Condo Blog – A Non-Corporate Blog From CondoDomain HQ

This month, Inman News is focusing attention to the issue of real estate compensation. Click here to find out more. In this guest essay, CondoDomain.com founder Anthony Longo offers a perspective on the percentage-based real estate commission structure.

Inman posted a good chunk of my article (I posted the entire response below)  Read the article on Inman

Is 6% Dead, Inman Article Response by Anthony Longo, Founder of CondoDomain

Yes, the day of the standardization of 6% commission is dead.  How long will it take to become realized is the new question?

Now, don’t get me wrong, we are not attacking the industry, commission dollar amounts or high-paid all-star agents, many who are worth every penny, we are simply talking about the percentage based commission structure.

If a top real estate broker in New York City is on average making $50,000 per transaction, we are not staking the claim that they should not be making $50,000 per transaction, they may in fact be worth it, possibly, even worth more.  Our belief and statement is that the “standardization” and commonality of the 6% commission in the industry is dead and 2009 will be the year in which we will see major movement to innovative fee based business structures.

Where we are today:
The real estate commission structure is what it is most likely because it is easy to calculate and it is easy to fit into the sliding scale of individual home pricing.  It is universal and it seems to work just about everywhere.  Every state, every city, every neighborhood and on the surface it sometimes makes sense.  A $300,000 buyer can only afford to pay $X amount of commission and a $3M buyer can obviously afford more. Although this makes sense on the surface, it makes  absolutely no sense in reality, especially todays reality.

Not to jump into the actual commission complaint right away, but there are two sides to every story and most often there are two sides to every real estate transaction:  including buy side and sell side brokers.

As a seller, it is  quite possibly a good idea to have your agent tied to a percentage based commission on the sales price.  After all your agents compensation is tied to the amount he can negotiate the highest possible price for you.  Not bad actually this kind of makes sense.

Lets look at the reverse as a buyer.  A buyers agent on commission makes LESS for negotiating the lowest possible price for you.  This is not in line.  It doesnt make much sense; actually, it does not  make sense at all.  It is completely backwards in our opinion.  If you want to pay a buyer agent on a percentage based commission, a reverse algorithm would be most warranted for them to work their  tail off to get you the lowest possible price, right?  The way it exists now is that a buyers agent makes less money the BETTER they negotiate for you.

Lets look at the entire percentage-based puzzle as a whole.  Real estate has evolved and always has been a commission based business model, mainly because real estate used to be all about sales & marketing, right?  Everything was based on selling the property for the highest possible price, because all the agents were working for the seller, directly or indirectly.  So we do not want to attack that the percentage based commission structure has always been wrong.  Actually for a very long time, it was probably the most appropriate way to cut a deal (agent to seller).

Broker service breakdown:
Lets look at the core skill sets, costs and everything associated with both sides of the  transaction (sell side & buy side).

-  Talent (marketing skills, a good design eye, a great memory, etc.)
-   Experience (# of transactions, # of toured properties, # of successful negotiations, etc)
-   Relationships (media contacts, marketing outlets, buyers, sellers)
-   Time (amount of time you spend with a client to transact on that deal)

Bottom line is that Talent, Experience and Relationships in our eyes = Performance. Time is just another part of the equation to combat a true value for services.   After all, a real estate broker (buy-side or sell-side) renders a service.

If we could start all over, clean slate, today, I think you could put a value on these 4 bullets and that is what an agent or broker should be charging (of course in this world today, the transparent marketplace would be setting the rates).   Most likely the value would be different for every agent in the marketplace, certainly every brokerage operation.   Then the market would determine the cost of the service, not a huge union association (NAR) or just history and longevity of a particular structure.

If you look at brokers today, you will see the cream rises to the top.   The best agents & brokers work with the most expensive listings why?  Because for the same amount of time and energy spent, these agents can make exponentially more income compared to marketing lower priced properties.  Makes sense and I applaud the few agents and brokers who have gotten to this level.   But this simple statement makes the point for me and while many think that the rich do not mind spending large commissions on brokering real estate, they are wrong.  The rich most often are the most caring for each and every dollar they have earned.

Buyers brokerage:
In a world where everyone is working for the seller, buyers brokerage is the best thing since the 4% interest only ARM we all saw in 2004.  Here at CondoDomain we operate very much like a traditional buyers, however, our compensation structure is drastically different and gaining much wanted attention by buyers nationally.

CondoDomain is a flat-fee buyers brokerage and are staking a claim that this is where the buy-side of the business is going.  As a buyers broker our core responsibility to our clients, among other things is to educate our client to the best ability that we can disclose everything we can find on a particular property and then negotiate the lowest possible price for them no matter what.   We render a service of expertise in our local market and we charge everyone the exact same price no matter what.  Make sense?  We work with every client, whether they are buying a $300,000 studio or a $3M penthouse for the exact same flat fee (and refund the remainder of the commission to our buyer client).

So, are we a discount broker?  No, Let me make this loud and clear.  Simply because we do not  operate on a percentage based commission structure  does not make us a discount broker.   What if our flat fee was $100,000 per transaction, would you call us a discount broker then?   We are NOT a discount broker although many have pointed their fingers this was in a very uneducated view on how the real estate brokerage commission structure actually works.

