The case against 'one-size-fits-all' real estate pay structure

Transcription

1 The case against 'one-size-fits-all' real estate pay structure By Inman News Even as some major national real estate brokerage companies are downplaying their lower-cost business models, there are local and regional real estate brokerages that choose to promote a range of choices in the type and cost of services they provide to clients. The housing and economic downturn has led some consumers to seek cheaper alternatives to the traditional commission-based brokerage model. At the same time, ever-growing real estate resources online mean consumers can now easily search for homes, research neighborhoods, and even market their properties without the aid of an agent -- leading some to consider doing some tasks themselves with the goal of saving money. Even so, the housing slowdown has made going-it-alone a difficult proposition for some sellers. Consumers in many market areas have a wide range of choice in agent compensation, including full commission, discounted commission, rebates, flat-fee, a la carte, hourly rates, and a la carte/fee-forservice. In addition, evolving mobile and geolocation technology has meant that brokerages can offer consumers targeted discounts at their fingertips. "From a consumer perspective, it's kind of getting away from the one-size-fits-all, one-commissionfits-all traditional service," said Albert Hepp, president of the American Real Estate Broker Alliance (AREBA), founded in AREBA has about three dozen members, most of whom are flat-fee real estate brokers, but its members also include brokers that offer other limited-service discount models. Some discount brokerages are full-service brokerages, which means they typically offer a package of real estate services that cover the real estate transaction process from beginning to end, and some are limited-service brokerages, handling only certain parts of a transaction, such as entering a listing into the local multiple listing service. Fewer limited-service brokers According to the National Association of Realtors' 2010 Profile of Home Buyers and Sellers, 1 percent of buyer's agents and 3 percent of listing agents are paid by flat fee; most agents are paid a commission by a seller, based on a percentage of a home's sales price. Less than 1 percent of listing agents are paid by "per task" fee, NAR reported. The vast majority (88 percent) of sales are agent-assisted, while 9 percent are for-sale-by-owner. The latter figure is a drop from 2008 and 2009, when FSBO sellers made up 13 and 11 percent, respectively, of sellers overall. "In this tough market, a greater share of sellers are turning to agents to help them sell their homes," the report said.

2 Joe Ory, 2010 president of the New Orleans Metropolitan Association of Realtors, said he's seen no increase in limited-service brokers during the downturn. "Actually, the downturn really emphasized the need for full-service brokers. With people facing foreclosures and short sales, a hands-on, tenacious Realtor was the only guarantee of success. Those sales weren't for the fair-weather soldier," Ory said. According to the NAR report, the vast majority of agents (80 percent) provided sellers with a broad range of services and managed most aspects of the home sale. For 11 percent of sales, the agent listed the home on the MLS and performed few if any additional services, and for 8 percent of transactions, the agent performed a limited set of services as requested by the seller. Whether the downturn has been a boon or a hindrance to discount brokers is an open question. Some report less business, some more. Hepp estimates there are fewer flat-fee brokers since the downturn, just as there are fewer brokers in general. "Two competing forces are at play in the current real estate market. The perception that it is more difficult to sell a home favors traditional agents over the flat-fee home-sale model," Hepp said. "The opposite force is that many sellers do not have the equity to pay a traditional commission. They desperately need or want a lower-cost option." Of sellers who sold their home as a FSBO, the biggest share (38 percent) said the main reason was because they did not want to pay a commission or fee, according to the NAR report. That figure goes up to 57 percent for those who did not know their buyer. By law, real estate commissions are negotiable. "Even though there may be the perception of a 'normal' commission, our industry is subject to federal laws that prohibit price fixing. All commissions are negotiated, so there really is no 'discount' broker, by definition," Ory said. Whether most consumers actually know this is less clear. NAR's 2010 buyer and seller profile found that in 44 percent of transactions, the real estate agent brought up discussion of compensation. The client brought up the topic in 34 percent of transactions. In nearly 74 percent of client-initiated conversations, the agent was willing to negotiate, while in more than a quarter of such conversations, the agent was not. Ten percent of clients knew commissions and fees could be negotiated, but did not bring up the topic, while 11 percent of clients did not know commissions and fees could be negotiated. Differentiation by compensation When Aaron Farmer, an early champion of low-cost real estate business models, founded Texas Discount Realty, he sought to distinguish himself from competitors.

