Buyer Agreement Fees: The Future of Real Estate?

by Peter Thomas Ricci

Defying Tradition
One brokerage that operates with a similarly client-driven mindset is Redfin, the Seattle-based franchise that approaches its business in a somewhat topsy-turvy manner, as Mark Reitman, Redfin’s central U.S. regional director, explains.

“I always liken Redfin as less a brokerage that happens to have good technology than it is a great technology company that happens to be in real estate,” he says.

In Redfin’s business model, technology – and how consumers choose to use it – is front and center. As a brokerage with access to the MLS, Redfin’s website gives information about all the for-sale properties in a given market, from conventional listings, to short sales, to REOs, to for-sale-by-owner residences, and it updates its information on a 15-minute basis. And that’s really all there is to it – consumers peruse the site, choose a house they are interested in seeing, and, upon a few clicks of the mouse, they are put in touch with a Redfin agent who represents that city or neighborhood. For Redfin agents, the clients initiate the meeting; no time, or money, is spent on networking or building clientele. And under that system, Reitman says most of his agents average five to 10 sales a month (Greg Whelan, who had 51 transactions in 2011, was the No. 15 agent in Cook County, according to Chicago Agent’s Real Data), and since Redfin launched in Chicago in 2008, its total transactions have increased from 18 in that year to a projected 525 in 2012.

“For our agents, it’s a completely different business than for a typical agent,” Reitman says. “As a typical agent, most of your focus is on acquiring clients, whether it’s prospecting in one form or another, networking or talking to your sphere. I think the difference between being a Redfin agent and being a traditional agent is that Redfin agents all focus on servicing the client, and they don’t have to do any focusing on acquiring clients, which is the complete opposite of the traditional brokerage.”

Redfin is still a full-service brokerage though, so between Redfin and any other brokerage, there is no service or amenity that Redfin does not provide, Reitman says. What challenges that statement is Redfin’s rebate system, the aspect of its business model that has inarguably generated the most controversy. All buyers who hire the services of a Redfin agent receive, upon a successful closing, a refund check, which is taken as a portion of the agent’s buyer commission. Over the past 12 months, Reitman says the average refund for Redfin’s clients in Chicagoland has been $3,200. On the listing side, Redfin charges a discounted commission of 4 percent, and as Reitman explained earlier, the services provided are identical to that of any other brokerage, including listing the property on the MLS, showing the property to prospective buyers and syndicating the listing to more than 30 different websites, as well as professional photography, listing brochures, open houses and an automated system that allows sellers to track how many page views their listings receive.

Technology may be a huge part of Redfin’s business model, but the brokerage does operate an office in Des Plaines, and Reitman says they have been looking at expanding to a second office location in Chicago’s downtown; however, the current office, like every other aspect of Redfin, does not operate in a traditional fashion. Rather than the attractive window dressings and aesthetics that many franchises use in their office designs, Reitman says Redfin’s office is more modest by comparison, and instead of designing the office for agent’s interactions with clients, it’s optimized more as a meeting place for agents – more “congregation,” less “retail,” in Reitman’s words. Agents are still more than able to meet clients at the office (and some do), but the vast majority of agents work virtually and meet with their clients either at listings or at public places, like a Starbucks.

Finally, Redfin’s compensation model for its agents, according to Reitman, is similarly unorthodox. Redfin agents are not independent contractors, but are salaried staff members, and as such, they receive: a full benefits package with an expense account; provided equipment, including a laptop, iPad and a printer/scanner; and their salaries. Agents, Reitman says, earn a base salary of $18,000, but with their bonuses – which are client satisfaction-based and fluctuate on the agent’s customer reviews – they typically earn $80,000 or more. Team leads earn a $36,000 base, and on the same bonus model, their salaries come to approximately $100,000.

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  • Michael Sims says:

    Kudos to K&S for taking a step in the right direction for Illinois Realtors. Too often realtors get stepped on by the general public and are not always seen as professionals with standards. Personally I have maintained a minimum fee for all transactions which averts myself and my agents working at minimum (or less than minimum) wage on a transaction. Some clients turn their back on the proposition, but most understand that our time is worth money too.

  • Wayne says:

    Agree wholeheartedly with this. It should end up becoming state law that it is published in each office. Too many lookee-loos think we get paid a salary to be in the office.

    How often do people call us or stop by an office and want to know about buying a home? They then go to another and another office. They seem to think that if they ‘work with’ more than one agent they will get more information than the MLS has.

    If they want to pay $250. up front to each of us, they can work with as many agents as they want!

  • Barry Newman says:

    I can appreciate Koenig & Strey’s approach to buyers. I believe that the State of Illinois needs a new law requiring buyers contracts as they do listing agreements. Some buyers do not understand that their agent typically works hard and only gets paid if something is purchased.

  • Ron Brampton says:

    Listen to a salaried tenure guy like Hsieh and you’d think Realtors are Romney. Making a lot of money for doing nothing. He misses the point like trying to catch a bullet with a net.

    It’s an extremely personal, nuanced and skilled service with risk/reward that can result in a transaction where a lot of money is exchanged. For instance, does Hsieh have any idea where all the data on an MLS comes from and who pays to aggregate it? Agents, maybe? But the data doesn’t get a transaction done. Does he understand why commercial real estate information is so splintered?

    Pro agents know how many well-tended deals fall out. It makes you wonder if any residential real estate would ever get sold without us.

    Maybe a lot of college professors are lousy teachers because they’re disincentivized by tenure. Are agents getting a salary complacent like them? A commission agent has less incentive to service a client? If that last fallacy has to be refuted on an agent web site, we’re all wasting our time.

  • Robert Nowak says:

    The old commission model doesn’t work when some properties are selling for $40,000 or less. Buyer’s that are serious and want to work with an experienced agent will pay the fee.

  • Gary Lucido says:

    Interesting to see Chang-Tai Hsieh heavily quoted here. It was a 2002 paper of his that led me to my current business model, similar to Redfin but with true full service. As he says the biggest inefficiency in real estate is the prospecting. Agents spend a disproportionate amount of time prospecting, which is why I give my agents the leads I generate in order to improve their productivity.

    The other problem is the clients that waste our time, which is why I recently introduced an hourly model for buyers with a 100% commission rebate as well. At first agents don’t know what to make of it but once they try it they really like it. And serious buyers like it also.

  • Laura Mostardo says:

    Excellent article. Well researched.

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