There, I said it: Broker compensation is indefensible.
An independent broker who is a friend of mine and I were having — how to put it? — a robust discussion that centered on commissions the other day (without violating anti-trust laws, heaven knows).
I ventured an opinion that I hold strongly and have put on the record previously, that percentage commissions make no sense to me. So “Bill” asked me what was the origin of my “guilt,” adding that he had to support a family of six. (Nor should the choices he has made bear on his occupation and income.)
My rejoinder was that guilt had nothing to do with my position. Instead, said I, the amount of work required to shepherd a $500,000 sales was not much different from — sometimes even greater than — the burden of bringing home a $5 million sale. It’s true!
I maintained that the value we bring to a transaction is not so different at various price points, most requiring essentially the same amount of work and expertise .
Instead of a percentage fee, why shouldn’t we be paid, if not on a project basis, at a substantial rate per hour?
If that’s what you believe, Bill contended, just lower the percentage commission. I suppose he has a point, but seller and broker still are stuck with being able to offer enough compensation to buyers’ representatives to motivate them to show and sell a property.
He went on to contend that the value we bring to brokering the flow of assets between two entities — buyer and seller — can be exceptional and ought to be rewarded commensurately. I don’t know about that.
When I argued that a broker’s value in selling a property — say, $50,000-60,000 each for the broker on either side of just a $2 million transaction — could not compare with the virtues of a surgeon who doesn’t, as far as I know, earn even $100,000 for transplanting a heart, restoring vision or curing cancer in a patient.
That’s when Bill failed to win me over, by skating toward the total cost of surgery and hospitalization for many procedures.
I am not, by the way, suggesting that so-called “discount” brokerage is the point here. The appeal of discount brokerges is that they charge less money than other models because they don’t typically provide a full range of services. Often, they provide the option of selecting from a cafeteria array of services.
I believe those brokers who are overpaid should charge less for a soup-to-nuts way of doing business, a tasting menu for which no substitutions are allowed.
While I have been maintaining that brokers in many transactions earn way too much money, I confess that I’m not about to cut my own income by embarking on a lonely crusade.
I’m able and willing to adopt a more rational fee basis, but I won’t do that if I am virtually the only broker in Manhattan ready to do so. It would be nice, though unthinkable, if my crusade involved plenty of company.
Obviously, I’m not counting on it.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022
I wrote a blog post not too long ago on the possibility of brokers charging by the hour, but I think in the end sellers would rather pay a higher fee than share the risk. Rob Hahn also wrote a very insightful article before that.
When you buy a loaf of bread, a car or anything else, you pay for every mile traveled and every hand that handled it. Nothing is free. All overhead plus a margin to stay in business.
Yet when people look at real estate, they only see their grabbing the loaf off the shelf. They don’t see the listings that don’t sell because they wouldn’t price realistically, clean up, bargain in good faith or cooperate with showings. They don’t see the no shows, the stolen signs (admittedly not a Manhattan issue), the buyers who see 30 homes and then disappear, or other things that make ours a high risk/high reward industry.
I would happily lower my fees if my risk were mitigated. If I knew a home seller would take my good advice or a buyer would indeed buy in the next 6 weeks (which would effectively make me more of an order taker, but that is another discussion) I’d net the same or more, so why not? However, we work on contingency with a pool of people unaccustomed to making some of the largest financial decisions of their life and the vagaries have either put well capitalized models out of business or relegated them to obscure market share.
Ironically, only collusion would lower fees, and when one considers that they have been lowered organically almost overnight in other industries, it makes me conclude that market forces are more powerful than we think.
Real estate brokers have always been like ducks. We appear to be sitting there on the surface, but below the surface we are paddling like hell and that makes us worth our fee when the result is achieved. That means you also Malcolm! I could yap more, but I’ll post on this when the time comes.
And always feel free to call me out. I am an open book and would be irrelevant if I agreed with you on everything.
Thanks so much for your comments, Phil. You know how much I value your opinion–even when I happen to disagree with you. I found especially intriguing your point about the irony of collusion.
