What The Opportunity Report says about commission compression

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As a parent, I quickly learned two important facts: first, with years more experience than my children, I could provide life-tested advice that, if listened to, could prevent trouble, heartache and even physical damage.

I also learned that, even though I was ready and willing to dispense wisdom at will, they were not so eager to hear it and, on countless occasions, ignored my input to their detriment. 

The second lesson was that there are some circumstances children need to go through to acquire the wisdom required to make wise choices. I had to let them fail.

This idea flies in the face of many parents who go overboard trying to prevent their children from experiencing any trauma or failure. This mindset amounts to helping a butterfly in their struggle to break free of their chrysalis: the effort and trauma required to escape is required to strengthen the wings so they can fly. Cut them free and you will dramatically shorten their lifespan. 

The real estate profession is full of landmines and pitfalls that, if not recognized and acted upon, can cause catastrophic damage to any and all real estate-related entities. There is also incredible opportunity for those who understand the times and respond effectively.

One of the reasons savvy real estate agents spend a lot of time in training is they realize that the more input they receive, the higher the chances that — when circumstances arrive — they will know how to effectively respond.

Unfortunately, there are also many who ignore the signs and warnings that appear as signposts along the way. This not only applies to individual agents but the industry as a whole. 

Commissioned by NAR, May 2015 saw the release of the “DANGER Report,” a 164-page document from Stefan Swanepoel, T3 Sixty’s executive chairman.  The report was written after extensive research, including interviews with 70 knowledgeable entities and a survey that had close to 8,000 respondents. The report outlined 50 threats, risks and challenges the real estate industry was facing at the time and would face in the near future.

Unfortunately, like a parent’s advice, much of the report was ignored, with the result of traumatic changes being forced on the industry. As a result of the recent spate of lawsuits directed at the real estate profession and the ongoing shifts in opinion and practices, Stefan Swanepoel and T3 Sixty were asked to do further research and come up with a “sequel” to the DANGER Report that would provide recommendations going forward.

The resulting document, entitled The Real Estate Opportunity Report, details 20 key opportunities facing the industry. The report is sponsored by Homes.com so that it can be available to the industry at large. It is important to note that, while sponsored by Homes.com, they did not have a voice in the content of the report. 

Here are the nine “opportunities” as presented by the report for agents and brokers:

1. Decouple buyer and seller agent’s compensation

“The National Association of Realtors lawsuit settlement makes buyers separately responsible for compensating the real estate agent that helps them buy a house. Buyer agent compensation can no longer be paid through a unilateral offer of compensation through the MLS.”

Mandated into effect on Aug. 17, 2024, buyer and seller commissions have been decoupled, with sellers being responsible for compensating the broker who lists and sells their property and the buyer being responsible for providing compensation to the agent who provides representation for the purchase.

This move gives buyers the opportunity to negotiate their fees and potentially increase the level of service provided by their agent. Buyers may also ask their agent to negotiate a concession from the seller from which they can pay their agent’s fee.

This puts the onus on the buyer’s agent to increase their negotiating skills and the level of service they provide to their clients. Those buyer agents who can demonstrate their negotiation skills and provide a top-tier level of service have an opportunity to not only boost their compensation, but distance themselves from the rest of the pack.

The inverse is that buyer agents who provide basic services and are not skilled negotiators can expect to see their income dramatically decrease along with their transaction volume. 

This also gives the listing agent an opportunity to focus only on the services they provide without the need to pre-negotiate a fee for a buyer’s agent. I personally believe we need to “stop trying to pre-negotiate with our sellers any concession to a buyer from which they can pay their agent.”

While we can explain that any given buyer may include a request for a concession in their offer, to pre-set a level of compensation and advertise it in some manner violates the intent of the agreement and can also be a disservice to the seller. 

2. Establish best practices for buyer services

“The practice change in the NAR settlement that requires MLS participants to obtain buyer agreements before showing a house may cause some consumers to forgo buyer representation and a loss of services for consumers.”

