The Argument For Flat Fee Real Estate
September 7, 2021
It may be the prevailing market practice to pay a real estate agent 6% commission on a contingency or when the deal closes; however, it is an outdated practice with no place in a modern digital real estate market. With better-informed consumers, more efficient business offices, and greater competition amongst brokerages, the digital age of real estate is seeing advantages like lower agent fees, better quality services, and greater choice. Unfortunately, not all consumers can participate in these advantages. Many consumers have little to no knowledge of how to lower their fees, get better service, and what options they have to save money. Industry leaders and professionals advocate for consumer education; however, they often gloss over vital compensation details in the frenzy and rush of taking on a client. By doing so, professionals avoid uncomfortable conversations about the value of their service versus cost and replace it with discussions about curb appeal and property updates. A better compensation option for real estate agents is to take an upfront flat fee because it protects the consumer/agent fiduciary relationship, supports shifting consumer behavior, and saves the consumer money while providing traditional full-service marketing.
When agents take on a new client, the agent has a fiduciary relationship of care, obedience, loyalty, disclosure, accounting, and confidentiality. Consumers need to understand that these duties aren’t simply good business practices but required by law. When talking about compensating your agent, the agent’s responsibility to be loyal to you plays a significant role. Loyalty is best described as, “The duty of loyalty requires that the agent place the principal’s interests above those of all others, including the agent’s own self-interest.” By paying your agent upon successful closing, we create a conflict between the agent’s loyalty duty and their self-interest to earn a commission. In other words, by paying your agent on a contingency or only when the deal closes, you are asking the agent to decide what is more important, his commission or your best interest. To drive this point home, imagine working with an agent who was broke, facing bankruptcy. Do you suppose he would be more loyal to your best interest or the commission? How can an agent be devoted to a client when his compensation is at risk? Many hard-working, well-meaning, upstanding, and ethical agents walk this fine line every day. They sacrifice their interest on the altar of their fiduciary responsibility of loyalty to their client; however, as often as there are agents who do, as many, if not more, do not. A better option is to pay your agent a flat fee. The agent’s commission bias is removed from the transaction by paying a flat fee, similar to other professions, like attorneys, accountants, or even financial advisors. This way, the agent is not asked to serve two masters: their client and their self-interest.
As true with most industries, consumer behavior evolves. The real estate industry is no different. In the past 20 years, the single most significant impact on consumer behavior is the availability of information. Once the realm of only licensed real estate professionals, information like which homes are available, how much those homes are, and what features or amenities are included can be found by anyone with a cell phone and access to the internet. Consumer-centric sites like Zillow, Realtor.com, or Trulia provide a wealth and depth of knowledge on everything from the number of beds and baths to the more complex property value estimates and purchase analysis. A consumer will have access to as much information as the real estate agent does and, in some cases, more so. The availability of housing data and user-friendly websites with self-service options is shifting consumers away from traditional Realtors whose service offerings appear old, outdated, and expensive. We know this shift is occurring in real-time. We can see the rise and popularity of such sites as Zillow or Realtor.com. The industry’s largest trade organization the National Association of Realtors has also noticed this shift and warns of such in their published DANGER Report. The DANGER Report explains as consumers become increasingly more independent and technologically savvy, they are moving towards self-service options that give them more control over their transactions.
Homeowners want the golden calf of a free capitalist market. That is to get more for less. Consumers work very hard to earn the equity or cash savings they have saved up in their homes. For many, the monthly mortgage payment can be a burden when deciding on new tires for the car or making a $700.00 house payment. The equity they have saved up is often the family’s only nest egg; it is precious. When people live paycheck to paycheck, an unexpected illness, injury, or job loss can result in a family not making their bill payments next month. It is no wonder more and more people are looking for viable alternatives to paying a 6% commission. Consumers who do a little digging can discover boutique real estate brokerages that operate lean and efficient offices with little to no overhead cost. Those savings can be passed on to the consumer. These offices offer full-service marketing packages through automation and artificial intelligence technologies while providing a personalized approach. These disruptive brokerages or discount agents might discount their costs but never discount their services. At a fraction of the cost, saving homeowners tens of thousands in expensive traditional real estate agent commission, the homeowner saves money and does not miss out on any services.
In conclusion, the real estate industry can and must do better. We have a legal duty and moral obligation to eliminate any potential bias before we work to represent someone else’s best interest. Consumers should expect more from real estate agents. With a change in expectation, so comes a behavior change. Consumers are becoming educated about the process and are asking tough questions about what they are getting in return for the 6% commission. When the agent can not communicate the value they bring to the table, consumers armed with knowledge and experience will find an alternative way to buy and sell a home to save money. As it often does, the sordid conversation of money is the bottom line. Because many people do not have any savings or retirement outside of the equity they have in their home, it is no wonder people will look for ways to keep more of it. As real estate agents, we should be looking at ways to help them keep their hard-earned equity. After all, it is their money.