Realtor Commission Structure in Need of an Overhaul

Real estate agents are very useful in putting buyers and sellers together by advertising properties that they list. However, the commission structure by which they're compensated has serious flaws. It's time to make a change and start compensating realtors based on the added value they bring to those who they represent.
In recent years, I have placed many houses on the market for sale…only one time have I been able to say "thank God I had a real estate agent because I would have never found that buyer had it not been for that." The one thing I have found is that every agent has wanted to start the house much lower than what our market analysis showed was fair. In every instance, we sold the house for a higher amount than the agent requested we list the house for. In addition, I love the go-to real estate agent comment: the first offer is usually the best one. In all my years of being involved in real estate, the first offer has NEVER been my best. And here is why they say it: They have a buyer ready to go. So of course they would want the first offer taken. They have a vested interest in getting the deal done because the commission is all set.

When I was living in Toledo in 2003, I bought a condo for $115K. My agent, Larry Cain, helped me find the house and we became friends. A year later, when I moved back to Cleveland, I listed it with Larry for $125K. Within two weeks, he found me a buyer and their offer was $119K, which I was happy with. But you know what my agent did? He said, "Paul, let's counter at $122k. They were looking at another property I was listing and they lost it because they didn't increase their offer in a bidding event, so I think they would come up a bit." Guess what…they took $122K and I got $3K more than I was even willing to take! Larry made his commission all day on that one. He actually worked in the interest of the guy who hired him (me) and not in the interest of just getting a deal done. I was ready to take it at $119K!

So I guess the question is: OK so what's the point? Well my point is this…we have to find a way to make it financially incentivized for the seller and the agent to both make money and feel like they are both being useful. If real estate agents really think they're extremely good at what they do, they should want a more incentivized income based on the sale price.

My main point: let's say you live in a house that is 3,000 square feet and normal comps in the area say the house is worth $100 per square feet, or $300,000 (again, this assumes that people know what value is and not just emotional ups and downs). Now, think about this…if you wanted to sell the house tomorrow for $100K, could you do it? $150K? $200K? $250K? Well of course! If the house is really worth $300K, then you should be able to sell it for $250K by just putting a sign up in the yard. So why pay 6% on the first $250K when you could do it on your own so easily? I suggest this…no commission for the first $X a house sells for. But a very large % for an amount above $X. The question is, well, what price is the first level? Well, that's the point of the agent! If they are experts they need to be able to pitch in and do work! Tell them to come to your house and say "I think your house sells all day for $250K, but I think it's worth $300K. So instead of 6% of the total, I will charge you 30% of every dollar above $250K." So if it sells for $300K, which is what the market bears, then you will pay $15K, which is 5% which is about right. Now, the buyer's agent shouldn't be paid that way because their job is to make sure their clients gets as good a deal is possible, so maybe there is a split of a flat fee to the buyer and then this kind of arrangement with the selling agent.

The best part is this: Let's say you have this deal with an agent and an offer comes in for $290K. Ok. Not bad. Your agent will get 30% of $40K which is $12k. Not bad! Now…let's say you want to counter at $300K…to your agent, that's an extra $10K in price or $3k commission! Under the normal 6% flat rule, that's only $600 in extra commission. So where is their incentive to try to get more money!?!? Duh! There is none! So they will have your back for a higher price if their commission is much higher based on getting every incremental dollar. Don't forget, if you bought your house and put 20% down, $10K could be a VERY big part of your equity, so every big is very important. You need someone who has the incentive to get as much as possible to preserve your investment.

So what do you think? Will you propose this fee structure on your next deal?