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Reputation and referrals matter to the agents on this forum. Do they matter to every agent? No. So it is an incentive for quality for good agents and it isn't an incentive for quality for agents that just care about money only. Then there are those in-between.
This is exactly why referrals are less effective than the compensation scheme to align interests. There are those that care only about money. And everybody cares at least a little bit about money (after all, that's how you pay for food). Commissions are for-sure-right-now money. Referrals are maybe sometime far down into the future money. People just don't buy homes often enough in their lifetime for repeat business to matter as much for real estate as it does for other industries.
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Originally Posted by perfectlyGoodInk
I'm[sic] haven't yet seen anybody make a case that 3% * salesPrice is a better formula. Most seem to be arguing that the standard scheme is not that bad, which is a pretty weak argument.
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Originally Posted by Silverfall
How are you making that jump. Break it down for me.
As I said from the beginning, referrals are important no matter which compensation scheme you use. Referrals matter when you use 3% * salesPrice. Referrals matter when you use 3% * (maxPrice + minPrice - salesPrice). Referrals matter when you use flat rate. Referrals matter when you use hourly rate.
That agents care about referrals is thus not an argument that any one of these schemes is better than the other. Yet we still saw comments like these:
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Originally Posted by NinaN
Buyers agents are rewarded for helping you find the best house at the best price by the loyalty you show them with future business and referrals.
and
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Originally Posted by MrRational
This is also most likely to garner that agent the PERSONAL recommendations that their business needs…
Since referrals remain important under my proposal, these are not arguments why 3% * salesPrice is better. Thus, they belong in the category of "the standard scheme is not that bad." Here's another one in that same "it's not that bad" category, pointing out that the loss for an agent working against incentives is small:
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Originally Posted by Zyngawf
The difference you are talking about is usually minimal and not enough of an incentive to only show the higher priced ones.
Aside from the person who didn't understand the definition of collusion and the one who didn't think legal contracts were binding (and the ones who thought the proposal was reasonable), the rest make criticisms that are equally applicable to 3% * salesPrice, but in the other direction. The only difference is that they wouldn't use such harsh terminology to describe the identical effect in the standard scheme:
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Originally Posted by FalconheadWest
That's paying based on the buyer picking whatever house they want and punish the agent because you want a more expensive house...
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Originally Posted by Bill Keegan
It simply punishes the agent when his client starts out thinking he wants to spend $x and then decides he can spend more than $x.
And your own:
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Originally Posted by Silverfall
You are trying to eliminate one bias and in doing so create another bias…
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Originally Posted by Silverfall
To only show you homes in your lower price range since they get paid more.
According to this argument, both 3% * salesPrice and 3% * (maxPrice + minPrice - salesPrice) are equally bad because both are biased and/or "punish" the agent if the buyer expresses a preference that ends up lowering the agent's commission. Which seems to reflect the thinking that the buyer works for the agent and has a duty to maximize their commission.
This is also really an argument in favor of flat rate or hourly rate, not in favor of 3% * salesPrice. Furthermore, it ignores that the bias in the 3% * salesPrice scheme maximizes sales price, and thus maximizes out-of-pocket cost for the buyer. This is against the buyer's interest. A bias that minimizes out-of-pocket cost for the buyer is at least a bias in the direction of the buyer's interest. Really, saying "bias in the buyer's interest" is just a negative way to describe an incentive scheme that correctly aligns an agent's interest with the buyer's interest. Narrowing the difference in goals between the principal and the agent ought to be the goal of any compensation scheme.
Please find me a comment that explains reasons why 3% * salesPrice is better for the buyer than the other types of commission schemes, or points out why 3% * (maxPrice + minPrice - salesPrice) is unfair.
Last edited by perfectlyGoodInk; 09-05-2012 at 11:24 PM..
Sounds like you need to open your own Brokerage and capitalize on your superior understanding of all this. Start with getting your real estate license, finding some buyers who subscribe to your theories, and closing your first 4 buyer-side sales. Let us know how it goes.
Meanwhile, the rest of us still describe getting something without paying as "free".
Aside from the person who didn't understand the definition of collusion and the one who didn't think legal contracts were binding (and the ones who thought the proposal was reasonable), the rest make criticisms that are equally applicable to 3% * salesPrice, but in the other direction. The only difference is that they wouldn't use such harsh terminology to describe the identical effect in the standard scheme:
It would be much simpler to have a buyers agent agree to a flat fee regardless of house price rather then try to do all of this, but Austin Steve already explained you aren't paying it anyway and he is right. The value of someones house is what it is. Even if the buyer was paying the commission I don't think a most sellers would want to sell their house for less than the value. Values don't go up or down because of commission amount.
I wonder why he refers to it as a "scheme" every time he mentions it. A scheme makes it sound like you're trying to get away with something you shouldn't be doing... but that could be why it's referenced that way.
I would have called it a model... and we all know how many different models have come and gone, and more who try to do something completely outside the box disappear pretty quickly. Consumers like what they're comfortable with. For the most part, people don't like change. It is what it is and reinventing the wheel doesn't make sense...
Sounds like your main objection is that you can't do rebates in Oregon.
No. It would make it easier, but my main objection is working with people who think an incentive like that matters to me. I'd prefer to work with clients that trust me.
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Originally Posted by perfectlyGoodInk
I still don't see the rationale of why the buyer's agent compensation is negotiated between the seller and the listing agent. Exactly what does this accomplish?
