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Agents upsell all the time. It is a problem. But at least it runs into the normal response of affordability. Down sell might be an even bigger problem as the natural response is to favor spending less money.
Remember, the gain to the consumer is value - price. The gain to the consumer shrinks when you upsell them things they didn't actually want or need (e.g. suggestive selling), or if they end up with a more expensive house with no more value than one that the agent merely never showed them, or if the buyer's agent negotiates poorly or not at all with the listing agent. When an agent downsells, price goes down, and as long as value does not go down as much, the consumer might even be better off (remember that the extra money can go towards home improvements). Note, the incentive for the agent here is to decrease price, not value.
All three commission plans use the same mechanisms for the value side of agent performance: contingency and referrals. It's the buyer who chooses what home to make an offer on, and it's the buyer who will need to be happy living in the house years down the road if the agent wants to avoid highly negative referrals. Keeping in mind the difference between price and quality, x% * sales price is no more likely to result in a higher quality house than flat rate or x% * ($YYY,YYY - sales price).
While the standard plan has the exact same mechanism for the value side of agent performance as my proposal, it has no mechanism for the "as low a price as possible" side of agent performance. Indeed, it has a mechanism of "as high a price as possible" and relies upon the intelligence and real estate knowledge of the buyer to check this backwards price-increasing mechanism. The incentive for the agent here is to increase price, not value.
Last edited by perfectlyGoodInk; 09-26-2012 at 07:01 PM..
When I recently sold my condo in California, one of the reasons we chose our listing agent was their proposal of a commission scheme that paid less if he sold the home below a certain price and more if he sold it for higher. As an economics educator, this struck me as an especially good scheme.
Now that we're buying a house in Austin, I wanted to come up with a similar scheme for a buyer's agent. This is also usually based on a percentage of the sales price, so it struck me as having backwards incentives. A buyer's agent who finds a great deal on a home and/or negotiates well will receive less commission than one who finds an identical home at a higher price and negotiates poorly. I know there are agents able to ignore these incentives by focusing more on the referrals they will get for doing a good job, but it still seemed like it could be improved upon. After all, referrals would be important no matter which compensation scheme was used.
So, with the goal of better aligning the compensation scheme while still maintaining the same level of commissions, I came up with this formula:
Where maxPrice and minPrice define the buyer's range, and x% is whatever is the standard rate in the state (e.g. 2.5% or 3%). If you look at the range of commissions for a particular buyer's range under the standard scheme, this formula creates the same range of commissions, it just flips it. Instead of earning the highest commission for closing the maxPrice home, the agent will earn it by closing the minPrice home.
To illustrate with some numbers, for 3% and a buyer with a range of $150k to $200k:
- Closing a $200k house would pay $4,500 (less than 3%)
- Closing a $175k house would pay $5,250 (equal to 3%)
- Closing a $150k house would pay $6,000 (more than 3%)
If the buyer has a range of $400k to $500k:
- $500k house -> $12,000
- $450k house -> $13,500
- $400k house -> $15,000
Note that the formula still works outside the range: closing a $600k home in the latter example would still pay $10,500. The buyer and the agent would need to agree upon minPrice and maxPrice, but once they did, it fits into the standard agreement pretty easily. The second example would read in the contract as specifying commission to be: "3% of ($950,000 - the gross sales price)."
I have already selected a buyer's agent who agreed to the principle. They even recommended that this be implemented without negotiating anything off of the standard commission in the contract between the listing agent and the seller, but instead for them to agree to rebate me 100% of the standard commission and for me to then pay them according to the agreed formula. However, I haven't yet specified the formula to them. So I would like to hear whether y'all think this proposal is fair and equitable.
So do you think this is fair? Why or why not?
