Earlier this week the Tribune reported that Koenig & Strey will begin charging home buyers a fee for the privilege of working with one of their real estate agents. According to the article here are the key elements of the new program, which the Tribune claims has been common in other parts of the country for more than 10 years but not in Chicago:
- Whether or not the buyer is charged the fee and how high the fee is is at the realtor’s discretion
- The fee will be paid up front but will be refunded to the buyer at closing from the proceeds of the realtor’s commission
- Obviously if the buyer never buys a home there will be no refund
- Regardless of the fee charged the buyer is obligated to ensure that at closing Koenig & Strey gets paid 2.5% of the purchase price + $250. If the commission is at least 2.5% then the buyer is not on the hook for that amount.
Interesting. Let me point out a few things, starting with the fact that this is at the realtor’s discretion. So it will be interesting to see how many Koenig & Strey realtors actually embrace this policy. This whole concept may just prove to be a non-event except for the $250 fee at closing – and I bet the realtors will eat that fee on behalf of their clients.
Also, it turns out that most of what Koenig & Strey is proposing is already included in the Chicago Association of Realtor’s buyer’s agreement that is often (but not always) used today. It reads in part as follows:
In the event that the seller or listing broker does not pay Broker a commission, then Buyer shall pay Broker at the time of closing, compensation equal to _______% [percent] of the purchase price of the Property which Buyer acquires during the Term of this Agreement (“Acquisition Commission”), whether or not the Property has been identified by Broker to Buyer……If Buyer enters into an agreement to acquire Property and the closing does not occur because of any fault on the part of Buyer, then Broker shall still be entitled to the Compensation set forth above…. Buyer shall pay Broker’s Designated Agent a non-refundable retainer fee of $______________ which shall be due and payable to, and shall be considered earned by, Broker upon signing this Agreement.
Basically it has been assumed for a while that buyer’s should pay realtors for their services and why not? Of course, I have no idea how many buyers agree to these terms today. But it’s interesting to note that in the comments section of the Tribune article the reaction from people is pretty negative. But people who comment on an article like this are probably part of a biased sample.
Why is Koenig & Strey charging buyers?
We’ve actually had this discussion a few times on Cribchatter. One of the reasons real estate commissions are so high is that clients that actually close deals are subsidizing clients that don’t close deals and the large dollar transactions are subsidizing small dollar transactions. The way the more successful agents become “top producers” is that, rather than just being good realtors, they are exceptionally good at figuring out how to allocate their time in the most profitable way possible. They actually interview potential clients to find out if they are worth working with. Only the most desperate realtors will take on a buyer looking for a $65,000 short sale that will effectively pay less than $10/hour.
So what Koenig & Strey is doing here is trying to level the playing field and mitigate some of the subsidies that exist. In fact, just the imposition of the fee itself will probably self select the more serious buyers.
We’ve struggled with this same problem – especially since we share the real estate commission with our buyers. First, we do assess the commission potential of each buyer before agreeing to take them on as clients but referrals and acquaintances get added consideration. Second, we use a sliding scale for calculating our rebates. Below a certain threshold there is no rebate and the rebate percentage is smaller at the lower price points than at the higher price points.
However, lately we’ve had a number of buyers interested in exploring an alternative arrangement with us. They pay us an hourly fee and we rebate them 100% of the commission. We like it because we are guaranteed that we will receive fair compensation for our time and the clients like it because they think they will get more money back this way. We’re not so sure the clients are right because we think buyers underestimate how much of our time they need but one thing is for sure…clients who agree to this arrangement are much more careful about how they use our time, thus ensuring that our time is used as effectively as possible. I am convinced that if all buyers worked under this arrangement we could get rid of half the real estate agents in Chicago. Actually, we should probably do that anyway.
No one wants to pay for something that use to be free. How about this: design a better product and we’ll pay for it. It shouldn’t be too hard to read through some common criticisms of the Real Estate Industry, weed out the bitter trolls who are speaking from the left side of their anus and come up with a top 10 list of things to improve.
For example, the freaking MLS Connect. Please revamp it.
I agree that MLS Connect is pretty bad. I’ve called in many issues with it. From the consumer’s point of view there are some really dumb things in it.
