny Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac). So who’s supposed to be protecting the public from this? At the federal level it is The Appraisal Foundation. They are authorized by congress to set national standards and oversee the various state appraisal commissions.  The problem is that the Appraisal Foundation has only one way to punish a state that does not comply with their rules; the Appraisal Foundation can remove their accreditation so that the state can no longer do federally related appraisals. In other words all loans would dry up which would be an economic disaster for the state. They have never done this although they have threatened to. There is no lesser punishment such as fines or other penalties available to them. Meanwhile most of the states try hard tp enforce the rules but they do not have the funding to police the appraisers under their jurisdiction. So the congress just recently passed new laws to protect the public from further predatory lending in the future. Did we correct this problem? No, we did not. The truth is that a lot of money was made on the high risk mortgages and there is pressure on the congress to ensure that they don’t do anything that would dry up this lucrative market.  The recent federal legislation is merely a band-aid and will do nothing to cure the underlying problem. Meanwhile the appraisal industry gets unfairly blamed for the problem.

“You said ‘but.’ I’ve put my finger on the whole trouble. You’re a ‘but’ man. Don’t say,’but.’ That little word ‘but’is the difference between success and failure. Henry Ford said, ‘I’m going to invent the automobile,’ and Arthur T. Flanken said, ‘but…”

Sgt. Ernie Bilko

The Phil Silvers Show

If I am trying to make positive changes in my life “But” is a very dangerously powerful word. In a way it acts as a reversing switch. When I make a positive statement and then follow it with the word “but”, I reverse or turn off everything I said before it. “I am going to do it, but…” means I won’t do it. You are very intelligent, but…” is not going to come out as a compliment. “I love you, but…” will do nothing to improve the relationship. A very basic integral step in making life-affirming changes is becoming aware of the language we use when we speak and think. If I am a “but” man or woman this is a powerful indication that there is something blocking my intention. Before I can move ahead toward my goals in life I need to examing where that “but” is coming from and remove it. Step one is to start listening to my languge. That means what I say our loud, what I say in writing and what I say in my “self-talk”. Do I express my intentions with clear affirmative statement or am I languaging things in a way that indicates a lack of total commitment? Step two. If I become aware that I am using weasel words (words that allow me to weasel ot of commitments) then I need to find the cause  and re-language my intentions. Every time I am tempted to use a weasel word like “but” or “if” or “maybe” I need to put in a period instead and then start a new sentence. An very important part of growing toward our dream is developing positive language to support it. If I want to turn my stumbling blocks into stepping stones I must start using positive language with no weasel words.

“The only difference between fear and excitement is what we label it. The two are pretty much the same physiological/emotional reaction. With fear we put a negative spin on it: ‘Oh, no!’ With excitement, we give it some positive english: ‘Oh, boy!’”

from “The Portable Life 101″ by John-Roger and Peter McWilliams

Stuff happens to us but it is only “stuff” until we label it as good, bad or otherwise. We decide whether what the events that happen to us are going to mean in our lives. In fact living life is a process of meaning-making. This is normally an unconscious process until we learn to use it for our advantage. There is tremendous power in learning this. The martial artist knows how to move with the opponents thrust and thereby capture their energy for his or her own use. FDR in his first inaugural address said “…the only thing we have to fear is fear itself.” We can learn to handle our fears like a martial artist by focusing our attention not on what scares us, but rather on our goals. If we focus primarily on the possibility of failure and its consequences we will experience fear and most likely we will fail. If we focus primarily on the possibility of success and the benefits of reaching our goals we will experience excitement, and that is an energy which will propel us toward our destiny. There are those who feel what happens to us in life is pre-ordained or that it is determined by some higher power. They think that we are helpless pawns. That is only true for you if you choose to believe that it is true. I invite you to join me in believing that everything (and I do mean everything) that happens to us will bring good. Let us choose to create our lives in such a way that we celebrate everything that happens to us knowing that in the long run it will benefit us and those we love. We create lives of joy and gladness and share that with others by choosing to label it the way we want to see it.

We hear and read a lot about change today. It is part of the political campaigns and is certainly permeates everything around us. I know from my work as both a manager and as a coach that most of us find change threatening and we fear it, yet is the one thing that is certain. No matter what we do, there will be change. The field of real estate is no exception and I believe that the next ten year will see more dramatic changes in the business than we have seen in the last 50 years. A lot of what happens in the practice of real estate today has remained unchanged over the last 100 years and is out of touch with what consumers want and the world we live in. Here are two of the fundamental changes I expect to see in the next 10 years.

• The structure of fees will change In a typical real estate transaction today the real estate agents get paid a commission which is a percentage of the sale price. They only get paid if there is a successful sale and the commission is paid by the seller. This system dates back over 100 years. When it evolved (and up to about 15 or 20 years ago) all of the real estate agents in the transaction worked for the sellers and the system was set up to reward a good job done for the sellers. The more money the agents got for the property the more they were paid. If they were unsuccessful in selling the property there was no paycheck. In recent times there has been a big change in that buyers now have agents of their own in most transactions yet theses buyers agents are still getting paid in the old way. How does it benefit the buyer if their agent can make more money by selling them a pricier property? How is the buyer benefited by having the seller determine what their agent will get paid? Is it a good thing for the buyer that their agent has to talk them into buying something in order to get a pay check? The rules of the game are changing because the old system no longer serves the clients best interests. It is too early to determine what sort of compensation system will evolve but we are beginning to see agents who work for a flat fee or an hourly rate; we are seeing retainer fees being charged  and we are seeing the fees no longer tied to a sale. Today some agents get paid for their work whether there is a sale or not and that is only fair.The agent is providing the same information and expertise to a client regardless of whether a sale takes place. And more and more we are seeing situations where each client pays their own agent for the services received. The real estate agent of today is not a salesperson; they are a consultant and that demands a different payment structure.
• The MLS as we know it will die The primary purpose of the MLS is to create an offer of compensation and cooperation between the real estate agents. It was not designed to be a marketing tool or form of advertising. In the “old days” real estate agent used the MLS to control access to the inventory. A buyer who wanted to know all of the properties that were on the market had to contact a real estate agent because the agent controlled access to the information on the MLS. Today with the exception of a few backward markets where agents don’t use the MLS a buyer can find out about all of the listed properties simply by going on the Internet to Realtor.com or to a local or state MLS site and accessing the public side of the web site. Today because most agents get paid a commission by the seller the MLS serves to facilitate that offer of compensation, but as more and more agents start getting paid by their own clients this basic function of the MLS will disappear. There will still be a need for a central source of data about properties for sale. The question of who will provide this database is one that is up in the air at the moment. Non-REALTOR® controlled websites such as Zillow and Trulia as well as the public sites of the large national firms such as Coldwell Banker, Century 21, RE/MAX and others already have an abundance of market data that anyone with a computer can access.

We know from history that one change often leads to another in a cascade of new ideas and these two changes I have talked about are so fundamental to the real estate business that I would expect to see them create other changes as well. The end result will be a more professional real estate industry that will do a better job of serving it’s clients and provide a better and more stable work environment for the professional real estate agent.