As buyers became aware that, after Aug. 17, 2024, they would need to sign a buyer/broker agreement (in most cases) and be responsible for compensating their agent, some decided to try going direct to the listing agent. Once there, a few discoveries were made: 

1. A buyer/broker agreement was still required. 
2. Going direct to the listing agent constitutes dual agency, which is not allowed in some states and, in the states that allow it, is fraught with potential issues. 
3. Going direct did not remove the necessity for providing compensation to the agent representing them, regardless if it was the listing agent or not. 

The rule surrounding compensation is simple: where there is representation there should be compensation. In a situation where the buyer tries to go direct, the agent representing the seller will be drawing compensation from the seller, who should expect full representation.

Given the fact that there will be extra work involved in representing the buyer as well, the listing agent would most likely ask for a fee of some kind for their representation.

If the listing agent submits an offer on behalf of the buyer and includes a request for compensation that is agreed upon by a seller, then there is absolutely no benefit for a buyer to go direct. In fact, by virtue of the fact that the listing agent’s primary goal is to effectively represent the seller, the buyer will actually be worse off than if they have their own representation. 

As the new rules and practices unfold, we are seeing (at least in our market) buyer’s agents providing sole representation to their clients and successfully negotiating a concession from the seller from which to cover their compensation. 

The other option here is for a buyer to go direct and represent themselves. In this case, no fee would be paid since the buyer would be unrepresented. 

The fact that buyers are now faced with a number of options means that buyer agents have a unique opportunity to establish a value proposition that clearly demonstrates their value to their potential client and justifies their compensation. Historically, there has been a cloud around what buyer agents actually do: a comprehensive document outlining the entirety of services provided would go a long way in establishing recognizable value. This document could include: 

1. A focus on needs: Identify the core issues potential clients could face when buying a home.
2. A clear and specific roadmap: Identify how an agent’s services would address their client’s anticipated issues.
3. A list of benefits: Identify how a specific agent’s services are unique and how they will save their clients time, effort and money.
4. A risk-free commitment: Identify specific ways their clients would be protected when working with them. Examples could include an “easy out” policy whereby they could cancel their representation agreement or a guarantee to resell their home for free within a specific period of time if they are unhappy with their purchase.

3. Enhance credibility with the consumer

“The reputation of real estate agents has suffered due to recent lawsuits; threatening the long-term stability and value of real estate professionals and underscoring the urgent need to rebuild credibility and restore trust.”

There is no question that some agents and brokerages deserve a bad rep. Ironically, in the midst of the lawsuit and resulting confusion, entities that took the time to explain what was happening to their consumer base, detailed the path forward and continued to provide outstanding service also continued to rack up five-star reviews.

Real estate has always been a relationship-based business. Those agents and brokerages who embrace the reforms, provide transparency, are committed to educating their clients, demonstrate ethical practices, have a comprehensive and well-defined value proposition and clearly place the consumer ahead of their own interests will be instrumental in rebuilding the credibility that has been lost.

On the other hand, those who view their businesses from a transactional viewpoint, use hard closing techniques and consider each transaction another notch in their belt may wake up one morning with no belt with which to hold up their business. 

4. Elevate agents: A new perspective on their role

“The industry has a unique ‘second chance’ to redefine the role and value of real estate agents, positioning them as professional advisors rather than licensees or salespersons.”

A recent Google review came in for a California-based real estate team that read:

“’Service for Life’ is the name of the informative newsletter the Team sends to clients, but it’s also a promise. Over the past 15 years they have not only helped me to sell my old house and buy my current one, but they’ve been there to give me advice and referrals to dependable repair services every time I’ve had a problem. That’s been invaluable to a homeowner like me who has no handyman skills of any kind.” 

Over the years this team has garnered numerous reviews of this kind, signaling their desire to build meaningful long-term relationships with their clients instead of focusing on a single sale. This commitment to service over-and-above the norm has resulted in repeat business with some of their clients using the team five or more times.

If you hire a professional attorney or an accountant, you expect a few critical things. First, you want them to be full-time; you do not want their time divided with other interests. Second, you assume they will spend the time required to solve a problem and then bill accordingly.

