Do We Need to Change the Real Estate Commission Structure?

Many people think so. There have been many debates, especially lately, about the nature of real estate commissions and whether the structure should be changed. I think we need to take a serious look at not only commission structure, but real estate services in general, to figure out a win-win situation for buyers, sellers and agents.

The argument: Many sellers think that real estate agents are paid too much. Although the days of the 6% commission are not over, many sellers opt to work with brokerages that charge a lot less. Sellers don’t understand why brokerages charge so much to place their home on the MLS, market it and help with disclosures and paperwork. They feel they can self-market on the internet, create their own flyers, and rely on the escrow company to help them once an offer is presented.

The problem: Many sellers do not understand that the agent does a lot more than place a home on the MLS, hold open houses and deliver disclosure packets. There are a few things to keep in mind when selling your home. One is that the expertise of an area agent makes a big difference in whether you will get any buyers to come view your home. Your home needs to be priced right, according to comparable sold properties and the current market, and the first TWO WEEKS is critical in this regard.

Next, all the paperwork that comes with selling a home must be in order, especially the seller disclosures. I have caught things several times that, if I had not pointed them out to my sellers, could have turned into legal nightmares down the road. It is important that you have an agent (or attorney) look over these to make sure you have filled them out correctly.

Last, and most importantly, the legal ramifications. Like many agents, I could actually write a book about things other agents have done that could have caused major legal problems down the road for the seller. It is most important to have an experienced agent and her broker, or an attorney, look over any offers presented before acceptance. There could be language in the offer or even left out that could create problems for you later. This is why agents and brokerages pay for errors and omissions insurance. If there IS a problem down the road it offers peace of mind to know that they will stand behind you in most situations. Think of it as paying for protection.

Solutions:

Flat fee commissions. This is not new – the discount brokerage model has been around for some time. Companies will charge flat fees for listings. The rest of the work – flyers, open houses, dealing with offers, negotiating and opening escrow – can be left to the seller. Or, if preferred, the seller can opt to pay for other services. However, the discount model has received a lot of badmouthing in the industry. This is because there is little agent involvement, and agents work hard. I say you get what you pay for. You can receive “Nordstrom” service, and have an experienced agent take care of everything for you so that you don’t have to, but that costs money (just like you would pay an attorney if you were sued or charged with a crime – I would NOT recommend representing yourself in such a situation). You can also get “Walmart” service, where you do the work yourself. I’m not going to compose a diatribe on how hard we agents work – often for nothing at all – so suffice it to say that when we do a good job we deserve our pay. The choice is up to the homeowner and whether he wants to deal with the sale of his home himself, or have help.

Although I understand the desire to save money, I do not believe the traditional flat fee model is completely beneficial to sellers the way it currently stands. There are too many potential problems that many sellers do not foresee.

Real estate and legal services combined: this is the model I have been studying for some time now. A real estate agent who is an attorney has a unique ability to offer services to clients that are like flat-fees services, but with a twist: the client can get legal advice and know that all the paperwork is handled correctly. This offers peace of mind that you cannot get with traditional flat-fee brokerages. The seller would have the benefit of brokerage marketing and handling of the negotiations and paperwork, for one set fee, and can also opt to pay for other legal services at a standard hourly rate. I think it is the future of real estate. There are only a few companies doing this nationwide, and I am looking into it as well.

The hard part is educating the public that there are other ways to approach the sale of a property. But I think this will catch on. It will not work with short sales, as the lenders agree to pay regular commissions, but this does not affect the seller (unless the lender feels the price is not enough, in which case they cut the commissions anyway. This still does not affect the sellers, just the agent’s bottom line). But I think when this model catches on the lenders will eventually agree to the flat commissions.

I would love to hear from you – the sellers and buyers and agents and others out there. Do you think this is a good idea? It can save sellers a lot of money and offer a new option to many. Sellers would still get the benefit of working with an agent/broker, without having to basically sell their homes themselves. Traditional brokerages will not like this model, of course, but it is really something to consider.