This is a new post on these important issues and how they relate to alternative business models. There were many great comments off subject on the recent Ambassador Program Brainstorming Session Announcement which I will attempt to collect and move to here. To do this I have to manually modify the data base (literally) that supports the Exchange. This will be a time consuming process but, the comments are valuable enough to attempt to do this. It will take a while.
In the mean time, if you have thoughts on these subjects comment on this post.
I am a bit put off by what seems to be a push for "discounting" by some ACREs. I know that is not the crux of ACRE's message at all but it seems to be "out front" more than I would personally like. Due to the "seeming" emphasis that some ACREs place on "rebating" a portion of their commissions (which is fine if that's their thing) I am a bit hesitant to promote ACRE to my broker or other agents.
Please don't misunderstand. I know that is not what you promote but it is the perception that some people I've talked with have and it is difficult to counter that perception. I love the ACRE concept and am promoting it in ways that I am comfortable with but I do want you to know of my concern that we may be coming across to other agents and brokers as just another "discount" service being "branded" in a different way.
I do not promote or talk about "pricing structure" so much as "providing options." I do not discount and have no intention of discounting and I don't care for the image that "rebate" conjures up for many people.
In a recent board sponsored CE class I attended, the fee for service concept was discussed and nobody but me was in favor of it as an option. A couple of people became openly angry at the suggestion that it is a viable option and could be the direction our industry will move toward.
It seems to me that if we are to move our industry, we will have more success by focusing on the professional aspects of "consulting" and "offering options" as opposed to focusing on how or how much we are paid for our services.
The VALUE, in my opinion, is in the SERVICE PROVIDED not in the COST to the consumer.
Thanks for the opportunity to share my thoughts.
Tim
Timothy, your comment makes a lot of sense.
The agents who become openly angry are probably the same ones who are reducing their commission from their normal rate in order to get listings. However, they will never admit it, and the only ones who will ever know are the buyers agents who see the HUD-1.
Being a buyers agent, I see it a lot.
If we are NOT working on contingency and get part of our fees upfront, would it then make sense to reduce commission.
If the commission to listing broker is 1.5% or 2% (not including buyer broker fee), and if we got payment up front of one third of listing broker fee, would it then make sense to reduce our fee.
If buyer hires buyer broker expecting commission to be 12,000, would it then make sense to give $6,000 refund to buyer at closing, if the buyer pays $2,000 advance fee upon signing the buyer rep agreement. Thus buyer broker makes $6,000 of which $2,000 was advance payment.
and agrees to show 8 homes and thereafter charge is $75 per hour.
It really depends on the economy if your market which is different in Florida, or Detroit or Houston.
I would have to give a lot of thought of that. I see no reason to give half my pay to a buyer. Also, a limo driver will cost $70 per hour plus tip. Why would I provide my Town car (which I use) and service as the driver and also be the real estate consultant on the homes we're seeing, for $75 per hour (and no tip)?
I appreciate your candid comments regarding a push for discounting gimicks amongst some. You are right that is not what we are about and as we've stated many times, consulting is about providing choice - not a fee schedule. That having been said, we can't (and really don't wish) to create robots that do just what we say to do - rather what we try to engender in the community is a sense of professionalism and earning what you're worth.
I personally am very sensitive to the concept of rebating as it seems to me to broadcast to the public that we're overpaid to begin with if we have the "fat" to rebate back. I've felt that way for years about referral fees - how can we give up 25-35% of our pay if we're being paid fairly to begin with? How does that look to the consumer? But, having said that, if we have to deal with the commission system, is rebating our commission if we've been paid non-contingently (and well) from the beginning a bad thing?
We're on unchartered territory here and we will all try different things till we find out what works best, not only for ourselves, but for the public we serve. It's a shame that so many real estate professionals look at consulting as another discount scheme because in my mind, it is the antidote to discounting. Now, some may take consulting and use it as a gimmick: unfortunately, we can't control that - we can only do our best to train our ACRE population to value itself and the clients that we serve.
Again, I very much appreciate your candid thoughts and encourage you and others to post them on the Exchange. I hope no one holds out because they fear what others may think - the Exchange is here for you to be able to ask questions, share ideas, and refute other ideas "amongst the family". Keep in mind that like any diverse group, there will be different things that people are comfortable with that you may not be. That's why they make chocolate and vanilla (as my mother has always said). You represent yourself - not others and can advertise and promote how YOU individually work.
Tim, you make a valid argument that we tend to use the terms “discount and rebates” too loosely. I believe that most in this forum understand the difference in the consulting model as opposed to the traditional fee structure. However we must understand that most people, especially those put in a position to weight putting up a dollar to save a dollar or two, are risk averse. They intuitively understand the large risk premium in the traditional model but will find it difficult to share that risk unless the return is large enough. This will vary with individual tastes for risk. This is a real issue that has been studied over the past 15 years or so. This also is the crux of the client’s objection even if not voiced. They will pass on the idea that they will get professional, unbiased advice if they have to take the risk that for whatever reason the deal does not happen. This is one of our marketing hurdles.
