In writing the article "Why Didn't My House Sell" I neglected to mention another trend becoming more prevalent though it has no proven track record of success, and that is higher-than-average co-brokerage fees paid to the buyers' agent and other inducements to provoke a showing.

In culling the expired listings I ran across everything from a 6% co-broke fee to a drawing for a free week's vacation in a beachfront condo in the Caribbean. And, as previously noted, these listings all had expired.

Some argue that most agents will steer their clients toward the homes with these type of inducements without disclosing the extra payoff they will receive if their buyers purchase. While I can't say this never happens, the implication that a majority of real estate professionals would violate their ethical fiduciary responsibility to their client over a few hundred dollars is repugnant. And it's also untrue.

For all the discussion and hand-wringing among real estate professionals about disintermediation - the elimination of the so-called middle man in transactions (and the real estate agents in terms of real estate) - we as a whole seem slow to recognize that the rise of the Internet and buyers' increased use of the web in searching for real estate is making such buyers' agent bonuses irrelevant. It is not the agents driving the bus, so to speak. It is the consumers.

I send properties to my clients (regardless of the co-brokerage fee being offered, incidentally) and inevitably my clients will have selections of their own that they found either through the property search on Dalton's Arizona Homes or elsewhere. To believe that I am the sole selector of homes and therefore able to guarantee myself these bonuses is ludicrous. (It's equally ludicrous to believe the Internet will eliminate my role in a real estate transaction, which is at the heart of disintermediation theory. Change? Absolutely. Eliminate? Never.)

All these financial inducements cannot compensate for proper pricing and aggressive marketing. The rest is just fluff.

(c) Jonathan Dalton, 2006 / Jonathan Dalton's Arizona Homes

During my first year of college I enrolled in a class on logic, as I needed an "honors" course as it were as a term of the conditions of my scholarship. In short, the course was a linguistic equivalent to the joyous geometry classes I despised in high school - my thinking being, if Pythagoras says his theorem is correct, why do I need to prove it? I'll take his word.

One item that always stayed with me was the ad hominem argument, the last refuge of those with no other means of defending their point. It's also dear to my heart as my children are experts: "I know you are but what am I?"

I've learned to avoid most bubble blogs, and even a large portion of the bubble debate, because of the prevalence of the ad hominem argument. There's little interest in actual discourse. Rather, this crowd is interested solely in capitulation - confess your sins upon the altar of the Bubble Gods or else! Any attempt to discuss the issue in any rationale manner only proves your status as a heretic.

It was interesting to see the same logic has entered into the buyers' compensation debate. Either agree that flat-rate or fee-for-service compensation or face the withering bluster of an ad hominem attack.

Sadly, capitulation really isn't in our nature. Not this boy's. And certainly not in Tobey's.

(c) Jonathan Dalton, 2006 / Jonathan Dalton's Arizona Homes

Yesterday there was a fairly spirited debate about the future of real estate commissions, particulary on the side of the buyers' agents, and whether a flat-rate structure truly represents the future or is little more than the latest marketing fad.

(NOTE: Some of you are probably clicking away from this page, including my wife who may be heading here instead of reading what her husband has to say. Some may view this entire debate as little more than an internecine squabble - agents arguing with each other. Rather than pulling out the rulers and measuring, we're instead blogging away. If you haven't quite clicked away, though, it might be worth staying since it is the service you will be receiving and, depending on which side of the transaction you're on, the dollars you are spending that are being discussed. I also believe your intelligence is being brought into question, but that's just me.)

I believe it's safe to assume everyone is familiar with Nordstrom. Fairly pricey clothing, offset by personalized service and an overall service guarantee that can't be beat: you can return an item for any reason - ANY reason - and the refund promptly is provided with a smile, no questions asked. How can they do this? Because they have the utmost confidence in their value proposition. A Tommy Bahama shirt is the same whether purchased at Nordstrom, Robinsons-May or Macy's. The difference is in the value of the service provided to the customer.

Nordstrom does not deign to enter the fray with sales on presidential birthdays, national holidays, or random Fridays spread throughout the calendar. The only discount to be found comes twice a year during the semi-annual sale. For some, like my friend Dawna, the semi-annual sale is a national holiday unto itself but that's another story. How can the store justify only two extensive sales a year? Again, supreme confidence in their value proposition.

For any business, the decision must be made at some point whether the business model will be based on price or on service. Even for those claiming that you can have excellent service at a lower price, public perception ultimately will be their undoing. If it walks like a duck and quacks like a duck, you're not going to convince someone you're a swan.

