Raising the performance bar will be a challenge for many REALTORS®, with the most work needed in the restructuring of fees, the clarification of agency relationships, and improvement in service delivery. Each of these tasks has its roots in the traditional business model in which the listing broker has control of the transaction, and collects fees from serving both sides of the transaction.

The biggest challenge that the migration to the Internet poses for the individual real estate practitioner is the inability to make traditional real estate practices work for the Internet-empowered consumer. Brokers who want to survive and thrive in real estate ecommerce must regroup and create new approaches to service delivery that not only works for the consumer, but also makes good business sense for themselves.

The real estate paradigm of listing broker-take-all has shifted until it is almost upside down, revealing a vulnerable underbelly to the industry that will widen the chasm between those who can earn a living in real estate and those who can't. These weak areas are in how brokers and agents get paid, how they promote their services as advocates or non-advocates, and if consumers can understand what value they deliver to the transaction. These aspects of the industry are particularly cloudy on the Internet as agents and non-agents fight for the eyeballs of the confused consumer. Realtors are not only competing with each other, they are competing with third-parties who are willing to trim the fat from the commission-based real estate fees and pass the savings to the consumer. If the industry is to survive and thrive, the listing broker must learn to give up some power in the delegation of fees in the transaction or risk displacement by others who are willing to empower the buyer as well as the seller.

It is already proven that money is being left on the table by the real estate industry in its lack of representation of buyers, yet the Internet is proving that buyers are driving the real estate transaction. Almost all new services that are being promoted on the most popular Internet sites are geared for buyers - mortgage calculators, mapping, school reports, and home buying financial planning services, to name a few. For sellers, the new products are few and should be disheartening to traditional listing brokers - discount listing services, and agent bidding services designed to reduce the costs of selling a home to the seller.

In order for the industry to stem the flood of fee-cutting that has already begun, listing brokers will have to learn to share power in the transaction, beginning with letting go of the sales contract itself.

The listing broker who would like to serve both sides of the transaction is given a lot of power in the listing contract, with the commission paid at the end of the transaction, as the large carrot for performing services. With the commission built in to the selling price, the listing agent and sub-agents are assured of being paid at closing. The listing broker, at best, can facilitate a quick transaction with the company team of salespersons working in the seller's behalf. At worst, any buyer may overpay for the home.

Another area of power for the listing broker is in market manipulation. Some listing brokers can actually limit their competition by lowering co-broke fees below accepted levels, or by refusing to share commissions with buyer's brokers at all. At the root is the broker's desire to serve both sides of the transaction, a feat which really can't be done. Franchises are already doing battle in courts to limit unfair practices which can be construed as monopolistic.

That's where the tangle of agency relationships and commissions will prove to be the Achilles heel of the industry.

The Transaction Brokerage Trojan Horse

To enable the listing broker to serve both sides of the transaction, the device of transactional brokerage, or non-agency was created. It is being adopted by most states, as long as the consumer is adequately disclosed as to the nature of agency and non-agency relationships.

Two events recently took place in which are the harbingers of agency and non-agency disclosure. In Florida, it has been decided that all consumers must be disclosed as to whom the agent represents. That means a transactional agent (listing broker) must explain the non-agency aspects of their services to all consumers they encounter in the transaction in order to comply. In Oklahoma, the Supreme Court recently ruled that not only was a buyer's agent within his rights to advertise that he saves his clients money, the Court admonished the Oklahoma Real Estate Commission for not understanding its own regulations concerning the right to promote agency. Again, the listing broker contingency lost face and lost ground.

Transactional brokerage allowed for third-party intermediation to slip through the barricades into the real estate transaction. As soon as transactional brokerage was introduced, fee-for-service and discount brokerage instantly became more common. Why? Because listing brokers no longer performed as fiduciaries and no longer could command a fiduciary's fee for exceptional service. Now, listing brokers must compete with low-cost listing services who are willing to place seller's homes in the MLS for $500 or less, and offer a menu of low-cost services from which sellers can choose. Along with the right to represent both sides without liability, the listing agent gave up the right to ask high commission fees.

Designated Agency and Single Agency

For a service to survive the cost of service must suit the consumer and the cost of doing business must yield a profit to the service provider. Two solutions that make sense for listing brokers could also provide greater yields for consumers - designated single agency or pure single agency.

The definition of the transactional broker is that the listing broker can remain neutral in the transaction while designating agents from within the company to serve as advocates for both sides of the same transaction. The conceit here is that although the broker reduces liability by reducing advocacy, the agents of the broker, the listing agent and buyer's agent must also reduce their advocacy in order to protect the broker and themselves. This approach is what leaves the industry vulnerable to fee reduction.

With designated single agency, the broker can clearly represent one side of the transaction or the other, while still limiting liability. With single agency, issues of advocacy and liability are even clearer, and are protected by statute as well as common law. As long as transactional brokerage is open to interpretation by regulatory commissions and by consumers, the industry runs the risk that common law can be abrogated, and statutes can be reversed, as it happened in both Oklahoma and Florida.

The remaining issue is how to make up the loss of revenues from giving up one side of the transaction.

Making Up Lost Double-dip Revenues

The immediate big picture effect of single agency and designated single agency is that consumers will be heartened by the fact that through these devices they can hire true advocates. This should go a long way toward raising the public opinion of the real estate industry. The higher the opinion, the more likely all agents will be able to charge fair to handsome fees for their services. With the restoration of advocacy, also comes the reintroduction of fiduciary services which carry greater risks, but also can generate higher fees.

Although it would take some retraining of consumers to think of agents as agents for themselves instead of agents of the broker, consumers should readily adapt. Contracts for sale could advocate that the proceeds of the transaction pay the listing broker and agent only. The buyer's agent and the buyer can negotiate their own fees, also to be paid out of the transaction. The listing broker, in return for giving up one side of the transaction, would be well within his or her rights to request a referral fee on all listings. Not only will they collect the listing fees, but a fee from every buyer's agent as well. After a number of transactions, the broker should see an increase in revenues instead of a decline. This business model should work even if other brokers don't cooperate in kind.

The industry should overall see an increase in the number of sides which are served. Since over half of buyers go to the closing table without an advocate, there is a huge number of untapped customers for the industry to serve. The serving of these individuals should also restore lost side revenues to the designated single broker.

To date, the real estate industry has built its market share by conducting business the same way among its practitioners. But the advent of buyer's agency and the Internet are changing that. They have already displaced the Realtor as the first point of contact on the Internet and at the center of the transaction, leaving Realtors with higher costs to compete and the inability to match the online services of many third-party real estate companies. If the real estate industry can react in time to adopt new business models that provide a win-win for both the consumer and themselves, the result will be a stronger industry that consumers will enjoy depending upon.

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