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A Real Estate Consulting Model
04-21-2012, 04:15 PM
Post: #1
A Real Estate Consulting Model
This article is one view of real estate consulting. I hope that it will generate ideas and discussion.

There are three groups of real estate services consumers: Sellers, Buyers, and “Advisees” (open to suggestions for a better term). The members of the first two groups are obvious, but I’ll state them anyway. Sellers are people who want to sell their real estate, and buyers are people who want to purchase real estate. Sellers and Buyers have traditionally paid for their services strictly by a commission offered by the Seller and shared with the Buyer’s agent only upon the sale of a property.

The third group, “Advisees,” are the consumers of pure consulting services. These are the people who do not necessarily want to sell or buy real estate, but are seeking advice upon which to base a real estate decision. This group would include such people as those: choosing between remodeling and buying a new property, landlords choosing between renting and selling, rental investors, value added resale investors (“flippers”), homeowners contesting a property tax bill, homeowners refinancing a loan, homeowners who want to maximize the value of their remodeling, and many others.

How consulting can work with each group.

In the traditional real estate model sellers pay for the services they use strictly by a commission contingent upon the sale of the property and based as a percentage of the sales price of the property. If the property does not sell, then no commission is paid. The seller pays a high fee in the form of the contingent commission, and assumes virtually no risk. The risk is assumed by the seller’s agent, and high risk requires a high fee

The real estate services used typically fall into three phases. The first phase is the preparation for sale and the marketing and advertising of the property. Think of this as the Multiple Listing Service (MLS) Phase. The second phase is the marketing activity to potential buyers. Think of this as the Showing Phase. The third phase is the negotiation and transaction management activity that takes place from the time a buyer makes an offer through the closing of the sale. Think of this as the Closing Phase. Each of these phases require different skills and experience.

The MLS Phase requires the fiduciary duties, experience, and judgment of the agent. The Showing Phase is mostly a functionary activity of running open houses, and meeting buyers for showings. The Closing Phase requires the fiduciary duties, experience, and judgment of the agent.

With the consulting model a seller can be given many different options to pay for the services dependent upon the sellers risk tolerance, willingness and ability to pay fees in advance of a sale, and willingness and ability to perform some of the tasks themselves. A seller who is risk adverse would want to pay a full commission for full service. Other sellers would be willing to pay an up-front marketing fee for the MLS Phase in return for a reduced commission. Sellers could further reduce the commission by paying an up-front marketing fee for the MLS Phase, and either paying for the services used in the Showing Phase by an hourly or task based fee, or by performing some of these tasks themselves. In terms of what to charge each agent will have to determine what the market will pay by experimentation and trial-and-error.

Buyers use real estate services in the same phases as sellers, but in slightly different ways.

The MLS Phase is where buyers search for properties that meet their need and desire criteria. Agents used to have control of this phase by controlling access to MLS information. That day is long gone, and most buyers now do their own work on the internet at the MLS Phase.

In the Showing Phase buyers are viewing properties either with their own agent, with the seller’s agent, or at open houses. This is mostly a functionary task for agents. Agents still have some control over this phase by use of seller’s agents requiring that buyers be accompanied by their agent, by the seller’s agent requiring that they be present at showings, and by use of lockbox systems available only to agents for access.

The Closing Phase for buyers starts when they make an offer to buy a property. At this stage a buyer needs the fiduciary duty, judgment, skill, and experience of their own agent to decide upon the details of the offer and its presentation to the seller.

Buyers are not used to directly paying for real estate services. This group presents the most challenges for adoption of a fee-for-services consulting model. The seller directly pays the fees to the buyer’s agent. The buyer is indirectly paying the fees, since the cost of the traditional sales commission is already factored into the prices of comparable homes. So keep it in the back of your mind that the wide-spread adoption of fee-for-services consulting in real estate may result in an overall decrease in home prices. Fortunately, this will not happen suddenly, and so the change may not be readily perceivable or perceivable as a result of fee-for-services consulting model.

Buyers could pay an hourly or task based fee for services, but many will not since they can readily find a buyer’s agent willing to provide these services for “free” or at least contingent upon that buyer purchasing a property through that agent.

In contrast to buyers paying fees for services many brokerages are now offering rebates of part of the commission paid by the seller to the buyer’s agent. Redfin is one of the best known examples of this.
Offering a buyer some combination of paying hourly or task based fees for services combined with rebates of part of the buyer’s agent’s commission is one way to provide consulting services. Keep in mind the distinction between charging a buyer an hourly or task-based fee, and waiting to receive payment of that fee until a closing. Deferring payment to the closing is a matter of when you are paid your fees, and not a matter of how you are charging for fees.

The biggest problem in switching to a fee-for-services consulting model is paying the buyer’s agent. These agents expect to receive a share of the commission paid by the seller. But what if the seller is not paying the seller’s agent a commission, or is paying a combination of fees and a very low commission ? How does the buyer’s agent get paid ? One way is for the seller to directly pay the buyer’s agent fees-for-services by task performed. This is radical, complex, and the subject of another article, but just think about it for a while.

This is the group currently under served or ill served by the traditional commission only compensation model. This is the group that will be most amenable to paying fees-for-services on an hourly or task-based basis.
Advisees can get some types of information for free from agents, but the information provided is always suspect. There is an inherent conflict of interest between the advisee and the agent, because with the traditional commission only model the agent only gets paid if there is a transaction. Any advice offered by an agent is tainted, since it is being provided, with the agent’s hope that the advisee will engage the agent is a transaction that will result in the agent being paid a commission fee. Better that the advisee pay a fee-for-service and know that the advice received is conflict of interest free.

In conclusion I hope this article gives you an analytical framework for real estate consulting, and stirs your imagination.

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04-21-2012, 05:33 PM
Post: #2
RE: A Real Estate Consulting Model
Melissa - this is fantastic. I wish I'd written it myself. Did you just put this together today, or is it something you use in your own practice?

Tell me more about YOU, please!
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04-22-2012, 02:20 PM
Post: #3
RE: A Real Estate Consulting Model
I love it Melissa - very well written.

Mollie Wasserman
Founder: ACRE
Proud Member of the ACRE 2.0 Team Smile

"Life is not about waiting for the storm to pass…it’s about learning to dance in the rain." Vivian Greene
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