November 16, 2018

We brokers make too damn much money

There, I said it: Broker compensation is indefensible.

An independent broker who is a friend of mine and I were having — how to put it? — a robust discussion at the last monthly meeting of the Lucky Strikers Social Media Club.  We talked about commissions (without violating anti-trust laws, heaven knows).

I ventured an opinion that I hold strongly and have put on the record previously, that percentage commissions make no sense to me. So “Bill” asked me what was the origin of my “guilt,” adding that he had to support a family of six.

(Should the choices he has made bear on his occupation and income?)

My rejoinder was that guilt had nothing to do with my position. Instead, said I, the amount of work required to shepherd a $500,000 sales was not much different from — sometimes even greater than — the burden of bringing home a $5 million sale. It’s true!

I maintained that the value we bring to a transaction is not so different at various price points, most requiring essentially the same amount of work and expertise .

Instead of a percentage fee, why shouldn’t we be paid, if not on a project basis, at a substantial rate per hour?

If that’s what you believe, Bill contended, just lower the percentage commission. I suppose he has a point, but seller and broker still are stuck with being able to offer enough compensation to buyers’ representatives to motivate them to show and sell a property.

He went on to contend that the value we bring to brokering the flow of assets between two entities — buyer and seller — can be exceptional and ought to be rewarded commensurately. I don’t know about that.

When I argued that a broker’s value in selling a property — say, $50,000-60,000 each for the broker on either side of just a $2 million transaction — could not compare with the virtues of a surgeon who doesn’t, as far as I know, earn even $100,000 for transplanting a heart, restoring vision or curing cancer in a patient.

That’s when Bill failed to win me over, by skating toward the total cost of surgery and hospitalization for many procedures.

I am not, by the way, suggesting that so-called “discount” brokerage is the point here. The appeal of discount brokerges is that they charge less money than other models because they don’t typically provide a full range of services. Often, they provide the option of selecting from a cafeteria array of services.

I believe those brokers who are overpaid should charge less for a soup-to-nuts way of doing business, a tasting menu for which no substitutions are allowed.

While I have been maintaining that brokers in many transactions earn way too much money, I confess that I’m not about to cut my own admittedly modest income, which no rational being would term “too much,” by embarking on a lonely crusade.

I’m able and willing to adopt a more rational fee basis, but I won’t do that if I am virtually the only broker in Manhattan ready to do so. It would be nice, though unthinkable, if my crusade involved plenty of company.

Obviously, I’m not counting on it.

Comments

  1. Should I have second thoughts? I’m about to “fire” a hostile know-it-all buyer after wasting seven full days of work with him over a few months. In answer to my question, however, I believe it’s a wash between failed and efficient transactions. So, yes, we are overpaid. Why else would we put up with the myriad difficulties and frustrations of our work?

  2. Malcolm says:

    Jeez, I expected a blilzzard of disapproving comments. Perhaps my views are so antithetical to readers of this blog that their silence speaks volumes? Either way, I do stand by my opinion.

  3. I meant to comment on this yesterday but never got in front of a machine. I agree with your assessment. At least you had the courage to voice it. Yes, RE agents/brokers/Realtors/whatever you want to call yourselves are WAY overpaid – at times. When you blend that rate, depending on who you are, it’s no wonder the average annual income is so low (something like $20+K/year). Very few real estate professionals, percentage-wise, make any decent money. People in this business don’t work nearly efficiently as they are needed to in order to be successful. This leads to these large margins being a necessity and leaves the door open for that few to make crazy money and be wildly successful. My hat is off to them but I suspect that there is a need for a shift in the industry where these people will be the norm – not the exception. A shakeout is coming, I think, and there will be a number of casualties on the side of the unprepared……

  4. When I first started in this business in 1990 my broker told me we charge X% up to a million and 1% for the difference over that. That broker is now out of business and I haven’t seen that model since then. I think that model makes sense, but I’m more in line with Patrick that there is a shake out coming that will make the barrier to entry very difficult. It will be that the agent will need to show their value upfront, online and must appear indispensable. With Craigslist, Zillow and all the other places to do research the average agent is useless and OVERPAID. The agent of the future will give up all their knowledge and expertise in the customers research phase. In the midst of all the education and war stories the customer will come to realize they do not want to be in a transaction of this magnitude with out a true advocate on their side!

    • To be honest, I find that most brokers add even less value than their agents. Brokers are a necessary evil for agents since SOMEONE has to hold their license. I think that the new broker will be the one that really incites the real shakeout and all of those others will quickly go by the wayside. Let the agent set their commission and you will give them a competitive advantage over the market. Let’s be honest, a $400K house isn’t that much easier to sell than a $1M house. Percentage based commission is obsolete. Nobody in our industry wants to admit it but it’s the truth. Consumers are sick of it and won’t put up with it much longer…..

      • I quite disagree. Other models have not been sustainable even with the advent of transparency and the Internet. Consumers may gripe about the commission line item, but none-NONE!- will agree to billable hours or something that had them share the risk.

        Until consumers develop an appetite for risk it is a high risk high reward industry

        • Good point. The ‘professionals’ in this industry need to work on getting some credibility before that will happen though. Like the mighty stock broker, why am I going to take a change on someone that has proven nothing – nor willing to disclose their track records? With no transparency in the industry there can be no trust. It all comes down to reputation which takes YEARS to build and hard to protect. Most agents are out of the business before that can happen. It’s not the job of the public to do that for those getting paid….

        • Good point. The ‘professionals’ in this industry need to work on getting some credibility before that will happen though. Like the mighty stock broker, why am I going to take a change on someone that has proven nothing – nor willing to disclose their track records? With no transparency in the industry there can be no trust. It all comes down to reputation which takes YEARS to build and hard to protect. Most agents are out of the business before that can happen. It’s not the job of the public to do that for those getting paid….