Two restaurants can have essentially the same menu and the same quality food, but if one has soft lighting and linen tablecloths and the other features a couple of wide-screen TVs tuned to ESPN, there's little doubt the former can charge more based on the ambience and remain as profitable as the latter. Each appeals to the clientele. Diners are not going to the second restaurant for a romantic evening (unless you're me, as my wife likely will point out). They're going for the food and the lesser price. End of story.

I believe this will be the crux of the debate regarding the future of real estate commissions - service and value versus price. And it's not at all a new debate. The only difference between the debate now and the debate then is we have the blogosphere (sorry, Kathie) in which we can hammer each other over the head with our own perspective.

All of the arguments that commissions based on a percentage of the sales price are doomed to extinction completely miss the fact there is a portion of the population - a significant portion of the population, in my view - who happily will pay for service. They want all of the trappings - the soft lighting, the candles, the violin music versus the NFL Game of the Week available in their own living room - and will pay to receive it. It is why AJ's markets remain in business even though there's little significant difference in its meat departments versus its parent company, Basha's, except in the greatly increased price. 

When service is your value proposition, service will sell.

Now take the flip side. Let's take the idea of a capped, flat-rate fee for service for buyers' agency as has been promoted and argued endlessly of late. Promises have been made that the service will be excellent, and of this we have no doubt. How you measure such an intangle or, more importantly, how the public measures such an intangible remains to be seen but we digress.

Let's say you advertise that you will cap your commission at $4,000 on a sale of properties $250,000 and under, with whatever remains of the co-broke on a property passed through directly to the buyer. Clearly, you should see an increase in business as those looking for the discount swarm like moths to the flame ... until another heat source appears on the horizon offering a cap at $3,900. And then another at $3,800. $3,700. $3,300. $2,500. Where does it end?

Take a look at the stock brokerage industry and the massive discounts offered a few years ago (most continuing today) and tell me, is there ever an end? I argue there is not. Once the journey down the discount path has begun - once the driving force of your business plan is not the service but the price, it's virtually impossible to pull back from the bring. There always - ALWAYS - will be someone undercutting the rest of the competition. It's the nature of a free-market system.

But let's go back to having service as the center of your business model. Service is intangible. It's touchy-feely. In many cases, it's nothing more than a feeling, a rush of endorphins akin to eating large quantities of chocolate. Most people can't define what makes great service better than good service, but they know when they've received it.

How do you compete when service is your core? By providing increasingly good service, of course. And is there any question that good service - communication, negotiating skill, contractual knowledge - is of benefit to the consumer at large? Can you honestly say there is nothing noble, nothing worthwhile among those who choose to promote service over price?

Is there any concrete evidence that a seismic shift will take place whereby consumers as a whole eschew service in favor of price, in real estate and other industries? Only in the discount crowd's rationalizations.

With service as your core message, provide excellent service and price becomes secondary. With price as your core message, all your client base wants to know about is the price and how it compares to everyone else. Service becomes secondary.

You can't have it both ways because the public won't buy it. Just ask the progenitors of the McDonalds Happy Meal for Adults.

(c) Jonathan Dalton, 2006 / Jonathan Dalton's Arizona Homes

SCENE: Interior, day. A darkened 8-by-8 room. A bare 60-watt light bulb provides the only illumination (we'll make it an energy-efficient bulb in deference to my rabbi.) In the center of the room, an inquisitor interviews a real-estate agent seated on a metal folding chair.

[INQUISTOR:] "So, Mr. Buyers' Agent ... How much do you charge your buyers?"

[BUYERS AGENT:] (stammering) "I ... I ... " (look of surprise) ... "Wait ... that's the question?"

[INQUISITOR:] (sneering) "Yes, that is the question. HOW MUCH DO YOU CHARGE?"

[BUYERS AGENT:] (laughing) "What a relief. I thought you were going to ask me about mold."

[INQUISTOR:] "This is no laughing matter, sir!"

[BUYERS AGENT:] "Sure it is. There was no need for the theatrics, just as there was no need for you to assume I wouldn't readily provide you the information. I don't make a secret of what I receive for working with a buyer. If you elect to sign a buyer broker agreement, you will see that I personally work for 3% of the sales price or what's offered in the Multiple Listing Service, whichever is greater. The amount is the same even if you don't sign a buyer broker; the main difference is with a buyer broker, it's in writing."