Buyer agents can be compensated in a few ways, however, in this region, buyer agents get paid on the buyer commission stated in the mls, from the sellers commission split
-the commission is already there- now most buyers agents do explain this to buyers, they, for the most part are pleased for the professional representation, and how or what the compensation is,,,the buyers dont have a clue most of the time-
now, if there is a flat rate a set compensation-say 5k or 7k, and its right out in the open, a few things will happen.. no matter what the flat rate is...it will be scrutinized by the buyers, and some buyers will feel more obligated to pay a realtor for there time and efforts even tho, they never buy a house, because they know the realtor stands to make 3.5. or 7k, also, some buyers wont want to look at 15 different houses, not to waste our time, if they dont buy
now, both of the last scenarios may play to the realtors favor, not the buyers if you throw flat fees around.
also i take issue with a buyers broker incentive to jack up the price for higher commissions,,,, the incentive is to represent the best interest of the buyers not myself
now, if there is a flat rate a set compensation-say 5k or 7k, and its right out in the open, a few things will happen.. no matter what the flat rate is...it will be scrutinized by the buyers
I consider price transparency a good thing, akin to putting the price of a mutual fund on the cover of the prospectus rather than burying it inside. In regards to the buyers feeling obligated to respect the realtor time, I've made a similar arguments, albeit from the other direction:
Quote:
Originally Posted by perfectlyGoodInk
As I said, when you make it seem like your service is priced like free doughnuts, buyers will consume that service just like they would free doughnuts.
In other words, claiming buyer agency is free encourages looky-loos. If you know what you're worth, I see little reason not to be upfront with what you charge.
Quote:
Originally Posted by mainebrokerman
also i take issue with a buyers broker incentive to jack up the price for higher commissions,,,, the incentive is to represent the best interest of the buyers not myself
Just look at it the other way, then. The best interest of the buyer should also be the best interest of the buyer's agent. Therefore, buyer agents should not be punished for negotiating down a house price.
Last edited by perfectlyGoodInk; 09-26-2012 at 08:02 PM..
I consider price transparency a good thing, akin to putting the price of a mutual fund on the cover of the prospectus rather than burying it inside. In regards to the buyers feeling obligated, I have made a similar argument that claiming buyer agency is free will result in buyers treating it as free and consuming it willy nilly without regard to the agent's time.
The best interest of the buyer should also be the best interest of the agent. Therefore, agents should not be punished for negotiating down the price.
here's the gray area
right now there is no out of pocket expense for a buyer
many of my clients are real good friends........ they have tried to pay me out of pocket after a day of showings "for my time" I tell them I get paid from the sellers commission split, an unknown number "that works"
I still stand on what i wrote above
a whole different world than a faceless, mutual fund
whats best for my client should also be best for the broker?????
a big no right there...
.ive talked many a buyers out of NOT buying properties- particularly commercial ones
even tho it took money out of my pocket
right now there is no out of pocket expense for a buyer
There is, it just occurs when they pay for the house. The buyer pays that money (often going into debt to do so).
Quote:
Originally Posted by mainebrokerman
I tell them I get paid from the sellers commission split, an unknown number "that works"
Can you explain what exactly it is about the standard commission structure that makes it work? Why it works? Most importantly, what exactly it is that you mean by "works"? Exactly what goal are you trying to achieve that it accomplishes better than the alternative structures?
Quote:
Originally Posted by mainebrokerman
a whole different world than a faceless, mutual fund
Well then, think about how much easier it is to shop for a lawyer, contractor, or an accountant when they provide you a quote for their services, versus the situation where they won't tell you how much they charge but that it will be based on an unknown number "that works"?
Quote:
Originally Posted by mainebrokerman
whats best for my client should also be best for the broker?????
a big no right there...
.ive talked many a buyers out of NOT buying properties- particularly commercial ones
even tho it took money out of my pocket
Well, you are always free to act independently of the commission plan, no matter what the plan is. I find it hard to believe you don't think the situation would be at all improved if helping your clients ended up putting money into your pocket instead.
Last edited by perfectlyGoodInk; 09-26-2012 at 08:29 PM..
There is, it just occurs when they pay for the house. The buyer pays that money (often going into debt to do so).
Can you explain what exactly it is about the standard commission structure that makes it work? Why it works? Most importantly, what exactly it is that you mean by "works"? Exactly what goal are you trying to achieve that it accomplishes better than the alternative structures?