In the end, when they are done, you have a tangible result — whether it is a completed tax return or solved legal issue — that is every bit as concrete as the purchase of a property. In some cases, their best efforts will result in a loss: you may still end up with an audit or lose a lawsuit. The outcome does not matter: it is expected that they will bill you nonetheless. 

It is interesting to note that they are designated “advisors” who provide a service, while real estate professionals who provide a service are called “salespersons.” The report suggests that the final outcome — whether resolving a lawsuit or buying a home — is the same: there is a tangible, measurable result, and the amount of work required to gain the ultimate solution should be billed accordingly. 

If real estate agents want to increase their credibility going forward, they will not only need to demonstrate their professionalism as advisors, but they also need to distance themselves from the large body of part-time agents. Additionally, they should consider a menu of services designed to meet the needs of various types of clients instead of the traditional cookie-cutter model with one level of service for all. 

5. Digitize the real estate transaction with AI 

“Artificial Intelligence is among the most transformative technologies ever introduced to residential real estate, potentially serving as the catalyst to fully digitize the real estate transaction process.”

The real estate industry has been good at recognizing and implementing key technologies to enhance the overall effectiveness of the industry. The latest revolution is AI, and while there is a lot of interest in the technology as it applies to the real estate space, there is also concern about how it can be effectively unleashed on consumers. 

The report outlines the following ways in which AI can be used to transform the buying and selling processes: 

1. AI-enhanced home searches: AI could enable real-time, voice-activated interactions and offer interactive ways to explore and present data. 
2. Improved customer communication: AI could enhance interaction and transparency between agents and clients.
3. AI as a personal assistant: AI could organize information, streamline decision-making, and personalize services, boosting agent performance.
4. Shortened transaction times: AI has the potential to accelerate transactions, enabling faster closings.
5. Automated tasks: AI could handle buyer underwriting, enhancing market preparedness and negotiation power.
6. Strengthened client relationships: AI could assist agents in maintaining long-term relationships with clients.

AI is here to stay and will definitely shape the future of the industry. In the same way there was initial pushback for using digital signatures and online communication platforms such as Zoom, we can expect to see initial reticence towards AI.

Those entities, however, who develop effective AI solutions for the real estate space and the agents who effectively harness those emerging technologies will most likely find themselves way out in front of the rest of the pack once the dust settles. 

6. Thrive amid commission compression

“With changing consumer behavior, emerging business models, and a declining perceived value putting significant downward pressure on commissions, it is critical to strategize now to mitigate the impact.”

From an environment where real estate agents controlled all the data, drove clients around in their cars to preselected properties and dictated all the terms to today’s empowered consumers who, with access to unparalleled amounts of data by and large drive the process themselves, real questions have emerged concerning the fees charged by real estate professionals.

The result of these questions has been commission compression and, as increasingly sophisticated consumer-facing technology appears, we can expect that continued downward pressure will become the new reality. 

There will always be a need for real estate agents. One of my neighbors, looking to transfer ownership of one of their properties to a family member, came up to me after the transaction was completed and stated, “I had no idea the process was so complicated; I will never do that again. I should have listened to you upfront and let you do it; never again will I try something like that on my own.” 

Agents and brokerages need to rethink compensation. As previously stated, beginning with a menu of à la carte services ranging from basic to full concierge-level support, agents could also switch to flat-fee or hourly-based compensation models based on the level of service provided. 

Agents also need to rethink proficiency: I am personally tired of prospective team members telling me they want to earn a bit of money “on the side.”

In an Inman article dated Jan. 4, 2024, Andrea V. Brambila stated, “The vast majority of real estate agents sold five or fewer homes in the past year and about half sold either zero homes or only one, according to a new study from nonprofit watchdog Consumer Federation of America released Wednesday.” It is simply not possible for an agent to be fully competent doing only one transaction a year. 

Brambila goes on to state, “The report, A Surfeit of Real Estate Agents 3: Abundant Jobs, Inadequate Mentorship, and Few Sales, is the third to highlight what CFA calls a “glut” of more than 1.5 million agents nationwide selling between five million and six million homes per year.

