Bring on Your Hybrid Fee Structures REDUX

From the True Gotham Archives (yep, still on vaca):

Mark S. Nadel has written a paper about fee structures in real estate. From the abstract (via Inman):

While real estate brokers have long set their fee as a straight percentage of a home’s sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if tax preparers set their fee as a flat percentage of a client?s gross income, irrespective of how difficult the return was to prepare or how much their efforts saved the taxpayer). Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.

I know a lot of people might expect that, as a broker, I’d shy away from this kind of talk. Isn’t that 6% my bread and butter? Aren’t people doing crazy things across the nation to protect this arcane structure that needlessly enriches morons like me?

Well, it might surprise you to learn (unless you have been reading TrueGotham religiously) that I find this kind of talk healthy, appropriate, and overdue. I am all for reforming the industry to create a hybrid of the current percentage plan and a fee-for-service.

To be honest, I think it would benefit me and my clients–by better approximating reality. I wouldn’t mind working for clients who have a financial incentive to make the sale as straightforward and speedy as possible.

And for those complicated sales, it would offer a measure of protection I don’t have now. I can honestly say that if I logged the hours that I spent on a deal (and I recently had to over a dispute with another broker) and assigned myself some reasonable hourly rate, I would often be paid more than the 6% commission.

Let’s just take a recent sale as an example (granted, it was a complicated one, but not insanely so). We showed the property more than two hundred times. Every time we did, one of my assistants had to walk the dogs. We also often had to get to the property early to straighten up.

The couple selling the property was going through a terribly contentious divorce and I received at least three calls per spouse per day–some of which lasted for well over an hour and most of which lasted at least 30 minutes (let’s also not ignore the amount of duress that I and my team were put under dealing with insane accusations and distrustful partners).

It took seven months to sell the property and hundreds and hundreds of hours of showings, communications, marketing meetings, open houses, cleaning, and dog-walking. I conservatively estimate that we spent about four hours a day on this one sale for seven months. We can argue all day about the proper hourly rate for a Manhattan professional with 15 years’ experience. But whatever the market rate proves to be–I’m confident that with an hourly rate component to my work, in many cases I’d come out ahead.

Not only would I be willing to participate in this type of "billing," but I would suggest that it absolutely will become a reality over time as the industry evolves. Consumers will be able to choose from menu of services that include both a commission percentage and a fee for service structure. And my income would be at least somewhat proportionate to the amount of work we do. Doesn’t seem to crazy to me.