Well then, think about how much easier it is to shop for a lawyer, contractor, or an accountant when they provide you a quote for their services, versus the situation where they won't tell you how much they charge but that it will be based on an unknown number "that works"?
Well, you are always free to act independently of the commission plan, no matter what the plan is. I find it hard to believe you don't think the situation would be at all improved if helping your clients ended up putting money into your pocket instead.
see, your last paragragh, reflects why you seem to be at odds with most of the decent people here-that do this for a living, and that you have a hard time understanding professional trusting relationships
I'll state again, I've talked many a buyer out of buying a certain property, in particular commercial ones.
I may have lost a commission, but often they call and thank me for holding them back from making a huge mistake-
thats what builds LOYALTY, and this is the heart of a successful brokers career-repeat clients, and them talking you up, getting referrels
This loyalty puts the emphasis on the individual and NOT ONE SET PRICE
LOYALTY still exists, and thats what separates good agents from bad, and yes, like every profession, there are some bad apples,,,but on the flipside, there are some excellent real estate agents
it seems you are good at parsing and twisting words....so i'll respectfully say this is my last post.on this matter with you
I learned a long time ago, you can't win an arguement with a woman, or an idiot- if you are a woman, please don't take offense
you have a hard time understanding professional trusting relationships
Professional trusting relationships can be built no matter what compensation structure you use. Indeed, you can earn trust and loyalty by carefully choosing that structure with your clients' interest in mind and then being 100% transparent about that choice upfront with all prospective clients. This can differentiate you from the bad apples who abuse trust and loyalty.
Last edited by perfectlyGoodInk; 09-27-2012 at 07:04 AM..
see, your last paragragh, reflects why you seem to be at odds with most of the decent people here-that do this for a living, and that you have a hard time understanding professional trusting relationships
I'll state again, I've talked many a buyer out of buying a certain property, in particular commercial ones.
I may have lost a commission, but often they call and thank me for holding them back from making a huge mistake-
thats what builds LOYALTY, and this is the heart of a successful brokers career-repeat clients, and them talking you up, getting referrels
This loyalty puts the emphasis on the individual and NOT ONE SET PRICE
LOYALTY still exists, and thats what separates good agents from bad, and yes, like every profession, there are some bad apples,,,but on the flipside, there are some excellent real estate agents
it seems you are good at parsing and twisting words....so i'll respectfully say this is my last post.on this matter with you
I learned a long time ago, you can't win an arguement with a woman, or an idiot- if you are a woman, please don't take offense
If an agent is focusing on the commission as opposed to putting the clients interest ahead of their own, which is a fiduciary duty, then it does not matter what commission structure the agent uses, as long as it's a simple structure, because buyers are interested in buying a home; not taking a math class and class on economics to understand how the agent is getting paid.
In the long standing current commission arrangement, the agent who would place his commission ahead of the clients interest by "attempting" to steer clients to higher priced homes, is not acting in the clients best interest.
.
In the model suggested by the op, the agent who would place her commission ahead of the clients interest may "attempt" to steer clients to lower priced homes, and that is not acting in the clients best interest.
.
Of course, in the op's model, there is the opportunity for the buyer to mislead the agent by quoting a price range where the hidden target is on the high side of the stated range; or even higher.
The op scheme is a complicated method that most buyers would probably reject, but if a buyer and agent agree on it's use, an experienced agent will see very quickly after starting to look at homes if the buyer is being deceptive. At that point mistrust will raise it's ugly head and make for a very uncomfortable buyer/agent relationship. An experienced agent will probably drop this client at this point because this deception could be a signal of more deception in the buying phase.
A textbook model such as the op's does not take into account the real world, nor the way most buyers operate when looking for a home.
Buyers usually start out with a budget that they can be comfortable with either in a mortgage or paying cash; and a list of amenities that will make their "dream" home.
As they search, many find that their "dream" home with all the "desired" amenities is going to be out of their budget range. Consequently, they must make adjustments to the required amenities or increase their budget, or both, in order to find their modified dream home.
An agent may try, but in my opinion it would be extremely difficult and unproductive to attempt to up sell a buyer to a higher priced home. Not to mention the violation of fiduciary duty.
