Making mountains out of molehills seems to be a favorite activity in the real estate industry. First, it was the “internet” going to put brokers out of business. Then, it was websites who were “selling” real estate consumers back to agents as leads. Along the way the industry even ate its own, claiming REALTOR.COM was “stealing” the value of brokers’ data because they used it to create a profit selling ads. None of these issues turned out to really be anything more than a few busybodies being, well, busy. So it’s no surprise that over at Inman, they’ve been humping another non-issue for some months now: The great debate over whether agents compensation is at the heart of the industry’s failings. We can tell you right now this is another non-issue because, in order for it to be a problem, agents would have to be being compensated – something not really happening in the business these days. But do let’s go on…
Slightly more seriously, the reason agent compensation is really a non-issue is because it’s totally disconnected from the problems it is purported to create. The usual “it harms consumer” canard doesn’t stand up to scrutiny for the most basic of reasons: consumers aren’t idiots. If they really thought the practice of charging a percentage of their sale – on contingency, mind you – was not in their interest, they would have defected by now. More companies would have heard from consumers that they “preferred” a flat fee, or some other form of payment mode. Yet the industry has been charging a contingency commission percentage for decades, and consumers have been paying for decades. More than 5 million times annually, on average. And as a percentage of overall industry activity, the few that have complained fall far under the levels of what we’d call a “harmful” practice to the consumer.
It’s the height of hubris for industry pontificators to posit that consumers “don’t know enough” to care whether the compensation model is “in their interest” or not. Of course they know – they are the ones paying it – and they have plenty of access to information, as well as legal and financial experts (there’s a lawyer at most closings) to make up their own minds. In most cases, we’re also only talking about a few thousands of dollars: Six percent of the average $200,000 home sale in America is a measly $12,000. The average consumer spends twice that when purchasing the average automobile (government subsidies notwithstanding). Consumers know how to spend their own money.
Within the industry, the handwringing over agent compensation is like worrying about a pimple on your nose while your head is half chopped-off. Should buyer’s agents be compensated by their client or the listing agent: it’s a non-question because both practices occur every day. The law of agency is disconnected from the practices of compensation – so the industry can represent whomever it wants by signing contracts, regardless of who pays. In fact, if some buyer’s agents prefer to risk their compensation on the percentage – or willingness – of a listing agent to share their commission with them, then it doesn’t harm the consumer in any way because their agency contract provides them with certain legal assurances regardless of the agent’s ultimate compensation. Consumers win no matter what; some agents simply lose – of their own fault. Conversely, many buyer’s agents charge a fee to their client – the buyer – contractually, up front, just like any other professional (plumber, lawyer, cleaning lady) for services rendered. Consumers know up front what costs are involved, and can decline or sign of their own free will. Again, the compensation model doesn’t need to be “one way” or the other because lots of ways work for lots of consumers. Even barter.
Real estate industry purists posture that the commission model harms consumers because only a “salary” based model would enable the broker to “tell” the agents what to do, how to do it, and how to do it right. Nonsense. Nothing in the independent contractor laws anywhere in the nation prevent a broker from doing this today – under the commission system. In fact, most regulations require the broker to supervise and be responsible for their agent’s conduct – which de facto means that they are expected to issue directions and hold agents accountable for adhering to them. That’s why most brokers are supposed to have an office policy document. Why would that be “standard practice” if the commission compensation model made such guidelines practically irrelevant? Because compensation isn’t the issue when it comes to getting agents to do the work – and the right work – for the consumer.
Some companies do pay their agents salaries; most choose not to. It’s not a problem, but more of a joke: The purpose of “independent contractor” status is mostly a tax loophole that absolves the broker from costs that are normally incurred by the average sandwich shop or auto mechanic: workers compensation, social security contributions and other insurances. But just because it’s a tax loophole doesn’t mean it’s consumer un-friendly – or that compensating agents only if they make a sale is harmful, either. Nor does it automatically mean that salaried agents actually perform better – or protect consumers more. Plenty of salaried employees in every industry perform poorly. And harm consumers.
The solution to the industry’s problems – of low performance per-person and potential for consumer harm (if real) – isn’t to change the money model. It is to change the management model. Adding agents to payrolls would merely hasten the bankruptcy of most companies – since brokers would be forced to pay hourly for non-performance. It would put companies out of business more quickly – perhaps the unspoken goal of salary-minded utopianists – and actually limit consumer choice to fewer companies, and operational models. Might consumers be harmed then?
Performance isn’t a money problem; it’s a management problem. Low wage workers often have very high output, when they work for companies with good operational models, technological efficiencies, adequate training – and most of all, management participation. The opposite is equally true. Even within the real estate industry, many of the “best compensated” agents don’t necessarily produce the best outcomes for consumers. Too many stories from consumers of their “top” agents not returning phone calls proves the point.
After two decades in the industry, we’ve seen this issue rear its head from time to time, only to creep back under the bed because ultimately, everybody understands it’s a non-issue. Real estate is one of the few industries that continues to tolerate – perhaps even foster – multiple models of meeting consumer needs. We have more than fifty regulatory regimes for agency; we probably have more than twice that number of brokerage operational models. Consumers can pay the tiniest of fees to list their homes in the local MLS, offering only compensation for the agent who brings the buyer; or they can pay tens of thousands of dollars for “white glove” total service.
In fact, some consumers have proven they can avoid compensating agents altogether – successfully selling their home on their own. Which begs the real point: The industry is too focused internally, squabbling and posturing about whose “model” is better or right. As usual, it’s staring at itself in the mirror, preening and primping, and comparing itself to the competitor. In the meantime, the consumer is walking right by all of the models. But not because they don’t want to pay, but because they don’t like what they are paying for.
Rather than talking about how or how much agents get paid, maybe it’s time we discussed the level of performance consumers are looking to pay them for?
Nah… that would mean we’d actually have to manage….