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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 you want to take money away from an agent because the buyer chooses to buy a more expensive home? That has nothing to do with "negotiating". That's not paying based on negotiating skills. That's paying based on the buyer picking whatever house they want and punish the agent because you want a more expensive house with all the bells and whistles instead of the fixer that needs a lot of work.
- $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?
It's an interesting concept. Flawed, I think, but interesting.
Who sets the buyers "range?" Any smart buyer seeing this formula will immediately tell you their "minimum" is about half their maximum, thereby assuring they pay the lowest buyer agent fee for purchasing the most expensive house. While I appreciate the concept of trying to create incentive for the agent to negotiate the best price for his client, this doesn't do that. 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. But if you find an agent who's willing to work this way, you & he are free to enter into such an agreement.
collusion n. Secret or illegal cooperation or conspiracy, esp. in order to cheat or deceive others.
Such cooperation or conspiracy, esp. between ostensible opponents in a lawsuit.
That's paying based on the buyer picking whatever house they want and punish the agent because you want a more expensive house
This critique is equally applicable to the standard scheme, where a buyer can "punish" the agent by picking a less expensive house. Is the standard scheme thus unfair?
Quote:
Originally Posted by Bill Keegan
Who sets the buyers "range?" Any smart buyer seeing this formula will immediately tell you their "minimum" is about half their maximum
The buyers and agent agree upon the range. An agent that agrees to a lower minimum is effectively lowering their commission rate, and it is equivalent to an agent in the standard scheme agreeing to work for a lower percentage or to rebate a portion of the commission. Of course, a smart buyer knows that the best agent isn't necessarily the one who has the lowest fee, just like the best contractor isn't necessarily the one with the lowest bid. A good agent will be able to point out when the buyer's minPrice isn't realistic by showing them comparables.
Last edited by perfectlyGoodInk; 09-05-2012 at 08:15 AM..
collusion n. Secret or illegal cooperation or conspiracy, esp. in order to cheat or deceive others.
Such cooperation or conspiracy, esp. between ostensible opponents in a lawsuit.
Suppliers collude by agreeing to cooperate to raise prices (typically only possible when there are a small number of firms with price-setting power, i.e. oligopoly). This is illegal because it prevents price competition, results in a higher price than the market equilibrium, and creates deadweight losses to society.
How is it possible for a buyer and a seller to collude? Any agreement between them cannot prevent other buyers and sellers from reaching their own agreements at whatever prices they seem fair. The market is large, so neither of them are able to influence the market price. Price competition can and will still occur no matter what agreement they reach.
How is this any more collusion than a home buyer and a seller negotiating on price? Or a seller and a listing agent contracting on commission? Does a listing need to disclose the commission the seller and listing agent agreed upon?
In a free and competitive market, buyers and sellers are free to voluntarily agree upon whatever price both parties deem fair. Voluntary exchanges only occur if both parties agree that they will benefit from the exchange. If one party does not feel the price is fair, the exchange doesn't occur. As long as price is free to react to market forces, there's no need for antitrust policies to be enforced.
I would play with the numbers a little more. That way if you hit something at just the right price your agent can make absolutely nothing.
The whole point is that I want something that is fair, but aligned in the right direction. The commission is a small percentage of the money they can save me if they do a good job. I don't mind paying them several hundred more for saving me a few thousand dollars. Indeed, I paid my listing agent more than standard and found it well worth the money.
You forget the seller has already agreed to pay his agent x% who advertises X% of that amount per the rules of their local MLS system. Are you asking the seller and the listing broker to renegotiate the amount offered after it's advertised to another agent ?
What you had is a Variable Listing commission. Now you're asking your Buyers agent to accept a variable BAC ?
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