Flat Fee vs Commission – Choosing How You Pay Your Real Estate Agent
January 16, 2021
The real estate industry is changing. The internet is challenging conventional wisdom as it pertains to selling a home. Consumers now have access to critical housing data, once only available through a licensed agent. Without ever contacting an agent, you can find essential data from your smartphone, such as which homes are for sale or how much those homes are. This shift in consumer behavior is not a new phenomenon. For years now, the National Association of Realtors has studied consumer behavior. Compared to previous years, the latest 2019 profile of Home Buyers and Sellers shows a steady and reliable increase in consumers relying on mobile apps or on-line searches. Change is happening now, and those professionals stuck in traditional, antiquated methodologies will find themselves behind the pack. Even worse, driven out of the profession, unable to compete.
To stay competitive myself, I am in the process of challenging the prevailing real estate business model here in Nashville, Tennessee. One of my more controversial business decisions is to allow homeowners to choose what compensation to offer any cooperative agent who brings a buyer to purchase their home. I am educating consumers on their choices. Options that they have always had but did not know anything about or worse were never informed of. My colleagues have frequently met this with ridicule and, on occasion, outright hostility. Threats of legal action and regulatory complaints: one agent attempted to file a title lien against the property for 3% of the gross sale price. The title lien was especially absurd considering the seller had disclosed and advertised from the start; he was only offering a $1.00 cooperative compensation. The lien attempt failed, and the veteran agent was out nearly $17,000 in compensation.
Call the real estate industry what you will. I call it broken. The extent of how broken the real estate industry is, is never more evident than when the agent discusses agency and compensation. Even though buyer agents are fiduciaries for their buyers, buyers typically do not directly pay their agents. This fiduciary/compensation set up is a classic conflict of interest that no one acknowledges but instead accepts as the way to do business. To put this into perspective, let me explain it as a slip and fall personal injury situation. Imagine shopping for your favorite ice cream, walking down the freezer aisle, and slipping on water from a leaking freezer, and breaking your leg. The store manager calls an ambulance, and you are rushed to the emergency room. While in the emergency room, an attorney walks in and tells you he will be representing you in this case and not to worry about his fees; the store is paying for everything. This conflict of interest occurs every day in this country, and no one seems to notice the elephant in the room. Buyer agents are working for buyers but getting paid by sellers. Worse is the fact that industry professionals seem to gloss over, ignore, or explain away this conflict as nothing more than, “it’s the way it’s done.” Upton Sinclair may have said it best when he said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
In Tennessee, Buyer agency agreements spell out the payment between the buyer and their agent; however, that section is often left blank or overlooked. These buyer representation agreements are thorough and go as far as to bind the buyer to pay any shortage from the offered cooperative compensation by the seller to the payment agreed upon between the buyer and buyer’s agent. The problem is, the prevailing custom is for listing agents to compensate cooperative agents according to the terms and conditions spelled out in the listing agreement between the listing agent and homeowner. Agents have been accustomed to this practice that many do not even bother to verify the disclosed and advertised cooperative compensation until the purchase is agreed upon and bound. As a result, some agents are left with a costly lesson in paying attention to details and understanding exactly how they get compensated.
Recently I had an agent allege I was fraudulent, and I was violating my ethical obligations because I allowed my seller to offer a $1.00 cooperative compensation. The agent expecting a commission of $21,000.00 was especially volatile when she discovered three days after binding the purchase agreement, she was only earning $1.00 from the seller. On the phone with her, she was hysterical at times. She was screaming about how this was wrong, unethical, and fraudulent. The entire time, I asked her what was the compensation in her representation agreement between her and her buyer. Her reply was, “That is not the way we do business, Jesse.” What she failed to understand is the way I do business. Undeterred in believing I was not somehow wrong, she uses social media and directly reaches my seller. In her direct message, she asks my seller if he knows I listed the property with a $1.00 cooperative compensation. When my seller did not reply, she reached out to a mutual friend and colleague connected with my seller. She enlisted their assistance in getting a response from him; however, my seller did not respond. Instead, my client sent me screenshots of the communication attempt, and once the deal was closed, I filed a Regulatory complaint against her. The last update I got from TREC (Tennessee Regulatory Exchange Commission) was that they had forwarded the complaint to regulatory attorneys after the initial review. This agent would not disclose what her compensation agreement was between her and her buyer because she didn’t have one. Like I said earlier, chances are, she left that section blank. I speculate she left it blank because she could not convince her client to pay her $21,000 for her services. My question is, if she couldn’t convince her client to pay her then, why would my client pay her when he does not even know her?
Do not get me wrong. I do believe bringing the buyer has value and is essential. I also know I have never seen a buyer look at their spouse and say, “Honey, I do not think we can buy this home because our agent is not making enough money off it.” My business model is not a good fit for every consumer, and I am not trying to convince you that my strategy is right for you. I am just highlighting that consumers are demanding change, the internet is facilitating change, and the agent who is not keeping up or too busy to cross “T’s” and dot “I’s” may end up learning a costly lesson.