OPINION by Peter Mericka B.A., LL.B Real Estate Lawyer Qualified Practising Conveyancer Victoria Director Lawyers Real Estate Pty Ltd It would seem that real estate agents are the same, all around the world. The following anecdote appears on a real estate...(read more)
I think that this article is probably best reproduced in it's entirety for forum members:
Quote:
Estate Agents - Commission Mentality Explained
OPINION
by Peter Mericka B.A., LL.B
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
It would seem that real estate agents are the same, all around the world. The following anecdote appears on a real estate industry blog in the United States. What makes this anecdote particularly interesting is the author's final comment "not all sales have to be 'difficult' to makes the salesman deserving."
I have often wondered as to whether real estate agents genuinely believe that they are entitled to take a chunk of a client's property (usually 2 or 3% of it) as payment for the dubious services they offer. Really, a real estate agent doesn't do very much at all. It is the lawyer who does all of the "heavy lifting" in any real estate transaction, by carrying responsibility for the client's legal well-being, and often keeping the real estate agent out of trouble along the way.
The inability of the real estate agent to justify remuneration by way of commission is highlighted in situations where the vendor's property sells to the next-door neighbour shortly after the "For Sale" sign has been erected. I know of one "ethical" real estate agent in Melbourne who boasts that in such circumstances he charges only half of the normal commission. This translates to, "If I have done nothing whatsoever to bring about the sale I will not charge the vendor the full $15,000. It would be unethical for me to take any more than $7,500 for doing nothing."
So, how does a real estate agent justify to herself the taking of a massive and undeserved fee? In her blog posting titled "But He Didn't Do any Work - Why Should He Get The commission?" real estate agent Wendy Rulnick appears to argue that because some sales are "difficult", she is entitled to demand a high commission for sales that are "easy".
Here is a transcript of the anecdote as written by Rulnick:
My husband and I had to go shopping for a new television last weekend. The old one was about to die - its channel guide was getting fuzzy and my eyesight is already "bat-like". We researched our options online, found one we wanted, then set out for a reconnaissance mission to Sears, Best Buy and yes, Sam's, at my Hubby's insistence.
Right away, at our first store, Sear's, there was our new flatscreen- and it was a lot less expensive than the internet price! I got really excited. The on-duty salesman, Lee, came over and quietly introduced himself to ask if we needed any help. My husband asked if it the t.v. had built-in speakers, and Lee said "Yes". Hubby didn't give signals to talk further (being an engineer), so Lee said to call him if we needed more help.
My husband and I walked up and down the aisles but I already KNEW it was the t.v. we wanted (OK-- " I" wanted). Hubby and I whispered ...."I really want it, let's get it now!" I said. My husband agreed.
I called Lee over and we said "We'll take it". He said he would have to check their inventory (sigh). Sadly, there were none in stock, but if we ordered it then, we could have it in three days. Hubby and I looked at each other. I said "Let's order it", but my husband wanted to finish our mission and go to the other stores.
Before we left, I asked the salesman, Lee, "Are you commission sales?"
" Yes" , he responded.
"Then I want you to get credit for the sale if we call or come back to order the t.v. I am a salesperson, too, so I respect that."
Lee then filled out a customer-finder form so we could let any of the other Sears salespeople know we were "his" customers.
Hubby and I completed our research at the other stores. Sears was the best price by far. I sent Hubby to get the t.v. the next day. "Make sure you give the on-duty salesperson Lee's card so he gets credit!" I instructed.
"Why?" he asked innocently, being an engineer, "He didn't do any work. He answered one question."
"Honey", I said, " If someone called me up because they found a house, then grabbed me to write an offer, would I not deserve a commission? Some deals are easy, some are hard. That's just the way it is. Lee might have killed himself with the previous three customers. They might not have bought, or maybe they did not give his card so he didn't got credit when they did buy. Yes, we were ‘easy', but not all sales have to be ‘difficult' to make the salesman deserving."