This surplus results in most agents being inexperienced and “unable to sustain themselves solely on sales commissions, contributing to widespread incompetence and pressure to maintain high commission rates,” according to CFA.”

If agents expect to thrive in the midst of commission compression and the public’s growing concerns about the industry, they need to move away from the part-time mindset that is polluting this industry, dramatically improve their proficiency and devise new compensation models that are more palatable to consumers. 

7. Reinvent the brokerage model for a new era

“The recent upheaval caused by lawsuits, combined with ongoing downward pressure on brokerage margins, has created an environment ripe for implementing new business models that were previously considered unviable.”

A friend of mine, owner of a few brokerages, once stated, “The real reason they call us brokers is because we are constantly broke.” It is no secret that the margins for brokerages are extremely thin, with many across the country hanging on by their fingernails to survive.

Faced with continued commission compression, the future is not bright — unless brokerages can find ways to slash operating costs, all the while maintaining their culture and increasing their levels of service to their clients. 

The report suggests the following: 

1. Reaffirm value: Set appropriate agent fees while avoiding service devaluation.
2. Drive innovation: Optimize workflows, improve transaction management and equip agents with essential tools.
3. Leverage settlements: Capitalize on settlements to develop new buy-side tools and services.
4. Expand services: Diversify into ancillary services such as mortgage, title and property management.
5. Lean into premium offerings: Introduce concierge-level services with comprehensive, high-end packages for clients seeking superior service.
6. Revamp compensation models: Explore flexible commission structures.
7. Embrace AI: Use artificial intelligence to build efficiencies, drive revenue, and enhance customer experiences. 
8. Consider tiered services: Offer tiered service levels — high-touch, mid-touch and low-touch — to meet varying consumer needs.

Interestingly, companies such as PLACE (not a brokerage in and of itself) are seeing the opportunities ahead and are partnering with teams to increase their levels of service, professionalism and productivity in the emerging real estate arena. 

8. Harness the power of mergers

“Consolidation can reduce redundancies, widen thin margins, enable better use of technologies, and provide a viable exit strategy for business owners.”

While there are many small or even solo brokerages out there, there is no denying that large brokerages dominate the landscape. While large does not necessarily mean “good,” there are economies of scale that could help brokerages survive going forward in the new reality where they might otherwise disappear.

As an example, consider the push by many of the larger brokerages to implement AI: the millions they can invest in state-of-the-art technologies can put them way out in front of the smaller entities that simply do not have the resources required to compete.   

Consolidation could also provide a greater range of training, services and quality control. Whereas smaller companies typically do not or cannot provide effective tech and training, forcing their agents to go outside the company and pay to obtain it on their own, larger companies have the resources built in either at no cost or a fraction of retail. 

I am constantly amazed by the choices some buyers and sellers make when choosing the agent who will represent them in what is usually the most significant financial transaction in their lives.

Something has to be done to raise the bar: I shudder to think about how some of the smaller or solo agent companies are navigating the new realties without access to the training or legal counsel built into most larger brokerages. 

9. Maximize the strength of teams

“Teams bring together diverse skills, perspectives, and experiences that enable them to tackle challenges the traditional real estate brokerage model has not effectively addressed.”

While teams represent a critical component in today’s real estate landscape, many are finding that the brokerage they belong to cannot provide the level of support they need, requiring them, while remaining under their current brokerage umbrella, to go outside to get the help they need.

Additionally, some brokerages see large, successful teams as a threat, undermining their profitability. Our team switched to our current brokerage when our previous agency made it impossible to scale upwards.

Additionally, despite our frequent requests, our local MLS has not been able to provide the functionality required to support large teams, requiring workarounds that are cumbersome at best. 

From my perspective, many brokerages focus primarily on providing support for individual agents, knowing that their primary revenue comes from the monthly desk and other associated fees, not from an abundance of transactions.

I believe that many brokerages with one or two large in-house teams fail to realize that it is those teams — frequently outproducing the rest of the office combined — that actually put the brokerage on the map and provide their visibility in the community.