It accomplishes nothing, but it has to be done that way for many buyers. Here's why. The old system was that buyer's had no representation. All agents were agents of the seller. The listing agent was the seller's agent and the "buyer" agent was the sub-agent of the seller. So as a result, the seller paid for all of that since everyone was representing them. Some states still have sub-agency.
The problem came in, not surprisingly, when buyer agency came into play in the 1990s. Buyers wanted their own representation but they often couldn't afford it with their down payment, and closing costs. So the old system, which wasn't designed for buyer agency, stuck. The issue on why it hasn't changed is very simple. Lenders and buyers. First most lenders put a cap on the amount of closing costs allowed, or like in the case of VA, buyer agent fees is a non-allowable closing cost, which means the buyer CANNOT pay it and still get a VA loan. So, do we tell our military men and women, eh...sorry, no representation for you? FHA has a 6% cap on their closing costs. Most FHA buyers need full closing cost help which runs about 4.5% of that 6%. Not a lot of dollars left for paying a buyer agent a reasonable fee, considering how inexpensive FHA homes are. Even my 20% down buyers often have just enough to do their 20% down plus closing. They need to be able to wrap fees into their mortgage.
So, you are confusing a philosophical issue with reality. I think most agents think a buyer should pay for their own representation and a seller theirs, but the real estate industry has systems in place that make that difficult for buyers.
Quote:
Originally Posted by perfectlyGoodInk
This is exactly why referrals are less effective than the compensation scheme to align interests. There are those that care only about money. And everybody cares at least a little bit about money (after all, that's how you pay for food). Commissions are for-sure-right-now money. Referrals are maybe sometime far down into the future money. People just don't buy homes often enough in their lifetime for repeat business to matter as much for real estate as it does for other industries.
Then you are just looking for an agent that isn't interested in being in the business long term. It is that simple. Referrals are a much more important motivator than a commission scheme. For me personally, if I did your commission scheme it would be to placate you as a client. It would have zero impact on my services or cause me to align my interests with yours. I already make good money. $1000 isn't an incentive to me. I think you are placing too much weight on motivation for money. Successful agents just won't be motivated by your scheme because they already do well.
Quote:
Originally Posted by perfectlyGoodInk
That agents care about referrals is thus not an argument that any one of these schemes is better than the other.
It isn't a competition for which is better. They are both fine if adults agree to them. You are just placing too much emphasis on your scheme being an incentive. That is what the agents are trying to communicate to you.
I didn't realize we were having a conversation about which system was better. I thought we were having a conversation about whether or not your system would incentivize an agent to do a better job for you, than the 3% model. I think you are removing one bias and creating another. I stand by that opinion. Whether that is good thing or bad thing is up to you to decide since you are the one paying for service.
So here is what will happen. You are specifically looking for an agent that responds to monetary incentives. As such, you will find one. You will be happy, they will get paid, and you will feel that your system works better than the current system. The problem is that for agents, like myself, that aren't motivated that way, we will just pass on working with people that want to work that way. People that are so "money incentive" focused often assume that others are the same way when they aren't.
Just being good at what you do takes care of putting food on the table. No need for schemes.
I wonder why he refers to it as a "scheme" every time he mentions it. A scheme makes it sound like you're trying to get away with something you shouldn't be doing... but that could be why it's referenced that way.
I would have called it a model... and we all know how many different models have come and gone, and more who try to do something completely outside the box disappear pretty quickly. Consumers like what they're comfortable with. For the most part, people don't like change. It is what it is and reinventing the wheel doesn't make sense...
I lived in the UK for 6 months when I was one year old, so not really a brit thing. Just used to seeing "compensation scheme" somewhere, probably from reading The Economist, which is a British publication. Model is the term we use to describe something that simulates how something works given a set of simplifying assumptions. For example, the supply/demand model assuming perfect competition. How about compensation plan, does that sound better?
Still seeing nothing but "3% * salesPrice isn't that bad" arguments here. Nothing about why it works better for the buyer than flat fee or my proposal.
...
Still seeing nothing but "3% * salesPrice isn't that bad" arguments here. Nothing about why it works better for the buyer than flat fee or my proposal.
It works better because:
1) it's simple and easily understood
2) nobody likes your plan
3) consumers understand simple multiplication but would be confused by your plan
4) Your theory is based on invalid assumptions, thus the entire basis for the plan is invalid
It's adoption rate would be nill. If any of us changed our buyer rep agreements to have two checkboxes the buyer could choose from. On being "[] x% of sales price" and the other "[ ] {Your confusing plan}", 99.99% of consumers would choose Box 1.
It's adoption rate would be nill. If any of us changed our buyer rep agreements to have two checkboxes the buyer could choose from. On being "[] x% of sales price" and the other "[ ] {Your confusing plan}", 99.99% of consumers would choose Box 1.
What more do you want to hear?
Why not have three checkboxes?
[] flat fee of $XX,XXX
[] x% of sales price
[] x% of ($YYY,YYY - sales price)
I don't think this would be too confusing, especially compared to the rest of the paperwork. Once the buyer tells you their range, you can add the min and max together to produce $YYY,YYY for them in the form.
Buyers who don't understand multiplication can use box 1. Those who get multiplication but not addition or subtraction or economics can pick box 2. Those who understand all of those can pick box 3.
I imagine most would check box 1, but who knows?
Although if your services are truly free to the buyer, the form really ought to have just one box that says $0.
Last edited by perfectlyGoodInk; 09-06-2012 at 12:42 PM..
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