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Payment isn't discretionary, it's based on a formula -- and the current compensation scheme also uses a formula. It also would not have to specify standards. My original thinking was to include incentive bonuses involving metrics a particular buyer cared about, like square footage and whether the home had a pool, but I guess you consider such criteria to be subjective and disputable. So just consider it just a base rate with a suggested value of 3% times the minimum price of the buyer's price range.
I can see that the math is causing headaches. Let's do some algebra to simplify it. If you set bonuses to 3% * minPrice, you get:
If you run this formula on the hypothetical homes I gave above, you will see it gets identical results. Indeed, you can plainly see that if salesPrice is equal to maxPrice, it cancels out that term and the commission is 3% of the minPrice. Similarly, if salesPrice is the minPrice, the commission is 3% of the maxPrice. So the contract would just need to replace the existing formula, "3% of the gross sales price" with "3% of ($XXX,XXX - the gross sales price)" where $XXX,XXX is the sum of the buyer's maximum price and minimum price. Each contract would have this $XXX,XXX replaced with the specific number which both parties to the contract would agree upon before signing.
So on what grounds could a buyer (or agent) dispute this contract that they wouldn't have been able to use if it had followed the standard formula?
Note that both formulas are equally disconnected from agent cost or time, but that would be an argument in favor of an hourly rate -- if Steve's invisible aliens actually existed and took notes. And for buyers who are worried about principal-agent issues, a compensation formula tied to good results works better than the incentives from referrals (which would still be there), better than costly and intrusive monitoring, and far better than a formula tied to the inverse of good results (even a flat rate is better than that).
You're leaving something out of your equation here that must ALWAYS be taken into consideration in anything involving consumers - simplicity.
The way something is priced must be easy to understand for the vast majority of consumers.
If you are having difficulty conveying your pricing scheme understandably to professionals in the field on a discussion forum, the message is clear if it's something that you think should become widespread: simplify.
The average consumer is not a mathematician or an engineer. They want pricing that they can understand immediately without algebra. That human factor absolutely must be taken into consideration. (For some reason I'm being reminded of an episode of numbers in which Charlie came up with an algorithm that was beautifully perfect, but that failed due to his failure to take the human part of the equation into account in designing it.)
In other words, if the math causes headaches, no matter how beautiful it is mathematically, the consumer won't buy it, and that's who you need to buy it in order for it to succeed generally.
ways to find homes -- free or nominally priced online
price comps -- ditto
someone to hold your hand through the process and offer advice on homes -- not everyone feels they need that, or can do fine with an experienced homebuyer friend/relative for advice
someone to let you in to houses you want to see -- ??? gotcha here. For people who can do all the other things without a realtor, it seems rather steep to spend 3% just for this service.
I was in the same boat as the OP at first, but I did end up getting a buyers agent. She was helpful and it was a good experience (and way easier than trying to call listing agents myself and wait for open houses!). But were her services worth $7500? I dunno.
You're leaving something out of your equation here that must ALWAYS be taken into consideration in anything involving consumers - simplicity.
The way something is priced must be easy to understand for the vast majority of consumers.
If you are having difficulty conveying your pricing scheme understandably to professionals in the field on a discussion forum, the message is clear if it's something that you think should become widespread: simplify.
The average consumer is not a mathematician or an engineer. They want pricing that they can understand immediately without algebra. That human factor absolutely must be taken into consideration. (For some reason I'm being reminded of an episode of numbers in which Charlie came up with an algorithm that was beautifully perfect, but that failed due to his failure to take the human part of the equation into account in designing it.)
In other words, if the math causes headaches, no matter how beautiful it is mathematically, the consumer won't buy it, and that's who you need to buy it in order for it to succeed generally.
Another thing that I see wrong with this is the agent might waste my time so they can get a bigger commission. If I am looking for a house and I find an agent that doesn't know me, and I tell that agent I'm looking for a 500k house with x attributes, I expect them to show me houses based on my criteria. Now, using this new formula they might want to show me 400k houses so that they can make some money for all the time they're putting in. After all, they don't know me yet so they might think they're doing me a favor as well. Now, I'm getting frustrated because they're wasting my time. The current system isn't broken, so it doesn't need to be fixed. Of course a few people on here will disagree with that last statement, but they are the minority.
Saw a house that looked good, but somewhat overpriced. Owner bought it new at a high price. Went to listing agents web site a week ago and entered an email request to see it...No response... Entered another request for showing on their web site....no response... Called and asked to see it. She gave me runaround with questions about why don't I just call my buyers agent. Said she was too busy with other buyers this weekend and would have her partner call me...No call received...
Am I required to tag along a buyers agent with me to see the house? I suppose when she has an open house she will refuse entry to all who don't bring an agent with them....
