Editor’s note: This month, Inman News is focusing coverage on the traditional structure of compensation in the real estate brokerage industry and alternative forms of compensation. We’d like to hear your views. Click here to learn how you can engage in the discussion.
By CHUCK BOLES
"Real estate commissions will keep falling … from an average 5.25 percent … to 4 percent by the end of the decade … some agents even agree to do away with straight commissions, charging hourly rates to show a house or negotiate with the other party." –The Kiplinger Washington Letter, May 27, 2005.
Imagine being a spectator watching a real estate compensation reality show, witnessing brokers and sales associates walking thin tightropes stretched between two ravages: the ravage of raising overhead and the ravage of shrinking compensation levels.
While watching long lines of contestants slip and fall, failing in feeble attempts to navigate this tightrope challenge, you notice an occasional contestant successfully navigating across the wire. The surviving contestants turn out to be those who keep their balance by challenging historical attitudes and mindsets about compensation. In other words, the compensation reality show survivors are the renegades running against the historical tide of real estate compensation models.
The historical compensation model of earning a flat percentage compensation rate based SOLELY upon the successful outcome of a transaction boarders on backward dysfunctional thinking and potentially compromises the sustainable financial survival of our industry. Consequently, it’s prudent to reexamine and overhaul the one-size-fits-all compensation attitude, remembering the wisdom that even if 1,000 real estate brokers (and sales associates) are doing a foolish thing — it’s still a foolish thing.
The history lesson, "that which a culture honors, it tends to cultivate," creates the need for cultivating a new real estate compensation future. It’s time to embrace change by plowing up the old and cultivating the new compensation attitudes. In the emerging economy, honoring financial success solely upon "earning an income on the outcome" is akin to operating a gambling operation.
So, what’s the solution? Here are some of the critical steps:
- The real estate industry needs a shift in economic behavior and attitude. You can’t bank settled volume and transaction count. Thus, it is important to shift away from the historical "ego rewards" based upon volume/transaction count in favor of "survival rewards" based upon licensees acknowledging the importance of positive cash flow and profit for sustainable business survival.
- We need to shift away from risk-sharing models where our financial success is based solely upon transactional outcome. Sitting back in anticipation that every buyer and seller will provide a paycheck is an attitude of the past.
- We need to muster up the guts to offer consumers alternate compensation models — and muster up additional guts to ask consumers for upfront money in the form of nonrefundable and/or refundable retainers.
- We need to begin educating consumers toward their obligation to subsidize our upfront costs. Attorneys do it, so why can’t we?
- We must embrace choice as a key business strategy by giving consumers a choice of how they compensate us for our services while giving sales associates a choice for financial survival.
Also, we need to create effective systems for change, including:
- Anticipating change — be forward-thinking to avoid knee-jerk reactions to change.
- Acting on change — offer a proactive response to emerging alternate-compensation trends.
- Adapting to change — place ongoing emphasis on creating alternate-compensation models to replace existing models or add to the list, and shelve outdated models.
- Accounting for change — no more taking for granted. Engage in ongoing research and tracking of compensation trends to fine-tune existing models, discontinue outdated models or create a repeat of the above change cycle.
Whatever steps are taken, strong consideration must be given to creating optional compensation models that allow prudent consumer choice while at the same time protecting cash flow and profitability goals.
In 2006, the Virginia Real Estate Board approved a continued education workshop on real estate consulting. Hopefully, other regulatory agencies and industry leaders will recognize the need for promoting — in additional to traditional models — alternate-compensation models that provide consumers greater choice and real estate licensees a greater chance for financial survival.
That’s my two cents’ worth.
Hey, wait a minute — this article took 90 minutes to write. At $400 per hour someone owes me $600! (Cash or check will be fine.)
Chuck Boles is president of the Chuck & Buddy College of Business Knowledge in Harrisonburg, Va.
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