The Set Fee vs. Commission Debate

Well, the great debate is just a couple of weeks away! On April 25, Help-U-Sell broker, Dan Desmond, of Forked River, New Jersey will take on Scott Einbinder, an industry veteran and speaker in a verbal joust about which model (set fee or percentage based commission) is best for consumers. The event takes place at the Tom’s River Clarion and the $10 tickets (proceeds will be donated to Habitat for Humanity) have sold out.

Dan, I am so proud of you! You were so persistent, consistent and correct in your pronouncements that you caused this ‘Debate’ to arise. I know you will represent all of us well. The buzz is already in your favor – as it should be. After all, you are defending what most everyone agrees will be the future of real estate. The other side is defending the status quo – which we already know consumers don’t like.

In fact, it’s hardly a fair contest. It’s already over. The decision has already been made. Percentage based commissions in real estate sales are stupid and the public hates and/or doesn’t understand them. Set Fee pricing is logical and accomplishes the same result as percentage based commissions with much less cost to the consumer. If you took 100 potential sellers and lined them up, gave them an overview of each of the two models and asked them to choose, I bet 95 would choose the Set Fee. The debate has already been decided in the court of public opinion.

One of the arguments percentage based guys always use (and one you may hear on the 25th, Dan) is that, with percentage based commissions, the agent has an incentive to get the seller more money because when the sales price is higher, the sales commission is also higher. Let’s debunk that, shall we?

Let’s imagine that we have a $300,000 home listed for sale with a seller who has agreed to pay, say, 6% of the final sales price as commission. Let’s assume a buyer comes along and offers $280,000. If the seller takes the offer, s/he will pay $16,800 in commission. Let’s say the agent, wanting to get as much out of the deal as possible, waves his/her magic real estate stick over the buyer and convinces him to pay $10,000 more: $290,000. Now the seller will pay $17,400 – just $600 more in commission – not that much money. Now consider the likely possibility that the buyer is working with another agent from another office. Now that $600 has to be split in half. The listing office’s portion is just $300. And of course, the agent doesn’t get all of that. Let’s assume s/he’s on a 70% split. That $10,000 more the agent ‘got’ the seller is worth a grand total of $210 to the agent.

Come on. Who are we trying to kid with this kind of logic?

Truth is, an agent in a $300,000 marketplace on a 70% split with an office that charges, say, 6% commission will probably need to sell about 13 homes in a year to make $100,000. That’s assuming their sales are a mixture of one sided and two sided deals, with the bulk being one sided. If this agent works a 40 hour week (and most don’t), that’s about $50 an hour. So getting the seller and additional $10,000 is only worth about 4 hours of the agent’s time, 4 hours that could be spent making a 14th sale for the year.

Unfortunately, consumers take the myth that the agent who has a percentage based interest in their transaction will get them more money to mean: ‘If I pay a lofty percentage based commission, my agent will get me MORE than market value for my home…’ and we all know how ludicrous that is!

So, Dan, when you hear this spin-doctored nonsense about percentage based commissions motivating agents to work harder, meet it head on. Pull out the chalk and do an example. Show everyone how little $10,000 more in sales price means in the agent’s pocket.

And by the way, it’s been my experience that most agents, whether commission or set fee based, will work very hard to help their clients – whether buyer or seller – achieve their objectives regardless of what happens to the commission. That’s certainly one of the characteristics that separates the really good guys from the really bad.