[INQUISITOR:] "A-ha! You said whichever is greater! So you're going to talk your clients into a certain property only because of the commission being offered."

[BUYERS AGENT:] "Don't be ridiculous. Is it possible same agents would? Yes, it's possible. Do I? Absolutely not. My job is to help clients find the homes that best suit them. In the long run, as a profession in a commission-based career, am I going to make more money squeezing an extra 1 percent on one house or by earning the referral business of a client who has been settled into the right house? It's a no-brainer, really."

-----

There has been a thread permeating the real estate blogosphere of late regarding what buyers agents charge their clients. It even worked its way into print in the Arizona Republic, courtesy of Bloodhound Realty. At its root, the question is meant to expose agents who are leading their clients to homes with higher co-brokerage fee offers in an effort to make a few more bucks. Builders are at the heart of the debate, as these same companies who wouldn't pay an agent a cent a year ago now are offering co-brokerage fees of up to 10%.

But the debate goes beyond the larger co-brokes. It cuts to the idea of buyers negotiating their own fee regardless of what is in the MLS. One of Bloodhound's suggestions is for the co-broke to be credited to the buyer and split according to a previously-negotiated compensation agreement between buyer and buyers' agent.

It seems like a simple solution but the devil is in the details:

1) The commission on a sale is negotiated between listing agent and seller on the Exclusive Right to Sell form. This commisson amount, unless otherwise stated in the agreement, remains the same whether there are one or two agents (i.e., a listing and a selling agent) involved in the transaction. The buyer has no say in the commission debate, at least from this standpoint.

The argument made most often when discussion commissions, particularly from the unrepresented seller crowd, is the list price is inflated by the presence of the commission; if buyers were paid directly in all transactions, or if the seller were agreeing to a lower co-broke and lower overall commission, prices would be lower.

Poppycock.

In a market such as the Phoenix area currently, market averages dictate price. The presence of a commission will impact the seller's bottom line, no doubt, but the lack of a commission will not necessarily cause them to lower their price by 5% to 7%. The price will remain the same (or higher, if they are like most unrepresented sellers) as they grasp at a higher net.

2) Buyers willingly will pay the buyers' agent fee in exchange for representation. The basic fact, right or wrong, is buyers' agency and buyer representation is less an issue to the public than we tend to believe. Problems in the past arose when buyers believed they were being represented in a transaction when all agents in fact were representing the seller. Those days are in the past. Yet it is still extremely common to find buyers calling listing agents off their signs, looking for the best deal on a home. Sometimes they have an agent, most often they do not. There's a common misconception that they can buy a house for less through the listing agent (possible under a variable commission agreement but not automatic, as per point #1) and the idea of representation is less important than the idea of price.

3) Under the current system, imperfect as it may be, buyers are financing the commission because it's wrapped into the sales price. Maybe not the wisest of decisions, but for buyers struggling to find money out-of-pocket to purchase, it's no worse a decision than financing closing costs by offering higher and obtaining a larger loan. Ask these same buyers, or worse yet force these same buyers to pay out-of-pocket for representation and we'll soon have a majority of buyers entering into real-estate transactions unrepresented, just the situation that was supposed to be corrected with the introduction of buyers' agency.

4) What of higher co-brokes? I have no issue with passing along some of the extra commission to a buyer as part of a previously agreed upon employment agreement. I also have no issue with adjusting my commission to consumate a deal, if that's what needs to be done. But I also would expect my buyers, in the case of a co-brokerage offer lower than the minimum I have set for my own business, to pay the difference. This should be a two-way street. It's often not, as evidenced by the below-minimum co-brokers I'e accepted in the past.

The argument's been made that my agency is being bought with a higher co-broke. Personally, this isn't the case. My job is to find the right home for my clients. And I have enough of a long-range view to understand I'll earn a better living in the long run doing what's right and getting my clients into the homes they want.  Earning their referral business wil be far more financially rewarding than trying to squeeze an extra percent or two on a one-time deal.

5) Lastly, there are the sellers. Most have little issue with paying a buyers' agent to bring a buyer to their home. The bulk of the sellers I've worked with, however, would balk at handing additional cash to a buyer - particularly in this market, where below-list offers and closing-cost assistance has become the norm. Obtaining the buy-in of sellers to post these co-broke credits to the buyers isn't impossible, but it's far from automatic.

(c) Jonathan Dalton, 2006 / Jonathan Dalton's Arizona Homes

Tags: Buyer Agency Compensation