3 "When I originally started back in the summer of 2000, there were very few brokers doing anything remotely close to these kinds of models," he said. While many brokerages shy away from calling themselves discounters, Farmer has embraced the term as essential to his brokerage's brand. "I think that we have become known for the 'discount' label and come up very high in search engine rankings under most of the popular search terms relating to that, so changing might hurt more than it would help at this point," he said. Texas Discount Realty is typical of local and regional discount brokerages in that it offers several service packages: three limited-service plans and one discounted full-service plan. The brokerage mostly works with sellers, though it does offer rebates to buyers. The plan most popular among clients is one in which they pay a $495 flat fee to have their home listed on the MLS and some other real estate websites, and pay a $1,500 flat fee at closing for assistance with negotiations through the end of the transaction. "I tell sellers that it is basically a full-service transaction once a buyer is found. We do not do any 'additional marketing' of the home other than (place it on the) MLS and all of the websites that pull data from the MLS, which is all that many traditional agents do anyway," Farmer said. Rise in competition While some brokerages offering flat-fee models were discount pioneers when they first launched in their market areas, several now report plenty of competition and more demanding customers. "I have noticed many more similar business models, as well as traditional brokerages lowering their commissions and allowing their agents to be more competitive in their pricing," Farmer said. Ryan Gehris is co-founder of Housepad, which operates in 25 states and Washington, D.C. The brokerage operates on a flat-fee, a la carte model, which means customers can choose from a list of available services, including listing a home in a local MLS, providing yard signs, and phone consultations with a real estate agent. "When flat-fee (MLS-only listing services) became a known option -- (around) customers were thrilled to have a new option, and they placed relatively few demands on their flat-fee MLS broker. Now that the subindustry has matured, customers have many flat-fee MLS broker choices, and therefore their demands are much higher," Gehris said. "Specifically, the sellers are more concerned about how fast a phone call or lead will get forwarded to them, and what are the (additional) fees. Originally, it was common practice for flat-fee MLS brokers to have the right to capture and monetize buyer leads. That quickly became not accepted by sellers as the model grew," he said. Because sellers can avoid paying commission to the buyer's agent if the buyer is unrepresented, "most flat-fee MLS sellers require their broker to not 'get in the way' of their leads," Gehris said.

4 "Only about 20 percent of our sales do not involve an agent for the buyer, but sellers want to maximize that possibility." When Housepad began, it ran on an exclusively traditional model. Between , the brokerage experimented with discount models, and by 2003 it settled with a model that largely resembles its current model. By the end of 2007, the brokerage became exclusively flat-fee and laid off all of its agents, Gehris said. The brokerage has significantly more customers now than during the housing boom. From , Housepad's listing volume grew by 49 percent, Gehris said. Still, competition from other flat-fee, MLS-listing-only brokers has pushed Housepad to lower its fees over time. "Our fee for the listing ranges from $99.99 to $249, depending on the market rate in that MLS area. Back when this was a nascent concept, the market rate was around $495," Gehris said. Local brokerages offer discounts Some agents at traditional, full-service brokerages offer discounted options when clients are likely to bring the agent more business in the future. Amy Wagner, a broker associate at Cherry Creek Properties in Denver, said she offers frequent investor clients discounted commissions. "Since I work primarily with fix-and-flip investors, I charge different amounts, depending on how often they use me. For my repeat buyers, I charge nothing on the buy side and varying amounts on the listing," Wagner said. "I charge 1 percent to my investors on the list side, at the lowest. I usually start at 3 percent and work down from there." Cherry Creek broker-manager Andrea Altieri said that for the past three years she has offered her fixand-flip clients the option to pay a flat fee to resell their homes using her services. "I started offering it because one of my repeat buyers was, way over budget on her rehab and she had always listed with another flat-fee broker. I wanted the business, so I offered the service," Altieri said. About half of her clients are investors looking for rental properties, and about a quarter of them sign up for the flat-fee service, she said. "It's usually for my flip customers who do their own marketing -- if I get paid full price on the buy side, I can afford to give them a break. I don't have to do open houses or show the house. I just put it on Craigslist, tweet it, put it on HotPads and Facebook," she said. "If I am not doing any marketing, I can't expect to receive a full 3 percent, but if I am doing high-end marketing and having broker opens with nice wine and food and upscale everything, then I'll get paid in full."