I don't have a lot of time available, so I can't post a lot. However, I'll take a few minutes here to say that I have Merv's Smart Plan, and that is the best way to begin. I can say what I'm doing, but each person has to do it themselves.
For sellers it's easier, and it's more difficult with buyers.
For buyers I took each price range and listed on the SmartPlan the functions that I perform; the amount of "average" time for each function, and the hourly charge for that function. It sub totals on the right, and then all totals on the bottom.
For a $400 k home, the "pay for activity" totals $10,515. There is NO Discount for that fee. That is what I have to have to keep my business running and make a profit.
If the buyer wishes to share the risk, then s/he will pay me $1,002 up front for the initial work; then $4,006 at the end of 30 days; then the balance of $5,008 at the close of escrow.Then I will have been paid $10,016 for the activities performed.In this case the amount they "saved" by sharing the risk, assuming the listing agent is paying me a 3% commission is $1,984.
If they do not wish to share in the risk, then they will pay me a 20% premium for me sharing the risk. That will amount to $12,000, ($10,016 X 1.20) which is the amount that will be covered if the listing agent is paying me 3%.
There is no discount. There is no rebate. If the buyer wants to share the risk, the s/he will "save" some money which can go to assist in down payment or whatever they wish.
For sellers I have a different list of activities for each price range. The standard activities that I do takes me to a contingency based fee of x percent. I cannot state the actual fee because of anti-trust, but I use a fee based on what feel is deemed acceptable by the public.
The seller can choose a group of activities and pay me a portion up front, another amount 30 days from now, and the balance at COE.
If they wish to do the commission based, but still have a reduced commission, then I will ask what activities they wish to have me not perform. The first to drop would probably be the open house.
Below a given price range, there would be no price reduction at all because my the commission paid by the buyers agent wouldn't cover my needs.
I have a lot or work to do to refine all this; to develop the presentation so that it's easy to understand, and the buyer/seller can easily see these numbers on paper and make an educated decision as to what activities they want and how they want to pay for them.
It seems to me that if people do not make that initial study and take several months developing a program and refining it, that it would be very easy to just start discounting and rebating; which is not what this is all about.
Your last paragraph Bill is spot on: our industry unfortunately has this mind set of a "silver bullet" and they invest lots of money in the newest flavor of the month but what they don't realize is that anything that will make you money takes thought and care.
I'm constantly asked for "scripts" for what I say and while I'm happy to give examples, you have to refine and make things your own. It's like taking someone else's prescription medicine - what works for me can't be used by all.
Our industry is full of folks that, when they encounter resistance from consumers, come up with the easy answers of cutting their commission rather than doing the hard work of developing choices that make sense for both consumer and agent alike.
You are absolutely right - lopping a percentage off your commission or handing back money with no thought of what will earn you a reasonable living is the easy way - scorned by consumers, and not what consulting is all about.
Great comments Bill.
I have offered a free consultation to every SmartPlan™ user to review their first time use of the models. Unfortunately, I have never heard back from anyone. Must I assume it was not the silver bullet and mosty are not using it. It does take time to refine your approach. I stepped all over myself my first couple times presenting it to clients. But, that is how I learned and refined my presentation (and hours and hourly rate) until it flowed easily and I wasn't under pricing my services. It does take work but when you use it clients love it!
This is for Tim and others commenting on rebates.
Offering rebates to buyers has wide ranging application. From just trying to be competitive to providing an incentive to adjusting for the amount of work that is done.
I choose to focus on the last one: adjusting for the amount of work that is done. Let me offer a real life example:
I received a call from an Air Force Lt. Colonel in San Diego. He was being transferred to the Pentagon (I practiced in Northern Virginia). He and his wife had already zeroed in on the town and neighborhood and narrowed their on-line search to two (2) listings. They wanted my services to
The sellers were offering X to the buyer broker (btw, I was a 100% agent with RE/MAX). I offered to "rebate" 1/3 of X to be applied to closing costs for NOT having to do all the up front work and touring looking for homes. Working with their lender, they were able to use the "rebate" to buy down the interest rate on their loan.
I was happy to be paid fairly. They were happy to receive a benefit for their comprehensive up front work.
In this case, "rebate" is not a dirty word.
Here is a law firm acting as a real estate agent or maybe it vice versa. I do not think they are ACREs.
http://walawrealty.com/fees/ They charge $4,000 for every transaction under $one million and give a 100% rebate of their commissions. For buyers they offer 20 hours of home tours Thereafter it is $75 per hour. Sellers can show their own home and get one open house gratis.