The biggest issue with the “product” is the poor service quality that most realtors deliver. It’s unfortunate that there is not a good way for consumers to shop around for the service. They end up making the decision based upon a variety of irrelevant emotional factors, including who is “well known” and who does a lot of business.
But these things have a tendency to work themselves out. People shopping under 150K or people who send up warning flags about being high maintenance simply don’t get the best agents and the highly profitable buyers can get big fat commission rebates – if they know where to find them.
“the highly profitable buyers can get big fat commission rebates – if they know where to find them.”
oh do tell me more
I’m not following your sarcasm.
no i’m serious. how can a buyer get a big fat commission rebate?
Sorry. I thought you were being sarcastic since I assumed you knew from the post that we rebated a portion of our commission to our buyers. For the larger purchases we rebate up to 50% of the commission. We’ve written $13,000 checks to some of our buyers at closing. And we’re not the only ones that do this. A lot of realtors will do this on a one off basis. The whole concept is is it really worth $25,000 for a realtor to put a buyer in a $1 MM home?
You just need to make sure that you are still getting full service with the rebate because some brokers will provide limited service in exchange for the rebate.
ah I knew you gave rebates I guess I didn’t realize they were of a serious order of magnetude.
I just came into a crowd of folks in the Chicagoland area and will probably have some referrals to pass out in the next 6-12mo+.
I’d love to know more about your hourly model. How much do you charge per hour to work with a buyer? With a seller? *if it’s listed in your site, I admittedly haven’t read explored it yet.
Thanks!
We are updating our Web site so the new version will cover the hourly model but for the time being we are offering our services at what I consider a bargain rate of $75/hour. Compare that to plumbers, designers, and car mechanics that charge $100/ hour. Eventually we will raise the rate to $100 but in an effort to promote this alternative we’re discounting it.
How can you justify $75-$100 an hour? I honestly think a freelance contract price for a realtor would be fairly priced at about $30 an hour. Plumbers and auto mechanics are NOT a suitable “comp” because they perform actual skilled labor, and most operate with high fixed costs that are truly necessary for the trade. I know “realtors” that work out of their kitchens.
It’s not about fixed costs. It’s about value received. If the value wasn’t there then people wouldn’t pay $100/hour for a plumber or an auto mechanic. Home decorators, who also work out of their homes, charge around $100/ hour and have very low fixed costs.
Now if you are arguing that the average realtor isn’t worth $75/hour I would agree with you. In fact, 80% of them aren’t worth $30/hour. But I can guarantee you that the kind of money that an agent would take home after splitting $30 with their brokerage and allowing for less than 100% utilization would pretty much guarantee that you would get a pretty lousy realtor working with you.
No, most realtors are not worth $75/hr. I would have a hard time paying even the most skilled realtor $75/hr, considering that would roughly translate into ~$150,000 a year in earnings if working approximately 40hrs/week. No realtor is worth that. It simply isn’t a skilled trade, nor is it an actual profession required extensive education and training. The move toward fee for service will hopefully expose this fact to more people, and eliminate the needless frictional cost and waste that realtors are in the overall industry.
No insult to you, your firm, or your employees is intended. In fact, I applaud most of your efforts, and the next time I have a deal in the works, you will be hearing from me in the real world. Fee for service is the future of the real estate industry, sooner or later. The only thing holding it back are the artificial monopolies held by the established players via control of the MLS, etc. along with market psyche which is changing quickly.
I appreciate your point of view but the fact of the matter is that we currently have clients willing to pay $75/hour who apparently think it’s worth it. Based upon the activities we engage in on a daily basis I would say that there is a considerable body of knowledge that we can leverage more effectively than the average consumer – knowing what questions to ask, knowing where to get information, recommending service providers, etc…Not to mention that a large part of what we do is try to save our clients from themselves.
The other thing is that you can’t assume 100% utilization of a realtor in estimating the annual earnings. When I was a consultant 80% utilization was a tough goal to achieve.
What’s more interesting is that people today choose to pay their realtors way more than $75 per hour by virtue of the fact that they go the traditional route when there are so many alternative models available to choose from. I guarantee you that the realtors who buy and sell Michael Jordan’s home will earn hundreds of dollars per hour. And the same for the agent representing Rosie O’Donnell. That home was bought and sold in just a day or two.