5 In the end, if she both buys and resells a property, she makes the equivalent of a 3 percent commission on a single transaction. "My customers love it -- there are no surprises. And they have more money to buy more houses, so I make it up on volume," Altieri said. Altieri and Wagner said they can be more flexible with their service options partially because of the structure of their commission splits with their brokerage. They pay Cherry Creek $199 per transaction and keep the remainder of their commission. Therefore, the brokerage makes more depending on how many transactions they close, not based on a percentage share of the overall commission amount. "It gives both me and my clients options," Altieri said. Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate, said she started offering a flatfee option to sellers and owners of rental properties about 18 months ago. Though the small boutique firm focuses primarily on mid- to high-end real estate, "we found a need in a changing economy to offer a flat-fee listing service," Eldorrado said. "Most still opt for full-service brokerage. However, it can be very helpful when there is a financially challenging situation, such as a reality check about the perceived equity one has in a property." The brokerage offers two flat-fee options to sellers and rental-property owners. One is a basic service for $299 that includes listing a home with owner-provided photos in the MLS and on Realtor.com, and a one-page printout of their MLS listing to hand out to potential buyers and states the commission that will be paid to the buyer's agent. A deluxe service for $598 includes listing a home in the MLS, Realtor.com and 20 other real estate websites, 16 professional photos, a neighborhood report, and additional marketing. "The flat-fee service typically involves the owner taking calls, setting appointments, showing the property, and doing follow-up calls and communication after the showing for feedback. These are things we do in a full-service agreement," Eldorrado said. At no extra charge, the brokerage's flat-fee listing agreement also offers clients the "minimum services" required by Illinois license law. These include presenting to the client all offers and counteroffers to buy, sell or lease the client's property; assisting the client in developing, negotiating, and presenting offers, counteroffers and notices "until a lease or purchase agreement is signed and all contingencies are satisfied or waived," and answering client questions in relation to offers, counteroffers, notices and contingencies. "It works really well for rentals, and our clients are very satisfied. (We are) unlike companies that feature the fact that they are flat-fee in their name," Eldorrado said. "I believe offering the service within a full-service firm such as ours does add a certain positive marketing element unlike a flat-fee-named company."

6 Coupons for real estate Some traditional, full-service brokerages are looking to take advantage of the rise of geotargeted collective buying sites as a way to generate more business. Recently, a Chicago-based real estate brokerage became the first to offer a deal on global coupon site Groupon. Dream Town Realty, a 165-agent firm, offered $1,000 cash at closing to buyers or sellers who purchased a $25 Groupon. The deal reached its 50-buyer minimum in less than a day. HouseTipper, a similar deal site geared specifically toward the housing industry, launched in January. HouseTipper offers deals on the services of agents, painters, plumbers, appraisers, and other professionals as well as store discounts. The company has deals running in several cities nationwide. Agents can offer deals on HouseTipper for free; the site keeps the cash from the actual purchase of the deal. "(The advantage for the agent) is getting the lead. Once the consumer buys the voucher, that's a pretty solid lead for the agent and it didn't cost the agent anything on HouseTipper," said Tigue Bonneval, the site's co-founder and an agent in Baton Rouge, La. "(Agents) are fine with discounting a commission if they get three solid listings, or they're fine paying for a home warranty for a buyer if they get five good buyer leads," he added. Brokerages can also offer geotargeted mobile coupons, prizes or discounts through a mobile gaming social networking site such as Foursquare. Mobile gaming platform SCVNGR offers brokerages the ability to take advantage of consumers' deal-seeking tendencies in a more indirect way, by sponsoring a contest that offers winning homebuyers a large down payment on their future home purchase. Dubbed "Race for the Home," brokerages can pay a fee to include some of their own listings in a game in which homebuyers use the SCVNGR mobile platform to visit and complete simple challenges at open houses around a particular city. SCVNGR began the competitions last year; its second contest in Atlanta is set for May 14.