I have seen this company but I still feel as if they are selling themselves short for the time involved in the transaction… They are a relatively new company and I have seen many of their signs in the area… It lacks that high level of industry knowledge and service in my opinion… But I am sort of a marketing snob… Is this more of a flat fee model?
Does it take more expertise and more time to consult on a $700,000 property than it does to help with a $400,000 property? Is our expertise and time more valuable on higher priced properties? If it takes the same amount of time should we charge more? I have been questioning myself?
I have several options for consumers to choose, however in Texas the fiduciary obligations make me be more diligent. If I sign my name, then the consulting fees are higher because I have more at stake. If consumer wants to come to the office for advise and pay hourly, then that does not require my signature.
The major brokerages do not pay a commission to subagents and only pay buyer agents usually 3%. One of my compensation options is to give 100 % commission rebate then charge half of that amount as consulting fee, meaning that my consulting fee is 1.5%, minimum $4,000.
Assuming that $400,000 property, I am saving them 1.5% which equals $6,000 am making the other half $6,000 then I ask for $1,500 (maybe $1,000) up front upon signing engagement buyer rep agreement. I get the remainder $4,500 at closing when they get their $12,000 REFUND (as Glen Freezman calls it, since the mortgage paid the commission)
Hmmmmm
Lester, profound internalization. I often think about the answer this way:
What if our industry NEVER was commissioned based? Erase it from your mind. Maybe there is a bit more service to be provided on the higher priced property, maybe not. Lets say the services are the same. If you apply the fee for service model to both price points are we being paid fairly for our services in either case?
When using a fee for service model against commission, many of us feel like we are leaving money on the table and find it almost impossible to do. This becomes a huge psychological conflict. Every person embracing a different fee model needs to resolve the internal conflict. If you can't, why ever think about offerring fee for service?
Let me go on. If you come to the conclusion that a particular client in any case is going to take more attention based on your assessment, maybe you adjust your fee upward to compensate for the extra time.
Now, lets go the other way. You get paid fairly at the $400,000 price point using fee for service. What do you do at the $200,000 price point? More interesting internalization about how and what you charge.
If I may respond to the $400 vs $700k question. In my opinion there is a greater financial risk with more expensive homes. If you make a mistake it's going to cost you more money. I made an error on a $1,200,000 home and it cost me $2,500 out of my pocket. I volunteered to pay it because I was getting a good commission and could afford the expense. The added goodwill more than made up for my error.
The buyers and sellers of more expensive homes are probably going to want more personal service and utilize more of your time.
Another thing. the model must be consistant; and I'm referring to buyers here. The reason for the contingency "commission" model being at a higher amount is to compensate for the times a buyer does not buy. (All the non-paid hours)
If one has some buyers pay by activity, or by the hour, and others work on contingency and give rebates, then all we've done is reduce our income by half. That means at least doubling the number of transactions to make up for that.
If one closes (15) $200,000 buyer transactions on contingency, with another (15) that did not buy (non-paid) the "gross"pay, if the sellers agent offers 3% is $90,000. Thirty transactions total.
If one closes (15) $200,000 buyer transactions and gives back half of the commission, then the gross is $45,000 for the 30 transactions.
In order to make the same $90,000 gross, the number of transactions would have to more than double to more like 80 transactions, because of increased marketing expense, and adding an assistant.
The model and the presentation should be so that the gross income is the same, with the total number of (non-paid) transactions being reduced. That is, we put in the same number of hours, with fewer non-paid transactions, and make the same money.
Discounting may put one out of business eventually. Pay by activitiy, if developed and presented properly, should present choices that are acceptable to clients and we make the same income, with fewer transactions. (Getting paid for all, or most, of our time)
In keeping with the Ambassador part of the discussion, I would not want to discuss the pay by activity with other agents until I have a full understanding of it; have my model fully developed; have the presentation fully developed; and have a track record of success to back up what I would discuss.I probably won't even be ready to make my first presentation to a buyer for several months.
Buyers will be extremely reluctant to put any money out of pocket because they are accustomed to not paying. If they're approached with this concept at the wrong time and with an unpolished presentation, they will walk.
My first priority has to be to maximize my income by weeding out the time wasters; those who are researching my area plus areas that I don't serve. I get a lot of that. A small affordable non-refundable retainer fee is difficult for buyers to accept. However, if I can present it with the pay by activity model that will save them money if they buy through me, then it may be more acceptable. Those who are really not serious won't accept it anyway, so that will save me time.
It seems to me that anyone going into this model is going to have to put in a lot of work and study. I took Merv's SmartPlan consultation and I believe it is the way to go in getting started with this model. Going it alone would have been much more difficult for me.