CondoDomain is a full-service buyers brokerage that operates on a flat fee.  How do we do it?  Well, we are not staking the claim that we are the most profitable real estate venture out  there, as we are certainly not, however, our strong agent base, combined with our online technology and inner-office  efficiencies have proved to make us not only a consumer-centric provider, but also an effective ,efficient and profitable brokerage in Boston, MA.  Not only do we give our clients large commission refunds, but we actually have real hard data that demonstrates that our agents, on average, obtain a 1.2% lower price than the  traditional brokers and much higher paid agents in Boston.  (Download our 2008 Whitepaper)  How is that for  convincing data?  I know Redfin has similar statistics  to boot.

Now should there be a tiered schedule of flat fees?  Maybe.   Probably actually.   Here at CondoDomain we have not implemented the tiered structure as of yet in our belief as a young brokerage operating a flat fee business model in a traditional percentage commission based industry, we are unable to make that claim as of yet.

Lets look at a typical buy-side deal.

1.   Buyer searches for homes online.  (Lets face it, everyone now starts their home search online).
2.   Eventually buyer takes their search offline & hits some open houses.
3.   Buyer may talk to friends/family to get referrals and meet some agents in there travels.
4.   Buyer inquires on non-search things in between like talking to mortgage consultants.
5.    Buyer eventually meets an agent and engages their buyers agent to help with with their search.
6.   Buyer finds property and agent begins negotiations.
7.   Negotiations met, contingencies are  worked through
8.   Agent brings value  by making sure the transaction moves forward
9.   The closing  occurs.

Now every deal is different, every single one, but for this example alone lets say we actually have two exact plain vanilla deals that take the exact same amount of time, with the exact same amount of tours, effort, skill set in negations, etc.  Exact.  Got it?

But buyer A spent $300,000 and buyer B spent $3,000,0000.

Ok here is the question.  Stating that there is a 3% co-broke commission on these identical deals, please explain why the broker for buyer B, who will make $90,000 in commissions, should be paid 10 times more than the broker for buyer A, who will only make $9,000 in commissions for doing the exact same amount of work?

Pleasee any comments that directly disagree with the statement above ,forward them to our team at tony@condoDomain.com

Seller Brokerage:
So, you now understand our strong beliefs of flat fee buyers brokerage.  What is on our minds regarding the sell side?  Hmm, we still are not 100% confident, hence, why our company does not offer sell side services yet.

One thing I do know is that our sell side fee structure will be tied to performance (highest possible sales price), will be tied to time(how long will it take and how much effort will be exerted to sell a particular property) and will be tied to customer satisfaction.

I only know one thing regarding the future of our company and the sell side product  and service we may plan to offer in the future.  Our structure will most certainly be value, property & client specific NOT price specific.

Discount Brokerage:
Now lets look at true “discount brokerage” as many have coined the phrase which means providing less service for less of a fee.  This business model has been gaining traction due to the increased availability of information that is easily accessible from the Internet.

When I think of discount brokerage I think of the most innovative and successful company to do this Redfin Corporation.  They were not the first, but they have definitely been the most successful.

Let me start by saying this.  I am bar none the biggest non-employee fan Redfin has.  Heck, I even modeled much of our own company off this brilliant concept that Redfins initial founders and executive team have outlined and brought to market.  I thoroughly enjoy watching the company evolve and speaking with the brains behind this awesome company.

In my opinion Redfin has really performed on two huge things.
1.   They have educated the public through genius public relations efforts that there is choice for both buyers and sellers.
2.  They have demonstrated extreme value in many ways that discount brokerage is needed service.  (they have done a lot more but this is good for starters)

Dont let me pump them up completely.  While I love their flat fee sell side model and I think that it is going to continue to make a huge impact in the marketplace, we dont agree on their buy side business model.  Although they offer a commission 50% less than a traditional brokerage, it is still tied to a percentage of the final sales price.   In other words, Redfin still makes more money the more expensive a property the buyer purchases.

Redfin, as a whole, is a stellar company run by stellar visionaries who have taken the brunt of negativity off newer players like CondoDomain.  Even as a competitor, we will still align ourselves with Redfin as allies and hope to overcome our future challenges in this traditional marketplace together.

Let me leave you with this.  I know some wonderful people in real estate, some more talented than others, some more successful than others. They got into real estate because they loved it, they do their job everyday and enjoy it and they abide by the rules and make a living.  There is nothing wrong with that and I applaud everyone in the industry who does hold the highest of business ethics and continues to compete in this very competitive marketplace.

The industry commission structure will change, but it certainly will not be tomorrow.  I think in these economic  times we will see great changes happen more and more often.

As an innovator who thinks the percentage commission based structure is ludicrous, I do understand how it has evolved and how it is so very hard to change.  I believe most agents and brokers who make a living selling real estate are not at fault of this percentage based commission structure, they are just performing what they have been taught in the industry which has been relevant.

In a nut shell, on the sell side of things, percentage based commissions, although still pricey and in need of some alteration, the values and needs are aligned between the seller and listing agent.  However, on the buy-side, no-way-jose this side of the transaction will change rapidly as it should.

This memo was written by Anthony Longo, Founder of web-based buyers brokerage CondoDomain.com.  Mr. Longo as the highest regards for his peers in the industry, is a passionate entrepreneur and looks forward to being part of a positive and fair change to this enormous industry in America.