Compensation or performance? Which one will it be?

There's been a couple of posts, recently, about alternative ways for Realtors to be compensated. One idea, put forth on ActiveRain, by Brian Brady and then by Jeff Corbett, is compensation based on performance. I guess the reasoning behind this is that we, as Realtors, would have an incentive to negotiate harder for our Sellers and therefore, get them a higher selling price for their property, if we had an increasing pay scale. I've been thinking about this for a couple of weeks and I am having difficulty coming up with a plan that I feel would work. First, I always try to get as much as I can for my Seller's property. Secondly, I don't require any additional incentives to perform my duties to the best of my abilities. And thirdly, I feel my current commission percentage is fair compensation for what I bring to a transaction.

It's important to remember, that when selling a property, Realtors do not set the market value. We provide a price range that we feel the property will sell within. The property's selling price is dictated by the market. The selling price is agreed by the Seller and Buyer through their negotiations. Offering a Realtor a performance bonus will not change market value. It just doesn't work that way. A Realtor cannot sell a property for more than it's worth just because he gets a bonus if he does. I guess the other side of this is, can a Realtor convince a Seller to take a lower price just to get the deal done and get his commission. This seems to be the scenario that was put forth by Mark S. Nadel in his paper, written in October 2006. Mark also mentions the issue with Buyer's Brokers "steering" buyers to properties offering higher co-brokes.

As hard as I've tried, I am not able to come up with a new plan or way of doing business that I feel would be more beneficial to the consumer and myself, than what I already do. It's pretty easy to say, when it comes to compensation, that the consumer wants to pay as little as possible and the Realtor wants to make as much as possible. So where's the middle ground? What can I do to ensure that my Seller is getting what they are paying for? And to ensure that I am getting compensated fairly for my efforts? So here's a short list of things that I already do.

  • I only take 45 day listings. This is something that I have been doing for several years now. The advantage to my Seller is that they are not locked into a long contract and if they are not satisfied with my services they don't have to wait 6 months or more to make a change. I tell my Sellers upfront that I probably cannot sell their property in 45 days but I can certainly earn their business during this time.
  • I do not charge cancellation fees. Even though my agreements are for only 45 days, I give the Seller the right to cancel our agreement, at any time, at no charge to them. I am guaranteeing their satisfaction. I am taking all the risk.
  • If the Buyer is not represented by a Realtor then I will reduce my fee to the Seller by 2%. I will handle the transaction as a non representative to the Buyer. My loyalty remains with the Seller.  
  • I do not work with Buyers. I will never have a conflict of loyalty.

By implementing these few minor things. My Sellers can rest assured that I will always be looking out for their interest. And for that, they will pay.

Now let's talk about Buyer's Brokers and "steering". Contrary to what Mark and others have stated it is neither illegal or unethical to not show properties that are not offering acceptable compensation. As a Realtor, you do not have to work for a $500 co-broke. However, this should be discussed with the Buyer beforehand. Buyers have the right to know the rules. If the Buyer does not agree with this, then they have three choices:

  • Go it alone.
  • Find another Realtor. 
  • Sign a Buyer's Broker agreement(BBA). A BBA will outline the terms and conditions by which you are willing to work. It will also state a minimum amount that you are willing to work for. This agreement gives the Buyer assurances that you will show them any property, that may meet their parameters, regardless of the commission being offered. Your fee will be x%. If the co-broke being offered is less, then the Buyer will make up the difference. If it is more, then you can rebate it to the Buyer, assuming it is allowed. So "list" your Buyers. Quit depending on the listing Broker to set your compensation level.

Our Code of Ethics specifically states that a Realtor cannot use the terms of a purchase agreement to change the co-broke. However, the Buyer can. The Buyer can request, in the purchase offer, that the Seller pays his Broker an additional commission, as per the terms of the BBA. This can be made a part of the contract. It is nothing more than a Seller contribution towards the Buyer's closing costs. A BBA is a win, win, for both Buyer and Realtor.

So, there you go folks. Things I do to protect my Sellers and Buyers and to ensure my performance. Very simple. If I perform, they pay me, if not, fire me. I'm a simple man and complicated commission formulas do not work for me. And I know from experience, having sold hundreds of homes, that really, Sellers just want to sell and Buyers just want to buy. If you can help them achieve this, then compensation is not an issue.

Is the consumer fed up with our compensation or our performance? You can be sure, one of these things is going to have to change. Which one will it be? What say you?

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