The home must "fit" the buyers family, or they will not buy it whether it costs more or costs less. The agents job is to understand, through observation and discussion, what is most important to the client and to help the client find that "dream" home.
In the real world today, agents will take the clients requirements and enter them into their mls search and send the client daily updates of homes within the clients desired area. All homes meeting their criteria are included in that search.
The client will pick homes from that list meeting their criteria, and the agent will also pick some that s/he feels meet their criteria, and they will visit them. During these first visits the experienced agent will learn what the client really wants, and will probably know it before they do.
What will benefit both the client and the agent, is for the "dream" home to be found sooner rather than later. The experienced agent will know the current market conditions well enough to advise the buyer as to the current market value of the home and develop an offer strategy based on current market value and current market conditions that is most likely to be successful. The agent advises, and the buyer makes all the final offer decisions.
Consequently, in the real world, the good, experienced, agent does not focus on commission. S/he is focused on learning the clients real needs, and fulfilling those needs for the client.
Now comes along buyers who think Realtors make too much money and falsely believe agents will focus on commission rather than the clients interest; and this buyer wants a part of the agents pay. Some of them will come up with deceptive attempts to get some of the agents pay.
One other poster advises buyers to never sign a buyer broker agreement except when they find a home to make an offer on. At that time s/he advises to sign an agreement for that one house only, and to demand a part of the agents commission at that time.
.
This is pure deception because the buyers intentions were not disclosed up front.
.
The op's scheme is also ripe for deception.
The result is predictable: When an agent has been deceived, and a part of his/her commission has been extorted, or attempt made at extortion, then the agent loses the incentive to work hard for that buyer.
Whether it's right or wrong, it's human nature, and reality. If an employer takes away a third of your pay (which is what I hear that most of this type buyer asks for) would you feel the incentive to work hard for your employer?
The OP is adamant that there are two ways to operate; his way and the wrong way, and his mission is to convince all Realtors that we are wrong.
He has failed. Agents have listened and discussed, and the op has not provided sufficient argument to show that his/her commission structure is better than the current simple structure.
Also, the forum is read by many non-Realtor buyers and sellers, and if this scheme had merit, then there would have been more support from non-Realtors for the scheme. Consequently, I have to conclude that the non-Realtor readers have also rejected the scheme.
I think the argument has run it's course, and I don't have anything more to contribute.
Note, I am not arguing that my proposal is the only way. Remember that I have argued against pricing standards. The best market is one where everybody offers whatever plan they think is best for them and their clients. I am just pointing out that the standard commission plan is backwards, and thus worse for buyers than both my proposal as well as flat rate (and hourly). If I thought my way was the only way, why do I talk so much about flat rate? Recall my suggested list of options:
Quote:
Originally Posted by perfectlyGoodInk
[] flat fee of $XX,XXX
[] x% of sales price
[] x% of ($YYY,YYY - sales price)
It's up to each agent to decide what options to present and to fill in the numbers, perhaps after consulting with the buyer. I just don't see a good reason why that list should only contain the second option when nobody can explain its advantage to the buyer over the other two.
Quote:
Originally Posted by Captain Bill
If an agent is focusing on the commission as opposed to putting the clients interest ahead of their own, which is a fiduciary duty, then it does not matter what commission structure the agent uses, as long as it's a simple structure, because buyers are interested in buying a home; not taking a math class and class on economics to understand how the agent is getting paid.
One of a long list of arguments on this thread that argues in favor of flat fee instead of any sort of percentage. I am not advocating focussing on the commission while you are doing the job. Focus on picking the right ones to present to the buyer on your own time. Once you've decided, don't worry about the plan anymore and just serve the buyer. If you picked carefully, it'll just work.
That nobody here can articulate what exactly it is about x% * sales price that works well indicates that it wasn't picked very carefully.
Quote:
Originally Posted by Captain Bill
the agent who would place his commission ahead of the clients interest by "attempting" to steer clients to higher priced homes, is not acting in the clients best interest.
