Alternative fee structures to attract clients when home prices are falling

The cost to sell is high — typically ranging from 8%-10% of the agreed-to purchase price. This includes agent fees of 5%-6% split between the buyers and sellers broker, as well as the cost to prepare the home for sale and pay taxes. This is especially true for certain locales which require additional transfer taxes, such as Los Angeles’s new mansion tax.

During the past decade of rapidly growing home prices, this steep percent off the total sales price was an accepted cost for the convenience of hiring an experienced real estate broker to guide sellers through the sale. Profits were excessive, and so be it for sales costs.

But when wallets tighten and profit margins narrow, sellers aim to save where they can, turning increasingly to for sale by owners (FSBOs), which by end of 2023 has not yet become to occur.

Without paying a broker’s fee, sellers trim down their additional costs from around 8%-10% of the sales price to less than 4%. For a $1 million sale, that reduces the seller’s cost by around $60,000, especially when the seller refuses to work with buyers agents who demand a fee from the seller — a big deal when considering:

• today’s homebuyers are price-constrained by higher interest rates, slashing their buyer purchasing power and thus the amount they are able to pay for a home; and
• home values for sellers are poised to resume their downward spiral, diminishing sellers’ built-up equity and the profit they will take on a home sale.

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How does a broker compete with these types of savings and attract clients when every seller penny counts?

Editor’s note — While it’s common parlance for real estate brokers and their clients to refer to the agreed-to fee earned as part of a sale as “commission,” firsttuesday has long argued for the use of the word fee instead. This term for earnings better represents the level of duty and care exercised by a broker in representing their client’s best interests (and avoids the many negative connotations associated with the word “commission”).

Alternative fee structures to stand out

Offering clients more fee options without sacrificing service helps brokerages stand out from the crowd and attract would-be FSBOs. Further, cost-of-selling options help brokers appeal to sellers who have already tried and failed to locate a buyer with their FSBO listing.

The three main alternatives to the traditional 5%-6% listing fee model are:

1. Hourly fee. Charging an hourly fee is a sound way to ensure agents get paid even for work they do for buyers and sellers who ultimately never close. You will run into reluctance from clients who do not wish to agree to pay when they never buy or when their listing expires. But clients who are not serious about their real estate goals are best avoided anyway. Asking your buyer or seller client to sign an agreement for hourly wage payment — when they do not end up closing — will weed out the looky-loos and ensure your time is valued no matter the ultimate fee negotiated. [See RPI Form 520]
2. Flat fee.  Flat fees are most common on “hot deals” when the property sold is too cheap to justify a full fee, or when the fee is not intended to be split with a buyers agent, competitively promoted as “a flat fee, not a fat fee.”
3. Smaller fee, base salary. Brokers who are efficient and handle a large volume of transactions as individual brokers or by employing a large number of agents at a base salary can consider charging sellers lower fees, supplemented by bonuses for good customer feedback. This has been tried by brokerages with varying success in major metros, evidence of a market for this type of service.

In contrast, the rigid fixed-fee structure most agents are used to:

• decreases production, or houses-sold-per-agent;
• inflates the number of agents in the profession; and
• decreases the effort of agents, or hours-worked-per-transaction, according to a study by the Massachusetts Institute of Technology (MIT).

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The half-and-half model

One alternative value-savvy sellers and buyers consider is the Redfin model. This approach puts much of the marketing responsibility on the seller, while maintaining access to the technical expertise and advice of a broker.

Brokerages with the numbers suited to this model will be wise to consider matching the back-room efficiency of Redfin, with more transaction coordinators and fewer licensed agents. It is an investment in support operations leaving productive sales agents to negotiate listings and sales transactions.

Since sellers are asked to d more of the legwork and the broker’s non-licensed assistants perform the more repetitive routine and administrative parts of the job, agents can focus on stepping in when needed, assisting with documents and negotiations. This frees up agents to assist more clients, while the broker can profit with a lower fee for each transaction.

At first blush, this may sound like a zero-sum game. But in a spiraling housing market, anything that makes a brokerage stand out from the competition can turn into a winning edge by capturing market share.

Related article:

Study finds typical fee structure harms clients, experienced agents

 

Swimming against the tide of price fixing

This 5%-6% broker fee has become normalized and accepted across the industry, and in the past was actually enforced by the National Association of Realtors (NAR). While the term price fixing comes quickly to mind, that practice was outlawed (officially in California) in 1981 as a violation of anti-trust laws. [People v. National Association of Realtors (1981) 120 CA3d 465]

The practice was further outlawed yet again in 2003, when local AORs attempted to sidestep the rules by banning brokerages offering “discounted fees” from participating in the multiple listing service (MLS). [Freeman v. San Diego Association of Realtors (9^th Cir. 2003) 322 F3d 1133]

When each agent charges the same rate, it’s impossible for clients to discern between a trustworthy, experienced agent and one with less knowledge.

Of course, this difference is present at the brokerage fee-split level, where a broker will grant an agent or broker-associate a higher fee split in exchange for their years of experience and higher sales volume. But this is an information level inaccessible and above the heads of most buyers and sellers.

While the actual rate may vary by price tier and region, the “fixed rate” for each of these variables persists. In other words, while it can no longer be prohibited, advertising a lower fee to increase a broker’s competitiveness is majorly frowned upon, and a broker has their reputation with other brokers and agents to consider. Peer pressure to conscientiously maintain parallel rates in the brokerage community is the result.

We aren’t suggesting low-fee brokerages are perfect solutions for anyone (sellers and brokers included). But the U.S.’s form of capitalism suggests there will always be a need for variance beyond the industry supported traditional fee rate — prohibiting a free-market fee rate is not only unlawful, it’s un-American.

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