Using the "easy" sale to pay for the "difficult" sale
According to the real estate agent, commission is seen as a way of ironing out the peaks and troughs that occur in real estate sales, so that big rewards can be reaped for small effort. But the reality of real estate is that real estate agents do nothing much, and take almost no responsibility for what little they do.
Another real estate agent added this comment to the posting: "Sometimes we hardly do anything to earn our commissions and other times we overcome the impossible. It all averages out after a while." Many other comments from real estate agents offer the same perverse reasoning for ripping off consumers.
Why should a seller, whose sale is straight-forward and "easy" be forced to subsidise a sale that the real estate agent regards as "difficult?" Real estate agents are very good at justifying such unfairness to each other, but consumers find this very hard to swallow.
And remember who it is that determines the rules of the game - that's right, the real estate agent. If the real estate agent refuses to operate on a fee-for-service basis, and prefers to risk working for nothing if a sale fails to eventuate during the currency of the agent's sale authority, then it is the real estate agent who should bear the cost.
Sharing the vendor's windfall
Real estate agents view the proceeds of a sale as a massive windfall; something similar to a vendor winning a lottery. When viewed in this way it is not difficult for even the most fair-minded real estate agent to see the commission as a sharing of the vendor's good fortune. This explains why the entire sale price is regarded as a fair basis for determining what share the real estate agent should take.
What is ignored is the fact that a property sale is the realisation of an asset that has, in most cases, been acquired with the vendor's hard-earned funds, and represents many years of effort. The sale proceeds are not "windfall profits", and the real estate agent has no right to insist on a share of money that the vendor has earned and invested in real estate.
Look at it this way, what would consumers say to a real estate agent who asked for an inventory of the vendor's personal wealth and assets and determined his commission as a percentage of the total? For most vendors their real estate does represent the total of their invested wealth.
Real estate agents do not make money for vendors
The truth is that real estate agents do not make money for vendors, and they do not cover their own costs. A vendor who believes that a real estate agent can bring about a sale where the price paid for the property exceeds the value of the property by an amount that covers the estate agent's commission, plus a profit for the vendor is a fool.
Real estate agents do not add value to real estate. The truth is that real estate agents simply allow market forces to operate, and then claim credit for the result. Often the real estate agent will manipulate the operation of the market by falsely advising the vendor that the property is worth less than its true value, or by falsely telling purchasers that there are competing offers, but such techniques are serious criminal offences.
As industry commentators regularly point out, real estate agents have no interest in negotiating higher prices. They simply want a sale, any sale at any price, in order to win a commission. The real estate agent can never use the ultimate negotiation "tool" of walking away from a low offer, because this put the real estate agent at risk of a no-sale. Or, the vendor may become impatient or disheartened, and list the property with another agency. Rather than miss out on a sale, the real estate agent works on the vendor to lower the price until a sale can take place.
Conclusion
Real estate agents cannot charge on a fee-for-service basis because the services they offer are of dubious value, and no real estate agent could survive on the basis of fair return for effort.
Commission allows the real estate agent to cash in on the sale of a vendor's property, but to do it in a way that makes the commission look small in comparison to the amount being paid for the property.
I believe that the real estate agent quoted above could have more properly described the situation like this:
"Honey", I said, "If I charged a client on the basis of reward for effort I could not make a living. Real estate sales are simple and straight-forward, requiring no meaningful contribution on my part, and I would not deserve more than a few hundred dollars for my involvement. By charging a commission based on the value of the client's property, and payable when a sale takes place, I am able to take huge payments even when I really don't deserve them."
Hmm...I need to leave this Forum - it is becoming uhhummm..I dislike the feel of the articles even though I don't agree with many agents and their fee structures. These articles are myopic in opinion.
Hmm...I need to leave this Forum - it is becoming uhhummm..I dislike the feel of the articles even though I don't agree with many agents and their fee structures. These articles are myopic in opinion.
This article was originally an extract (via RSS) from an article posted on another blog.
They are posted here (with permission) to generate discussion. If you disagree with the point of view, feel free to ignore it - or discuss it and put forward your own opposing point of view
__________________
Sim'
This is a general comment only and does not constitute advice. Before making financial decisions you should seek advice from a professional adviser, who can take into account your specific circumstances and investment goals.
