Alternative real estate compensation models: tipping and pay by the hour
updated: 4 April 2020, 28 May 2024
Justifying their commission is something every agent will run into with a seller at some point. At the same time, consumers face a lot of risk using a random agent. I was wondering about compensation models for real estate, and came up with these alternatives:
1. The case for tipping
In a service industry we tip people for the work performed and generally, a bit higher the more awesome the service we’ve experienced. Real estate is a service industry. So why can’t tipping work in this space?
How powerful would it be to come to a client and say, “I’m paid a modest base salary and additionally based purely on the quality of services I provide. Generally, that means a tip of between 3–6%, and historically I’ve averaged at the top of that range when compared to my peers. Let me prove to you why I’m worth it.” What client wouldn’t sign up for that offer?
The question is, as brokers, are you willing to bet on yourself in such a manner?
This is the question James from Homebloq asked in the following article, have a read:
I guess tipping can work as long as the base operational costs are covered and maybe shown to the seller, but it still requires a lot of faith in your seller, and your own skills.
2. The case for hourly fees
While set fees are nothing new (e.g. Purple Bricks, Eazi models) it still takes averages selling times into account as per traditional commissions: if your home sells in 1 day or 10 days, that fee stays the same. If your home sells in 2 days you are paying the price for an overpriced home that took 90 days to sell (including a couple of tanks of petrol for the agent on that deal). This is why the fixed fee model is so hard to nail, you need a lot of volume to compensate for all the expenses.
The New York times touches on the idea of hourly compensation for agents:
…Instead, the commissions have created a bloated and unproductive sector. That’s because the possibility of earning enormous commissions is so powerful an incentive that it has led thousands of people to become real estate agents…
Which leads to the question: if estate agents are paid by the hour like other professions (e.g. doctor), would this lead to overall better time and cost management for everyone involved in the transaction? As an added bonus, more serious sellers & buyers that will understand the concept of time = money? Personally, if I know I’m dealing with a highly qualified professional agent who has a brilliant track record, this model would certainly interest me. Running Entegral, this model of time=money is something most business owners understand.
I think this is where the ‘technology enabled agent’ can have an advantage: use tech tools to streamline the process, optimise costs and save time, which allows for flexibility in adjusting your hourly rate. A track record would be important here to show sellers how much time you typically spend on the average home sale.
3. The case for itemised billing
Fuel, car maintenance, (high) portal fees, flyers, phone bills, data costs, desk fees, registration fees, training costs…. it just all adds up, and why negotiating on their commissions, is tough for most agents and brokers. This is elevated in a franchise environment with royalty fees added on top.
Maybe the sweet spot lies in a combination of hourly and fixed fees, rolled up into an itemised bill that can be shown to your client? The advantage of such a model is transparency. Show me a consumer who wouldn’t love transparency when dealing with such a high value sale? Agents can showcase previous itemised billing statements for home sales to give consumers a feel of what to expect. Maybe consumers would then opt to eliminate some particularly high costs — e.g. portals that charge too much.
4. The case for a pure performance based fee
Brendon from the Real Estate Company suggested a pure performance based model, which I think is quite innovative — here is his idea:
Sign Mandate at agent’s recommended price, at 7% commission
After 2 weeks the commission drops to 6%
After another 2 down to 5%
And so on… Performance Mandate. 😅😅😅
Once Comm drops below 3% Mandate expires.
Try new agency….
5. The case for the service level packages
Real estate commission is negotiable, and depending on the market, agents will either walk away from a mandate or drop their rate to secure the mandate, but still offer the same service. In scenarios like this, it could be helpful to present commission rate packages to a seller, to help showcase your value and operational costs.
5. Last but not least, fixed salaries
Most real estate agents work as independent contractors for their agencies. For a few companies like Redin, the model is very different: their agents are employees, so they receive a salary with additional benefits like health insurance, paid leave and more.
Low or fixed-fee agencies would normally look at offering salaries to make this business model work. As we’ve seen through the years, this is a daunting task for various reasons:
- Motivation and performance: Earning a commission is a big drawcard for top performing agents. A fixed salary might reduce the incentive and lower sales performance.
- Market variability: Markets fluctuate, and your business model still needs to work and pay salaries during slow sales periods. You need to drive higher volume compared to the traditional agent.
- Attracting talent: It will be difficult to attract top performing agents with a fixed salary.
- Client perception: Do sellers perceive commission-based agents are more motivated to seller their property quickly, affecting their preference for agents?
For the time being, the traditional commission model that favours high splits to attract top agents is still the way to go. As the market gets more competitive and the real estate transaction become more streamlined with the help of technology, will we see more entrants offering alternative commission models?
