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Commission VS Fee-for-service

Written by on Thursday, 06 January 2000 6:00 pm
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From online financial advisors to the new fee-for-service brokers, the question is being asked, "Why should Realtors be paid by commission?" After all, many brokers agree that the same steps must be performed to get a home to close whether it is a $100,000 starter home or a million dollar mansion. In fact, the starter home is often more difficult, so why should the price of the home determine the Realtor's fee?

Just the fact that the question is being asked and acted upon by emerging Internet companies should cause Realtors to seek the ghostly handwriting on the wall. Realtors may soon quickly arrive at the same place as the travel and stock brokerage industries - slashing prices while turning over many of the chores of home buying and selling to the consumer.

Consumerism, particularly by those who are computer-enabled, is demanding lower costs to the real estate transaction from all principles. Buyers can already apply for a loan (and ask online lenders to cut the junk fees) and shop for a home online, putting the Realtor further down the food chain. When asked, many Realtors are hard-pressed to justify their fees to such pro-active customers who only want them to help them close the home. That means Realtors are often asked to either reduce their commissions or to provide select services at specific fees.

Commission is the fee structure of tradition, but Realtors may find that tradition holds no stronger shield than it did for the travel industry, particularly for agents. Consumerism and the desire for lower fees drove tremendous changes in the airline industry, at the expense of the travel agent, the airlines, and the passengers.

Less than three years ago, travel agents were stunned to wake up one day and find their 10 percent commissions had been cut to a $50 maximum per ticket by the airlines. Quickly taking the place of the now obsolete travel agent are Internet companies run by third-party technicians. These entrepreneurs found they could operate a travel business on virtual cost-cutting, and many have been successful. The same is true of online stock brokerages. The emergence of low-cost, low-ante stock brokerages has revolutionized trading. From day-trading to ordinary Joes being able to participate in IPOs thanks to their online trading companies, buying stocks will never again be the domain of the wealthy only.

The real estate industry faces the same situation with fee-for-service and discount brokerage which, I believe, will make a stronger impact this year than ever before. The reason? Two well-funded companies, Homebid.com and Homebytes.com , along with numerous independents including zipRealty.com and eRealty.com , are going to see to it that the MLS-listed home is going to be inexpensive for sellers - as long as they pay up front and choose services wisely.

These third-party companies are betting on the consumer, not on the traditions of the industry. They are taking advantage of the buyer-friendly aspects of the Internet to create services and attractions that will capture the buyer's attention and loyalty. This flies in the face of the traditional real estate practice in which the seller is sovereign.

Today, both buyers and sellers want representation, but many buyers are skeptical of agents. The NAR says that over 50 percent go to the closing table without an advocate. A Realty Times/Gomez.com poll showed that over 13 percent of buyers have no intention of contacting a Realtor. Realtors are leaving too much money on the table by not providing clearer, better services for buyers.

The only way to beat back the competition that third party companies and other discount brokers present will be in the restructuring of fees, the clarification of agency relationships, and improvement in service delivery. To stay ahead of the daily challenges posed by Internet-enabled competitors, Realtors will have to go beyond continuing education to proactive learning.

The increasing popularity of the Internet delivers a clear message. Demand for online services, competitive pricing, and better service will only increase. If offer and transaction management can be handled by online brokers with automated systems and licensed agents serving as customer support staff, there is no incentive for consumers to compensate individual agents at their current rates.

The best defense for an agent is to be able to outline and assign realistic values and profit centers to their services. This exercise could prove enlightening in a number of ways. Agents could quickly learn where they are overspending their time and resources and which activities bring more "rain" or revenues to their businesses.

One independent broker, David "Dave" Davidson, co-founder of U-List Advantage Real Estate Services Inc. , has found a way to make fee-for-service brokerage work. He has a menu of listing plans from which sellers to choose with fees escalating from a simple listing in the MLS to full-service. Where he beats other brokers, says Davidson, is that many brokers can't explain why they are worth their commissions to potential sellers. To keep from getting squashed by larger brokers, Davidson pays a generous co-broke fee to agents who bring buyers to the table.

His belief is that good agents should be able to justify their fees, not with generalities of the value they provide, but with specific examples of what they do in the marketing of a home. Realtors who are more in touch with their hourly costs of services and products will be more able to assign values to their services than those who do not track the pennies and dollars of overhead. Time has a value, but how much? Realtors who have a targeted annual/monthly income can determine their minimums easily to help them determine cost of services. Others may find that it is most cost effective for them to perform certain services and delegate or refer others.

Should You Cut Your Fees? Not Yet

Consumers will learn on their own that they should be careful what they ask for, because they just may get it. While they demand lower costs to the transaction, they will also need to understand that the more they do for themselves, the less likely it is that they are going to get the best home at the best price.

A revisit to the airline industry tells the story. While consumers demanded and got lower fares, they paid dearly by sacrificing safety and comfort. Anyone who has flown in a cramped seat, hungering for a hot meal, and looking over the wing wondering if maintenance had been performed definitely is paying a high price for low prices.

Buying a home is not the same as getting a hot stock tip, or buying a seat on an airplane. The one advantage that the industry has is that every home, neighborhood and transaction are unique, and value can only be quantified by comparison. That gives the agent willing to hold the hand of even the most die-hard Internet consumer an advantage. Without complete market knowledge of a given home and its neighborhood, it is anyone's guess whether the seller sold for too much or too little or the buyer paid too much or too little.

Only the Realtor knows for sure.

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  About the author, Blanche Evans

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.