Correct, whereas it may be in the agent's best interest under the standard x% * sales price plan.
Quote:
Originally Posted by Captain Bill
In the model suggested by the op, the agent who would place her commission ahead of the clients interest may "attempt" to steer clients to lower priced homes, and that is not acting in the clients best interest.
Incorrect. Recall the difference between value and price, and that the buyer's interest is maximizing value and minimizing price. There is no agent incentive to minimize value. Indeed, being paid on close and the presence of referrals is the same mechanism used by all three plans to maximize value, so x% * sales price is no more likely to result in a more highly-valued house than flat rate or my proposal.
Quote:
Originally Posted by Captain Bill
an experienced agent will see very quickly after starting to look at homes if the buyer is being deceptive. At that point mistrust will raise it's ugly head and make for a very uncomfortable buyer/agent relationship. An experienced agent will probably drop this client at this point because this deception could be a signal of more deception in the buying phase.
Also true in the opposite direction with the standard plan, if a buyer notices the agent upselling or suggestive selling them.
Quote:
Originally Posted by Captain Bill
Buyers usually start out with a budget that they can be comfortable with either in a mortgage or paying cash; and a list of amenities that will make their "dream" home.
I agree. Microeconomics teaches this using budget constraints against indifference curves. That budget is usually the biggest loan they can qualify for, so it is usually a very bad idea for the maximum to be increased (and as the subprime crisis showed us, that maximum may actually be much too high). An agent working the the client's best interest in mind will thus encourage them to adjust the "required amenities" rather than increasing their budget.
Quote:
Originally Posted by Captain Bill
All homes meeting their criteria are included in that search.
I am finding that our agent is doing the same thing, showing us homes even if they are at the high end of our range which would lower their commission. Since my proposal is basically a mirror image of the standard plan, why do you think this would change?
Quote:
Originally Posted by Captain Bill
What will benefit both the client and the agent, is for the "dream" home to be found sooner rather than later
That is true for all three commission plans because they are contingent upon close.
Quote:
Originally Posted by mainebrokerman
so i'll respectfully say this is my last post.on this matter with you
I learned a long time ago, you can't win an arguement with a woman, or an idiot- if you are a woman, please don't take offense
Quote:
Originally Posted by Captain Bill
I think the argument has run it's course, and I don't have anything more to contribute.
Why is it that everybody seems to feel the need to announce that they are going to stop posting on this thread? If you want to stop posting, just stop posting. It's not like this is a negotiation where you need to announce your final offer is final.
Last edited by perfectlyGoodInk; 09-27-2012 at 08:45 AM..
There is one other thing that I haven't discussed and it's regarding "transparency" which I believe you've mentioned
The Seller and Sellers agent determine how much the buyers agent is to be paid. The pay is an incentive for the agent to bring a buyer.
Neither the seller nor the sellers agent intends for any part of the buyer agent's commission to be rebated to the buyer. If the Seller or sellers agent thought a buyers agent would be as likely to bring a buyer for 2% as for 3% commission, then a 2% would probably be offered, and the seller would theoretically net that much more money for the home.
If a buyer wants to pay a buyer agent an incentive amount in addition to the commission the seller is offering, the fact that the buyer agent is receiving pay from two sources must be disclosed.
Therefore, if an agent is going to rebate to the buyer any part of the commission the seller is offering, then that fact should be disclosed in the offer, in my opinion. The seller may consider that to be a material fact that the seller should have in order to determine the price the seller is willing to accept for the home.
Wouldn't it be interesting if, when the seller receives the estimated settlement statement, s/he discovers that the buyers agent is not being paid the full agreed on commission, and instead has rebated a portion of it to the buyer?
What if the seller then complains that since she offered the buyer agent 3%, which was intended only for the buyer agent (not for buyers closing costs), and the fact that the money is being diverted to the buyer is a material fact that was not disclosed by the buyer and buyers agent at the time of the offer?
Is it possible that the seller, due to this non-disclosure of what the seller considers as a material fact, could cancel the contract, or demand that the money that was shown as some form of rebate to the buyer, be credited back to the seller account?
Something to think about.
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