OP, I did a quick look at your previous posts and saw this thread from six weeks ago...
Is this the same house you're asking about now? If it is, why not just make an offer? If you think it's overpriced, make an offer based on what you feel. The worst that can happen is they reject the offer, then you can move on.
Of course, the easiest way to make an offer would be to get an agent. Then you could look at any house you want, and make any type of offer you like. At the end of the day, if nothing works out you could just let the agent know that you're no longer interested in a home.
...
I was in the same boat as the OP at first, but I did end up getting a buyers agent. She was helpful and it was a good experience (and way easier than trying to call listing agents myself and wait for open houses!). But were her services worth $7500? I dunno.
If you had ultimately decided to not buy (as many buyers do after becoming discouraged after months of looking), her services would have been free to you. Is that a good deal?
The gross commission is just that, gross. The average Realtor nets 43% of gross commissions (according to Keller Williams nationwide survey of its agents). So, the $7,500 becomes $3,225.
From the $3,225, the agent must pay her own health insurance and self employment taxes, and absorb the costs incurred from dealing with buyers who never actually buy, including as those unrepresented buyers who expect a listing agent to come trotting out, like a dog answering a whistle, to open a door just because he feels entitled to that agent's time. And there are the listings that fail to sell, which is additional uncompensated effort and expense for staging, photography, virtual tours, time, etc. All free to the consumer unless a closing occurs.
So, the $7,500 contributes to the gross income of the agent which ultimately supports her ability to remain in the business, and at the service of all clients, while accepting ALL the risk of not getting paid, right up until the deal closes and funds.
As a client whose deal closed, it's understandable that you would look at her gross amount and compare it to the efforts and work you personally saw her complete on your particular deal, and think "was that worth $7,500?", but that doesn't recognize the true economics of being a Realtor.
If you had ultimately decided to not buy (as many buyers do after becoming discouraged after months of looking), her services would have been free to you. Is that a good deal?
The gross commission is just that, gross. The average Realtor nets 43% of gross commissions (according to Keller Williams nationwide survey of its agents). So, the $7,500 becomes $3,225.
From the $3,225, the agent must pay her own health insurance and self employment taxes, and absorb the costs incurred from dealing with buyers who never actually buy, including as those unrepresented buyers who expect a listing agent to come trotting out, like a dog answering a whistle, to open a door just because he feels entitled to that agent's time. And there are the listings that fail to sell, which is additional uncompensated effort and expense for staging, photography, virtual tours, time, etc. All free to the consumer unless a closing occurs.
So, the $7,500 contributes to the gross income of the agent which ultimately supports her ability to remain in the business, and at the service of all clients, while accepting ALL the risk of not getting paid, right up until the deal closes and funds.
As a client whose deal closed, it's understandable that you would look at her gross amount and compare it to the efforts and work you personally saw her complete on your particular deal, and think "was that worth $7,500?", but that doesn't recognize the true economics of being a Realtor.
Steve
I understand they don't pocket the full 3%, and I know that most realtors put in a lot of hours and don't rake in millions in commissions. I'm just saying that the service provided to me--as a web-savvy person who likes to research things himself--was maybe not worth the price paid. That also may be how the OP feels (though there seem to be other issues there )
And if a significant portion of my fees subsidizes lookie-loos & homes that don't sell, I want to be able to complain about that too!
You're leaving something out of your equation here that must ALWAYS be taken into consideration in anything involving consumers - simplicity.
My $0.02, for what it's worth. Use this formula if you can understand it. The algebra is done already, so the only math you need to know is how to use a calculator or spreadsheet:
To address BriansZ's concern, negotiate minPrice with the buyer so that you are only looking at homes within their price range.
If you don't understand it, use flat rate.
Don't use 3% * salesPrice unless you can explain to a buyer why it's in their interest. As I've argued, I think it works against your client, and it's also more complicated than flat rate anyway.
Don't ever claim your services are free because they are paid by the seller. Sellers pass on costs to buyers depending on negotiating strength.
Last edited by perfectlyGoodInk; 09-04-2012 at 12:55 PM..
I understand they don't pocket the full 3%, and I know that most realtors put in a lot of hours and don't rake in millions in commissions. I'm just saying that the service provided to me--as a web-savvy person who likes to research things himself--was maybe not worth the price paid. That also may be how the OP feels (though there seem to be other issues there )
And if a significant portion of my fees subsidizes lookie-loos & homes that don't sell, I want to be able to complain about that too!
You're not allowed to complain about it unless you become willing to pay a non-refundable retainer to a Realtor before they lift a finger doing anything for you. Otherwise, yes, the completed transactions subsidize the uncompensated efforts. That's how the system works, and that's actually how consumers want it to work, despite what they may say.
Steve
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