Real Estate Brokers: Exploring Another Option for Compensation by Breck Gallini
Real Estate Brokers: Exploring Another Option for Compensation
by Breck Gallini
Calls for reform in the real estate brokerage industry come from outside and within. The U.S. housing market is swinging widely, with home values at historic highs. Many real estate agents continue to build a fortune from their commissions in this soaring market. At the same time, the public questions the value of their services with the advent of web-based services like Trulia and Zillow. Most of the public understands that generally, the source of income for a real estate broker and their agents is the commission received as 5-6% of the sales price paid out of the seller’s proceeds at closing and split by either side’s brokers. This fee can be a hefty payday if the sale requires not much work for the agents to facilitate. So, what if the commission wasn’t the only option for compensating real estate brokers and agents? What if, instead, the public had compensation options among today’s leading real estate brokerages? One option might be an hourly rate. A slew of contractual and fiduciary issues probably come to the lawyer’s mind, and a bitter taste may form in the top producing agent’s mouth. However, charging by the hour could be viable for growing agents and the frugal public.
Many ventures have tinkered with the traditional commission model—the “discount brokerage” is a well-worn path, and agents increasingly team up to share in commissions while servicing their combined client pool. However, alternative exploits rarely branch out from the commission model unless they charge a flat fee. Redfin, a real estate brokerage and leading industry disruptor, takes less commission per transaction than the traditional broker while also tackling the concern that agents need steady income by paying them a base salary plus a bonus for each transaction. All in all, Redfin offers a viable answer to the frugal public and the striving agent. However, Redfin’s model makes the agent an employee of the company, and expectations come with that salary. With a time-based model, the agent remains an independent contractor with more freedom to manage their business as they see fit.
As a service, the hourly agent appeals primarily to people with cash on hand to pay their agent. Like many attorneys, real estate agents traditionally work on a “contingency” basis—if a sale doesn’t occur, the seller does not pay the agent. Historically, attorneys work on contingency because of the cost of suing someone and uncertainty of outcome—an injured client could be financially devastated by attorney’s fees if they had to pay their way through court to lose and not take any award. An agent who charges by the hour would face the same concern with buyers who only have enough cash for their down payment, and sellers selling because they need cash. In this respect, the commission model makes perfect sense—agents will not receive anything until a transaction occurs that facilitates the principal’s ability to compensate them. However, the hourly agent supposes some folks out there do have the cash to retain them for their real estate services before closing and funding. This is not a farfetched supposition, as many individuals out there retain lawyers who bill by the hour and might be willing to pay a real estate agent the same way.
Some agents will not be interested in this model. Take most top producing agents, for example. Expert, veteran, certified agents in luxury could charge more by the hour to deliver their full-service package—perhaps as much as you can imagine top-paid lawyers charge. But top producing agents do very well on commission—if they can keep up the momentum, the business keeps coming to them. They’re much less worried about the gaps between frequent and sizeable paychecks that benefit the agents and employees on their teams, among others. A top producer would much rather lock in a 2-3% commission than risk a shortfall because they put a deal together in just a few hours of signing a listing agreement. The risk is not worth it to them.
While the hourly agent would surely make less money per transaction, this means more savings to the public for full-service brokerage services, which theoretically attracts more transactions. In a sellers’ market, the hourly agent has the edge over the competition because the savings are evident to prospective sellers who are confident their homes will sell quickly. Buyers in this seller’s market could take the chance on an hourly agent in hopes that the seller will see the savings on the other side. Buyers will see savings from the hourly agent in a buyer’s market, where they are confident they will find a property in just a short time. Hourly agents need not provide a diminished quality or quantity of services than the commission-based agent—instead, they charge more or less money on a case-by-case basis (i.e., “I’ll do this one for $375 an hour.”).
In sum, charging by the hour could be good for an agent who likes the flexibility of real estate agency but also wants a steadier income. They would have to really “sell” prospective clients on paying out of pocket for the agent’s services, although hopefully, those prospects will see the potential for savings. While the real estate industry evolves, it’s important to consider other options for a business known to be oversaturated and cutthroat. Many brokers and agents are happy with the way things are, but once the market turns another corner, those same people must “get creative.” Charging by the hour is one way to get creative and facilitate healthy competition amongst brokers and agents.
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