Matthew Ferrara, Philosopher
 

Agent Compensation: The Non Issue

Making mountains out of molehills seems to be a favorite activity in the real estate industry. First, it was the “internet” going to put out of business. Then, it was websites who were “selling” real estate back to 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 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….


  • What a great article Matthew. You cut right through the BS and get to the bottom line. Model smodel, just get up, get out there and perform. All of us, agents, managers, and brokers, then watch your compensation sore.

    I really do believe that most of us get in our own way and have a tendency to feel that for some reason there is another business model that might be superior to ours when in fact we need to play in our own back yard and stop spinning our heads constantly.

    I love your no-nonsense attitude and get a lot out of your articles.

    Thanks,

    Don

  • What a great article Matthew. You cut right through the BS and get to the bottom line. Model smodel, just get up, get out there and perform. All of us, agents, managers, and brokers, then watch your compensation sore.

    I really do believe that most of us get in our own way and have a tendency to feel that for some reason there is another business model that might be superior to ours when in fact we need to play in our own back yard and stop spinning our heads constantly.

    I love your no-nonsense attitude and get a lot out of your articles.

    Thanks,

    Don

  • Matthew Ferrara

    Thanks, Don! One of the things I have found is that people are frequently trying to “jump models” rather than “work the model they have” to its fullest capacity. Even agents who jump from company to company in the search for a few more “percentage points” in their commission split often do not make significant gains because of the cost of resetting their business brand, retooling, etc. I believe that working a 20% plan to 95% capacity is better than trying to find a “golden” 100% solution. Sales doesn’t require “magic” but it does require consistent and full-powered effort.

    Thanks again for commenting! – M

  • Matthew Ferrara

    Thanks, Don! One of the things I have found is that people are frequently trying to “jump models” rather than “work the model they have” to its fullest capacity. Even agents who jump from company to company in the search for a few more “percentage points” in their commission split often do not make significant gains because of the cost of resetting their business brand, retooling, etc. I believe that working a 20% plan to 95% capacity is better than trying to find a “golden” 100% solution. Sales doesn’t require “magic” but it does require consistent and full-powered effort.

    Thanks again for commenting! – M

  • Right on, Matthew! Consumers have always greatly influenced, if not dictated what real estate brokers ultimately charge. Sure, custom and practice (creating consumer expectation) has played a role, too, but in the end, the seller either accepts a real estate professional’s fee, negotiates it, or goes elsewhere.

    Our mandatory listing contracts in Colorado include pre-printed sections for different methods of payment, including percentage of sale price, hourly, retainer, or “other” (i.e., as may be negotiated)., Same applies to the buyer’s employment contract. Rarely, if ever, has a buyer been willing to pay anything, gladly accepting my looking to the listing agent to share the commission. And listing agents readily “co-operate” by sharing their commission with buyer’s agents. So, no one here is complaining.

    Similarly, sellers rarely, if ever, agree to pay hourly, or even an upfront, nonrefundable fee (to reduce the percentage commission), which I offer. So, seems to me sellers still feel quite comfortable paying a percentage of the sale price. Those not willing to pay or negotiate any form of compensation to a real estate professional are called FSBO’s. Interestingly, we see repeatedly a significant percentage of FSBO’s eventually list there homes with a real estate company, after failing to sell it themselves. Why? Because they finally see value in the services and expertise a professional real estate person can offer, most importantly, getting the house sold.

    But not all real estate professionals or offices are the same. That’s where a consumer’s due diligence should come into play and where management needs to step up to the plate to ensure excellent performance. I know from personal experience and hear all the time from colleagues about the lack of training or supervision they had starting out or in previous offices. So, yes, I agree completely performance is, in fact, a management issue. I also agree that independent contractor status does not mean agents have free rein to do as they see fit or that they do not have to follow company policy and procedure and be accountable to management.

    From an owner’s point of view, I’ll gladly accept the tax loophole, but even if Uncle Sam ever decided real estate companies had to treat agents as employees, they still would be on a commission basis. Pay for performance is the only way I could financially survive, for one thing. For another, I’ve had too much experience paying salaries or hourly wages to employees whose pay is not commensurate with performance, but who certainly feel entitled to the pay. This arrangement definitely does not benefit the consumer or the company’s clients.

    But now you got me curious, Matthew. So, I’ll head over to Inman News and see what all the buzz on this non-issue is about.

