In its November 2010 issue Real Estate Marketing (REM) published a guest column entitled "In Praise of Commissions." When I cooled down a little, I wrote a response, just published in the February issue, which is reproduced below, but one should first read the original article In Praise of Commissions for context. Apologies for the length, but I'm competing with Paula Bean for the record!
Another View of Commission (as published in REM, February 2011)
The Guest Column (REM November 2010) did our industry a service by raising the subject of agent remuneration, but the assertion that sale-contingent commission is the best compensation method for ever and all time perhaps deserves some scrutiny.
Public response to on-line media articles around the recent Consent Agreement between CREA and Competition Bureau overwhelmingly cast real estate agents in a negative light, suggesting, among other things, that we are overpaid, under-qualified, self-serving, lazy etc. Little was said to suggest that we add much value to real estate transactions. A common thread connecting many of the negative comments was commission. Public opinion surveys repeatedly rank us embarrassingly low on the integrity scale. Our traditional compensation model only perpetuates this industry’s self-centric image in a day when consumers are demanding fairness and transparency.
Because compensation is a driver of agent behaviour and inextricably tied to agency and common law fiduciary responsibilities, it may be time to look deeply into agent compensation in general. One can only offer an overview of some of the issues here, an in-depth analysis being beyond the scope of a guest column.
Residential Real Estate Brokerage in North America is structurally flawed causing both consumers and real estate practitioners to suffer. The principal flaw, from which most others flow, is a disconnection between the duties and the compensation model of real estate practitioners. Driven by the momentum of a century-old sales culture, of which sale-contingent commission is the backbone, we missed an important turn in the road when most North American jurisdictions adopted buyer agency in the early to mid-nineties. It was time to stop selling and get serious about representing!
The common law has long held that real estate practitioners are fiduciaries, obligated as agents to place their clients’ interests above all others including their own. By tradition and momentum, however, agents work in a predominantly sales-oriented culture and are compensated as salespeople through sale-contingent commission. This incompatibility between duties and compensation method has far reaching effects on both consumer and real estate practitioner. The economic necessity of earning income creates the potential of conflict with the legal and ethical duties of being an agent. All too often, the advice that best serves the principal’s interests is different from the advice that would secure the real estate practitioner’s commission.
Confusion exists in provincial/state legislation governing real estate brokerage, through the regulatory agencies that enforce those laws, and in the boards and associations through which real estate practitioners manage their professional affairs. The popularly interchangeable terms of “real estate agent” and “real estate salesperson” exemplify the confusion. Can we really be both?
Sale-contingent commission is replete with incentives and motivators that too often run counter to the interests of the consumers we serve. Human nature being what it is how can one who has a financial interest in the deal possibly be objective and place the client’s interests above all others, including their own?
Most of a commission real estate agent’s work falls into one of three categories: overpaid, underpaid or not paid at all. Agents rightly cite their risk and expense as justification for commission being so expensive. A single “big kill” commission compensates the agent for free CMAs, expired listings, various favours and freebies, buyers who didn’t, etc. It all levels out for the agent, but that’s cold comfort for the consumer who paid $25,000 to have their property sell in three days! The reality is that consumers whose homes actually sell are unwittingly subsidizing a variety of unpaid services for people they don’t even know!
Other potentially conflicting elements abound… Buyers are told that their agent’s services are free of charge, when, in fact, the buyer’s agent’s commission is usually an undisclosed component of the purchase price being paid by the buyer.
Agents are still enjoined by brokers and colleagues to “remember who you’re working for” when the subject of compensation is being discussed.
The typical commission split arrangement is a disincentive for the buyer’s agent to show properties that are not listed or do not offer a sufficient co-brokerage payment. What a decision! Either limit the buyer’s choices or run the risk of not being paid!
Recent scandals around the likes of Bernie Madoff, Enron, Conrad Black and Wall Street have given consumers a big appetite for transparency in business transactions. Some of the emerging business models place the real estate practitioner more in the role of consultant than salesperson, thus enabling a better alignment of professional duties and fiduciary responsibilities. Such business models might be timely and go a long way toward increasing our credibility and improving our integrity ranking. One source of ideas for such business models is The Real Estate Consulting Institute www.realestateconsultinginstitute.com .
Ron Stuart is an Accredited Consultant in Real Estate® (ACRE®) and a REALTOR® practising in Halifax. He is a recent Past-President of NSAR and currently a Commissioner of the Nova Scotia Real Estate Commission. He may be reached at rstuart@harboursiderealty.com or via www.halifaxrealestatechoices.com .
Wow! You spoke so eloquently Ron and made so much sense. We've already had a new ACRE enrollment from Ontario who enrolled after reading your article. Kudos for great insight and even better writing.
First of all, Ron thank you for bringing this article to our attention to Ari Lahdekorpi’s article. As we read this article, we are able to see the flaws in Ari’s rationale. I am not sure about his comments about how using “a pay-as-you-go component in any way creates a lack of urgency on the part of the agent.” I am a new ACRE®, but what I have seen, is a group of highly creative and motivated individuals.
I also question his statement” If a real estate agent was paid on hourly or service-based model, the performance would not compare to the success achieved under a results-based model.” He does not support this assumption with any facts that such is true. Also, his last paragraph makes some assumptions that he also does not back up with any proof. “There is no doubt that commissions based sales provide both the client and the agent the best solution for the complex territory that real estate industry covers.” Mollie makes a much stronger case for offering clients CHOICES so that the latter feels an integral part of the experience and a WIN-WIN situation is created.
Great post Ron, although you can never compete with me in length or JudiB for that matter (giggles!)
If we all got more involved in posting on various sites, magazines, etc. we could go further in promoting the ACRE concept faster.
Keep up the good work!! I am looking forward to hearing your listing presentation on Thursday at 3pm EST. For those who've not seen this, sign up before there is no room left, you'll be glad you did. Ron has this down pat!
As of this moment, we already have 8 new ACRE enrollments that have come from this article. Wow Ron - you have surely made an impact!