I honestly can't get my head around the money real estate agents get paid. It's just phenomenal.
That said I can fully appreciate that there are good agents out there that completely justify their commission, but from what I have seen I'd have to say those agents are in the minority, and that many of the dud agents rely on these easy sales spoken about in this article and spending more time selling the home owner on accepting a lower price rather than getting the buyer to move up.
I had a conversation with a potential real estate agent yesterday (yes I'm looking to relist my IP again) he is a friend of my business partner, but unfortunately for him he is brand new to the game of selling property (though he does have four years experience in property management).
Anyway the main part of conversation went a little like this:
"So I'm going to be paying $15,000 in commission, what exactly are you going to be bring to the table to justify that commission if you don't have any experience, a database of potential clients or some strategy that improves the odds of getting a higher sale price?"
The response was basically this:
"Well you are going to pay $15,000 no matter who you list with, and I'm super enthusiastic and will work hard"
To which I responded:
"Those things aren't tangible, and in my mind not worth paying $15,000 for, plus I'd expect every agent to work hard. In my line of work business is only done if it is a win win for both parties, by this I mean if I'm paying you $15,000 to do something for me you need to be providing more than $15,000 worth of value to justify me investing in your services. Otherwise I'd be better off selling it myself."
To which he said he understood, and then repeated:
"But you are going to pay $15,000 no matter who you list with, and I'm super enthusiastic and will work hard."
To which I said:
"Ugh... I'm sure you will, and I know your my business partners mate, but you won't begrudge me from contacting a few other agents to see if they have anything more tangible to bring to the table, will you?"
I agree...and so many agents are not qualified in anything to justify that kind of money.
I think there should be a legal diploma or something required for real estate agents in addition to their other licensing requirements - then at least this would increase the barriers to entry for most agents
Still, nothing to stop you from selling it yourself.
I've never been a fan of commission payments (in any industry). Much like financial planners or fund managers or stockbrokers, why should you pay more in fees because the price is higher or the investment larger?
Real estate agents are a convenient and easy target but, unfortunately, it's become such an "accepted" practice that vendors or society in general don't think twice about commission payments.
Sure, it would be "fairer" if agents were paid a "fee for service" for their time and effort spent on a selling campaign, but which vendor is going to cough up $$$ when their property doesn't sell? The agent may have worked hard for many weeks/months, they may even have priced the property realistically, they could be the no.1 salesperson for the area but sometimes buyers don't buy and there's not too much that can be done about it. However, I can hardly see a vendor turning around and paying the REA for their time and saying "Bad luck buddy, thanks for trying anyway". It's just not the accepted practice.
If it were, you wouldn't see Blacktown agents turning up in their Toyotas whilst Mosman agents roll up in their Audis and Mercs
There is no simple answer to eradicating the commission system, especially in real estate. Like some independent FP's, a fee for service may be seen to be more equitable, but not for vendors who are used to the concept of "no sale no fee". It's never going to happen.
As for the arguments of REA's achieving better prices than the average seller, I'll leave that discussion for another post
This is a general comment only and does not constitute advice. Before making financial decisions you should seek advice from a professional adviser, who can take into account your specific circumstances and investment goals.
Well agents could potentially request that there be a $1000 downpayment made to even list a house. That would probably cut the "just interested to see what I could get" sellers out.
Well agents could potentially request that there be a $1000 downpayment made to even list a house. That would probably cut the "just interested to see what I could get" sellers out.
It would only ever work if it were the "standard" practice.
Can't see that happening, can you?
This is a general comment only and does not constitute advice. Before making financial decisions you should seek advice from a professional adviser, who can take into account your specific circumstances and investment goals.
It would only ever work if it were the "standard" practice. Can't see that happening, can you?
Why would their have to be a standard?
Real estate agents could just operate in a supply and demand system like everyone else in teh economy, where the agents that are worth it can charge as much as they want as long as they are still in demand, and of course agents who are very average would have to charge rates that gets them business.