Or, consider giving a portion of it away to charity. I give half of every net commission to the non-profit of the respective client’s choosing. It makes them feel good and it makes me feel good…
Compare to personal injury lawyers who charge 33% of the recovery. They won’t win most cases, but the ones they do win will compensate for the ones they lost. And the client only pays if they win. If a seller paid a flat fee to seller’s broker, the broker’s incentive to work hard would be reduced. Then the seller would be upset because his broker didn’t succeed buy he still had to pay. Maybe some sellers prefer success-based fees rather than flat fees.
Although I’ve only been working as an RE agent in NY for a couple of months and am focused on rentals, not sales, at this time my take is that unless you are the listing agent for a property, you are going to work with a multitude of buyers (in my case, renters) who will not buy from you or maybe anyone else. So while the huge commission you make for one sale may be more money than many make in a year, if you divide it out across the clients you spent hours and hours showing properties who never did anything, perhaps your hourly rate isn’t that high.
It is good to find postings about the very subject I was thinking about yesterday. I have worked in the insurance industry for many years and just entered Manhattan real estate last year. I was fantasizing about a model that allowed buyers, sellers and renters to hire an agent on an hourly basis to handle their search and transaction for them. It would seem to end many aspects of the process that seem unbalanced and unfair. At this point in my career I am certainly not overpaid – I barely pay my bills. I spend endless hours to assist buyers and renters only to be rewarded by their going around me (or on websites like streeteasy!) and doing a deal without allowing me a fee. It is maddening and weird, in fact. I know it is the nature of this particular beast but it in unattractive and causes much strife. Most people who do a good job do not have to worry about whether someone chooses to pay them or not. Maybe the future “excessive” fees I will collect will make up for the anxiety and misery I suffer now…. I am seriously questioning whether I want to live like this, even when I enjoy the business for the most part and am starting to earn more money.
The argument “well, if the price is too high, why don’t you lower your own fees” is extremely strong. If you lower your fee to half of what everyone else is charging, presumably you will get a huge amount of new customers, and be able to rapidly expand your business. The fact that you are not willing to do so is all you need to know to figure out why fees are not lower. (BTW I too think that the fees seem way too high… But the fact that no one is willing to cut their prices in half, even though it would mean dominating the whole market, suggests otherwise.)
But, Patrick, I am willing to reduce my fees, just not unilaterally. As I said, doing so would only be against the seller’s best interest since the vast majority of buyers’ brokers won’t show property that doesn’t provide them with what they consider to be the standard commission. One reason I have affiliated with Charles Rutenberg Realty is that the firm does not require minimum commission arrangements with sellers–unlike the dinosaur brokerages with names you surely recognize.
The fee collected on a $2 mill sale is not $60/50K. That is the commission earned. Then you still have the company’s cut (unless you own the company). However the buyer’s broker’s cut is ridiculous since all the broker had to do was take public information (listings) and show a client around. Their knowledge base is not worth the commission. Instead the commissions should be 3%, no co-broking allowed. But a fee may be cut off the 3% to a broker’s referral. However these are fantasy ideas. I couldnt see the system in place changing without a new player being strong enough to be a game changer.
With regard to “the company’s cut,” Sajh, not all brokerages are the same. One reason I chose Charles Rutenberg Realty is that it never asks for more than $2,000 from any residential transaction–unlike the dinosaur brokerages with names you know well. You correctly acknowledge that your idea is mere “fantasy,” but I’m not sure you’ve thought out the ramifications (which would entail a whole new post that I may write some day). To my mind, it is not about there being a strong enough new player to change the game, but an unimaginable change in the system.
Malcolm, broker’s commissions are just another reason, along with taxes, to avoid trading homes frequently. I’ve heard brokers suggest their clients successfully trade homes as a way to encourage business. In the boom years, there was almost a real estate mantra to buy, renovate and trade up. Maybe it’s just my slow-lane income holding me back, but I’ve never understood how spending lots of money on your home pays off.
Why not take a cue from lawyers and charge by the hour, if it’s indeed that case that the same amount of time and skill required for a $500K transaction is required for a $5 million transaction? But then again, don’t you think a person would think it’s kind of kooky that you’re charging them the same amount for a transaction which has 10 times less value?
Kooky? No, no, Nina. (Loved writing that.) My response is that consumers have become accustomed to the inequities, unfortunately. My point is simply that we should charge fees commensurate with the work, experience and expertise required.