Multiple Real Estate Compensation Models: Is This A Good Thing?

Multiple Real Estate Compensation Models: Is This A Good Thing?

Just like any other product or service available to consumers, there will always be different ways to compensate salespersons. This is the American way.

I think varying real estate compensation models gives consumers choices unlike never before.

If a consumer only wants to pay a listing broker $4,000 and the buyer broker, $15,000 on a $600,000 property, saving the seller $11,000, that’s totally up to the consumer.

If another consumer wants to pay a listing broker and the buyer broker the full $15,000 each (2.5%), on a $600,000 property, that’s totally up to the consumer.

CEO’s of non-traditional compensation models have figured out that getting the listing controls the parameters of the deals.

However, there’s another side of the coin. How will multiple compensation models affect the real estate industry?

The jury will be in extended recess deliberating on the ultimate verdict about this question. But for now, let’s look at a few things we can surely predict.

 

1. There will definitely be many IPO launches. The goal of many non-traditional compensation models is to create real estate stocks to sell to the public. IPOs raise billions of dollars for founders, underwriters, early investors and employees. Launching an IPO is the first reason to enter the market place for any new business. The unknown variable here is will non-traditional compensation companies stay in business to provide the same service and reduce costs to sellers after the IPO is launched?

An August 2017 Zillow article shows stock ups and downs after a company launches its IPO and a business functions in the real world.

 

2. Real estate is still a service- and time-intensive industry. Hybrid and salary models have an accounting entry on their balance sheets titled “employee salary expense”. Traditional compensation models do not have a huge employee salary expense. Or, at least, the expense is so small it is insignificant.

One guess I can make is in states like California, Oregon, NYC (Manhattan) and Metro Seattle, where home prices are well above the national median home price, discount, hybrid and salary, real estate brokers will try to dominate the market.

In other parts of the United States, traditional compensation models will continue to thrive because there will not be enough money to pay employees under the hybrid and salary compensation models.

A July 2017 article reports that, currently, most Realtors do not earn a lot of money ($30K-$40K). So, income in a non-traditional compensation model could be the same or less.

 

3. Most brokers and agents got their licenses expecting the income from the traditional compensation model, not the discount, hybrid or salary models. Brokers got licensed to leverage their time and money in return for commission splits when agents closed escrows. The 100% commission broker emerged in the mid 2000s for agents who did not like giving up splits to their former brokers. Traditional brokers’ main challenge today is they cannot give their agents a plan for success.

The majority of the agents my company has spoken with left full-time employment to pursue real estate sales for its income opportunity. Many retirees also decided to start post retirement real estate careers to supplement income with an additional $8,000 every two months. If discount, hybrid and salary brokers ultimately prevail in capturing huge market share, it’s unclear how agents accustomed to traditional compensation will react.

 

4. Consumers are not robots. Some consumers will embrace non-traditional compensation models. Others will continue working with traditional brokers and agents. Consumers have witnessed some amazing trends over the last 25 years, such as:

  • National chain department stores booming…until Wal-Mart began taking market share.
  • Music stores selling CDs were popular until…Amazon began in the late 1990’s.
  • Dental practices thrived until consumers could not afford to pay dental fees. Then, some private practices began shutting down their offices and accepting consolidation and guaranteed salary with big dental marketing corporations.
  • Healthcare, via the Affordable Care Act, tried to give the government control of healthcare.

TheResource.tv article even talks about Amazon’s potential push into real estate sales. I believe it’s this Amazon component that may affect consumers’ behavior in an interesting, unpredictable way.

Amazon has so much money and so many repeat customers that it could literally consolidate any industry. The fear I’m hearing is there may come a point in time when big technology hits the wall as consumers began to look over their own shoulders out of big technology threats in their industries.

Will the automotive shop owner be at risk if he or she does not lower prices to repair a transmission to match a digital marketing price?

Will the roofing company owner be at risk for not matching a roofing quote provided by the Internet?

Will the veterinarian’s business be at risk for performing procedures at low-ball prices to match Internet pricing that the business has to stay open 7 days per week to make a profit?

Will the enticement for consumers to save a few dollars begin to turn the American economy and the American dream into a place where no one can earn an above average income because of technology?

What is the trend here as it relates to moving products and services to consumers?

The trend is salespersons are giving up their financial freedom to technology.

Salespersons are basically acquiescing (giving in) to big technology because they are afraid to contact potential customers. I know this is a very strong statement but it reflects what I see everyday. What is happening to grown men and women where they feel contacting people is no longer a good thing?

My final comment is salespersons who truly believe in their compensation models, whether it is the traditional compensation or the non-traditional compensation model, will fight to protect it by working hard and showing value. Consumers always favor salespersons who work the hardest for their business.