A Tale of Two Real Estate Models: Commissions vs. Unbundled Services
Posted by nithi.vivatrat on January 24, 2009
In prior posts, I have argued how the commission model is an arbitrary method of calculating the fees to buy or sell your home with no direct connection to the value of services you were provided. Another major disadvantage of the commission model is that it impedes your ability to pick and choose, and only pay for, the specific services you want.
Consumers today are becoming more and more informed regarding real estate information, and many do their own homework when it comes to selling or buying a home. Yet today, those consumers will likely still end up having to use a real estate broker — and pay a considerable commission — to complete any transaction, even if they already did a substantial portion of the legwork.
In our opinion, consumers should have the right and freedom to pick and choose the services they want — they should not be restricted to an “all or nothing” model. In fact, “Limited Service Agency” laws in most states, such as Virginia, help clarify that buyers and sellers have that right.
The business model of the traditional real estate brokerage — dominated by the “commission on closing” fee structure — impedes consumer choice by eliminating the availability of “a la carte” services. A model where the fees are calculated as a straight percentage of the final sales price is just not conducive to offering consumers unbundled services charged on an hourly basis. From previous posts, we know that the commission-paid agent’s incentive is to spend the least amount of effort to close a transaction; a further side effect is that any work performed by an agent prior to a transaction is viewed, in effect, as cost of sales. Through that lens, consumers often feel dissuaded from contacting a commission-paid agent for help unless there is a near-term transaction to be had.
Take Jane as an example: she is considering putting her home on the market but first wants to get a professional’s analysis of the likely sale price, such as a comparative market analysis (”CMA”). The results of the CMA may determine whether it is the right time for Jane to sell her house. She hesitates, though, to call a traditional real estate agent because she is not ready to sign a listing agreement and does not want to feel pressured to use that agent later. Jane understands that an agent only gets paid when a transaction closes, so she would feel obligated to use the same agent for each stage of the transaction because there is a sense that she “owes” the agent for any work performed to date, whether or not she is satisfied with or has even requested such services to be performed.
Another example: suppose Jeffrey lists his home as a “For Sale By Owner”, but wants to hire an industry professional on an hourly basis to provide some advice on staging, marketing strategy and assist with price and contract negotiations. Jeffrey would have a difficult time finding a traditional real estate agent willing to offer these unbundled services without being tied to some form of commission-based fees.
The SmithAdams model offers Jane and Jeffrey the opportunity to hire industry professionals to conduct a comprehensive price analysis or make staging and marketing recommendations for a reasonable fee with no strings attached. The work product would be for Jane and Jeffrey to keep. Jane can use the CMA to help price her home when she is ready to put it on the market, whether or not she chooses to use a traditional real estate agent at time of listing. Jeffrey can hire a contracts specialist to negotiate the terms of the final sales contract on an hourly basis without having to pay an arbitrary commission at closing.
SmithAdams reverses the “all or nothing” model by offering consumers the option to pay only for value received.
Unbundled Services + Fee-for-Service Pricing = Freedom to Choose.
We believe that our fees should be calculated like any other professional services, such as accounting, legal, or any other general consulting — by the hour or by the project. You choose from our menu of services, offered individually or in sensible packages. Instead of paying a commission rate based on the property’s final sale price, regardless of the scope and quality of services you receive from a traditional agent, you are billed only for the services that you request and receive from SmithAdams. Further, since our team members are not paid on a commission basis either, our only incentive is to maximize your satisfaction — not just to close a deal. We believe this is a better and more equitable model for realty services.
One might ask, “Why doesn’t the real estate industry just promote a hybrid model — commission in some cases and fee-for-service pricing in others?” My theory: open dialogue about fee-for-service pricing is viewed by the real estate establishment as a slippery slope — if the unbundled services and fee-for-service pricing model works in some cases, then when does it stop? What’s to stop consumers from never accepting the traditional commission pricing? Our question exactly.
There are a couple of related key points for you to note:
First, it’s important to understand that we are not claiming, nor would we recommend, to reduce the commission that will go to the other party in a transaction. Until the industry widely adopts a fee-for-service model, we do not recommend reducing the incentive for other brokers and agents to engage with you in a transaction.
Secondly, if you have already entered into the now-commonplace “Exclusive Right to Lease/Sell/Represent Buyer” form of agreement with a broker, you have committed that you will NOT do business with another broker during the term of that agreement. Doing so would be going back on your word, as well as putting you at risk of owing two commissions! SmithAdams will not work on or become involved in any transaction in which the client has already entered into an exclusive agreement with his/her agent. We will discuss the concept of exclusive representation more specifically in a future post. In the meantime, it is clear that the combination of compensation by commission, an “all-or-nothing” service model, and the expectations of “exclusive right” type agreements hinder the availability of unbundled service offerings to consumers. There are signs, though, that consumers are starting to demand change…