  • Right on, Matthew! Consumers have always greatly influenced, if not dictated what real estate brokers ultimately charge. Sure, custom and practice (creating consumer expectation) has played a role, too, but in the end, the seller either accepts a real estate professional’s fee, negotiates it, or goes elsewhere.

    Our mandatory listing contracts in Colorado include pre-printed sections for different methods of payment, including percentage of sale price, hourly, retainer, or “other” (i.e., as may be negotiated)., Same applies to the buyer’s employment contract. Rarely, if ever, has a buyer been willing to pay anything, gladly accepting my looking to the listing agent to share the commission. And listing agents readily “co-operate” by sharing their commission with buyer’s agents. So, no one here is complaining.

    Similarly, sellers rarely, if ever, agree to pay hourly, or even an upfront, nonrefundable fee (to reduce the percentage commission), which I offer. So, seems to me sellers still feel quite comfortable paying a percentage of the sale price. Those not willing to pay or negotiate any form of compensation to a real estate professional are called FSBO’s. Interestingly, we see repeatedly a significant percentage of FSBO’s eventually list there homes with a real estate company, after failing to sell it themselves. Why? Because they finally see value in the services and expertise a professional real estate person can offer, most importantly, getting the house sold.

    But not all real estate professionals or offices are the same. That’s where a consumer’s due diligence should come into play and where management needs to step up to the plate to ensure excellent performance. I know from personal experience and hear all the time from colleagues about the lack of training or supervision they had starting out or in previous offices. So, yes, I agree completely performance is, in fact, a management issue. I also agree that independent contractor status does not mean agents have free rein to do as they see fit or that they do not have to follow company policy and procedure and be accountable to management.

    From an owner’s point of view, I’ll gladly accept the tax loophole, but even if Uncle Sam ever decided real estate companies had to treat agents as employees, they still would be on a commission basis. Pay for performance is the only way I could financially survive, for one thing. For another, I’ve had too much experience paying salaries or hourly wages to employees whose pay is not commensurate with performance, but who certainly feel entitled to the pay. This arrangement definitely does not benefit the consumer or the company’s clients.

    But now you got me curious, Matthew. So, I’ll head over to Inman News and see what all the buzz on this non-issue is about.

  • Right on! Those who do not see value in the compensation model do not see the value of the services provided to consumers. Agents always need to present their value when engaging a client. Let’s not keep secret our significance to the transaction.

  • Right on! Those who do not see value in the compensation model do not see the value of the services provided to consumers. Agents always need to present their value when engaging a client. Let’s not keep secret our significance to the transaction.

  • Matthew Ferrara

    Wow, Ninah! Thanks for the wonderful reply! I really appreciate you taking the time to consider our point of view and add your perspective and experience.

  • Matthew Ferrara

    Wow, Ninah! Thanks for the wonderful reply! I really appreciate you taking the time to consider our point of view and add your perspective and experience.

  • Matthew Ferrara

    Exactly! The compensation itself is derived from the perception and desirability of “value” in consumers. How we “divvy up the pot” between ourselves can’t be the starting point of improving performance or consumer protection – because at some point, we’ll just be left with different models aimed at dividing up “zero”! Thanks for your comments.

  • Matthew Ferrara

    Exactly! The compensation itself is derived from the perception and desirability of “value” in consumers. How we “divvy up the pot” between ourselves can’t be the starting point of improving performance or consumer protection – because at some point, we’ll just be left with different models aimed at dividing up “zero”! Thanks for your comments.

  • Karen Brewer

    I think this industry is going to be blindsided. I am an agent and profit from the existing model as we all do. But because consumers are not up in arms doesnt mean it doesnt need reworking.
    Car sales need reworking as do a myriad of other business models.As an ex newspaper person I can tell you that new ways of doing business can come literally out of the blue and as soon as someone hits the right note at the right time the consumer will JUMP on the bandwagon. I dont think the public thinks we are compensated fairly. They do know that even though they may be able to shave a point here or there from a commission, for the most part they are stuck with it. Thats not what I call delivering what the customer wants.

  • I think this industry is going to be blindsided. I am an agent and profit from the existing model as we all do. But because consumers are not up in arms doesnt mean it doesnt need reworking.
    Car sales need reworking as do a myriad of other business models.As an ex newspaper person I can tell you that new ways of doing business can come literally out of the blue and as soon as someone hits the right note at the right time the consumer will JUMP on the bandwagon. I dont think the public thinks we are compensated fairly. They do know that even though they may be able to shave a point here or there from a commission, for the most part they are stuck with it. Thats not what I call delivering what the customer wants.