Why the Current Percentage Based Commission Structure in Real Estate is Good for Consumers

Tomorrow, Help-U-Sell Broker, Dan Desmond, will be ‘debating’ the merits of the Set Fee Business Model vs. those of the traditional percentage based model with an industry veteren, Scott Einbinder. Dan will do just fine. He has dozens of comparative gems that illustrate the superiority of the Set Fee model over percentage commissions.

But I keep trying to think like the other guys. I wonder what they’ll say are the consumer benefits of a seller paying, say, 6% to sell their $300,000 home ($18,000) versus a set fee of, say, $4,950? Here’s all I could come up with:

The lofty percentage based commission is better for consumers because there is so much money in the transaction for real estate people that they will crawl all over one another to make the sale! AND it’s good for consumers because there is enough money in the transaction for the brokers to pay their salespeople ridiculously high commission splits and still have enough left over to pay the electric bill!

In fact, there is so much sales commission in real estate transactions that pay by percentage, that the industry has invented all kinds of new ways to ‘get the job done.’ How about this one:

I know of more than one company that has brought ‘Network Marketing’ (Read: MLM) to real estate. They pay bonuses to salespeople on the production of the people they bring into the company and the ones THEY bring into the company and the ones THEY bring into the company and so on. The models I’ve seen have agents earning bonuses SIX GENERATIONS down-line from the person who actually did the transaction. So the transaction agent gets paid . . . and so does the person who brought them in and, of course, the person who brought that person in, and so on and so forth until six people have shared that commission. It’s not only possible, it’s likely that the 4th, 5th and 6th generation winners won’t even know there is a transaction in the works! They may not even know the agent who actually did the deal! But they’ll still get paid because they did the one thing the traditional business holds as all important: they recruited!

What’s wrong with that? I mean, Donald Trump and Robert Kiyosaki have both endorsed Multi-Level Marketing (oops! I’m sorry, I mean: Network Marketing) as a great way to make a lot of money. What’s wrong with it is this:

If there is enough money in the transaction to pay six (or more) real estate people, most of whom had NOTHING to do with the transaction at all . . . . there’s too much money in the transaction for real estate people.

We have to remember why people get into the real estate business. Very few go to college to study real estate and prepare for a career in it. Most set out to do something else . . . that eventually goes wrong. Maybe, like me, they set out to teach but discovered several years later that teaching wouldn’t pay the bills. Maybe they were climbing someone’s corporate ladder and were suddenly laid off. Maybe they stayed home and raised the kids, who are now grown and independent. The point is this: most people come to real estate as a fall back (fall forward?) from a career shift. Why do they choose real estate? Anyone who’s bought or sold a house or two has a basic familiarity with the industry and how things work. Entry is relatively easy and cheap – you just have to pass a State test and pay a few fees. And there is potential to make big bucks. I mean, just look at the numbers! Sell a $400,000 house paying, say 5% commission . . . that’s $20,000 for just one deal! I know, I know, not all of that goes to the agent, but still, it’s a lot of money for selling one THING. You’d have to be selling industrial pumps or warehouse automation systems to make that much on a single sale anywhere else . . . and those jobs would probably require technical expertise that most don’t have!

So, when our chosen career shits and we need a plan B, we look to real estate because it’s easy to get in, it doesn’t cost a lot, and the money can be really good. In fact, it looks like ‘easy’ money. I assure you it’s not . . . but to a person looking for an income stream, real estate sales can appear relatively easy.

Unfortunately, most who get in quickly discover the truth: that it’s NOT easy, that they work more hours for less per hour than they what they left. It’s frustrating. And now here comes Help-U-Sell trying to charge sellers LESS for our service! Unthinkable!

I don’t want to give the impression that I am anti-real estate agent. I assure I am not. To me, the ones who are good are . . . heroes. I’ve worked with some who tirelessly wrangled angry dragon-like transactions into submission, day after day, deal after deal, and never stopped smiling. What I am ‘anti’ is: consumers bleeding equity to support a real estate business model that’s was out of date 20 years ago and that’s been on life-support ever since.

So, here’s to you, Dan Desmond! Put your armor on and speak the truth . . . it may just set them free.

MLM and Real Estate

I had the opportunity during my hiatus from Help-U-Sell (late ’05 – mid ’09) to work with a couple of well funded start-ups who were going to revolutionize the real estate business.  It’s true, both companies were thinking ‘out-of-the-box;’ it’s just that it was the wrong box.

Both saw a blending of Multi-Level-Marketing with traditional brokerage to be the wave of the future and built companies around the concept.  (By the way, nobody in MLM says ‘Multi-Level-Marketing’ anymore.  The term is tainted by too much bad history.  Today they call it ‘Network Marketing.’ ) 

Keller-Williams is often credited with starting this fad, though in truth, theirs is not a true MLM concept.  They have ‘profit sharing,’ where agents who bring other agents in can be compensated with a share of the company profits . . . which is laughable when you consider how nearly impossible it is for a traditional real estate company to turn a real profit.  I know, I know:  I’m  going to get blasted for that but the truth is:  very few KW agents are making enough on their profit sharing to replace their personal production.  Nobody is retiring to live on their residuals. 

The true MLM/Real Estate model is closer to Amway or HerbalLife than Keller-Williams.  In this world, I recruit you and you recruit her and she recruits him and him and so on and so  on and so on (just like that old Revlon commercial) and somewhere down the line somebody has a closing and everybody gets paid!  You don’t even have to be a good agent to be successful; you just need to be good at convincing others to join your ‘team.’ 

Here are my problems with this approach:

  • I don’t see how in good conscience a person six people removed from the agent who did the transaction,  who may not even know the agent involved, should be paid a dime.   This person probably had nothing to do with bringing buyer and seller together and may not even have known that a transaction was in process until his paycheck arrived.  If there’s enough commission in the transaction to pay an agent so far removed, then there’s just too much commission in the transaction! 
  • It’s all about recruiting, not about selling real estate.  The approach is:  recurit everyone breathing and eventually someone will luck out and sell their cousin a house and then we all get paid!  There is no attempt to find the right person for the job and little done to build the recruit’s skill. 
  • Finally:  THERE”S NOTHING IN IT FOR THE CONSUMER!  Sorry to scream, but this really bugs me.  Once again, it’s all about the agent.  It’s just the same messed up agent oriented business model, this time on steroids.  Really.  I had conversations with both of the companies I worked with about this and the attitude was that the consumer was the agent’s responsibility.  The agents would take care of the consumer.  The company’s role is to help the agent recruit.  In other words there is no consumer offering.  There’s nothing special or even distinguishing here for the consumer.  It’s not about them. (And how you build a business that’s not about the consumer is a mystery to me).

Will MLM be a factor in real estate? Probably.  The the idea of making money for nothing is way too appealing, especially in a market where everyone is working very hard and few are making a good living.  But is this something the consumer is going to choose going forward?  I don’t think so.  To the consumer it just looks like more of the same:  a new twist on an already tired model.