I’ve done a bit more thinking on my previous post…
The “base-plus-commission” compensation model is attractive in many ways, but as Nadal correctly points out, the key difficulty may be in getting the seller and her listing agent to agree on what the “target” price is.
That may be because both parties are fixated on a fixed price instead of a range, and realistically, nobody really knows in advance what exact price a home is worth. So how about if we tweak the compensation model to reflect a price range?
Back to our hypothetical $1M home…we don’t know in advance whether the home is really worth $970,000 or $990,000 or $1,015,000. What we do know, however, is that the highest price at which it would sell pretty quickly and with minimal effort (the price that a monkey posing as a Realtor could get) is roughly $950,000.
So here’s how we do it: If the agent only gets the “monkey price”, she only gets monkey pay — let’s call it $2000. Her incentive commission is on a sliding scale, based on the final price she gets, along the following lines:
She gets 20% of every additional dollar she gets for the home between $950,000 and $975,000 and 40% of every additional dollar between $975,000 and $1,000,000 and 60% of every additional dollar thereafter.
To spare you getting out your calculator, here’s what the final compensation looks like:
With this scheme, the Realtor’s compensation is directly tied to her success. Notice how quickly her overall compensation climbs above that arbitrary holy grail of a 3% commission. If she can indeed get 15% ($150,000) more than what we roughly believe the home to be worth, she gets a cool 9.3% commission.
The lynchpin in this whole scheme remains the base price, and though reasonable people could certainly come to an agreement on this, Greg Swann points out how an unscrupulous agent could certainly fleece an unsuspecting victim.
Tags: Disintermediation, For sellers, Freakonomics, Mark Nadel, Real estate
Possibly related posts
- Mea culpa twice over and the annoying cowboy error message
- If a monkey can sell a $1M home for $950K, does he deserve 3%?
- Why the Internet will never disintermediate Realtors — Part 1: It’s the relationship, stupid
?RE: Any thoughts on the feds (in)activity this morning?? August 5 at 9:46 pm 
�Good news, your equity line and business line of credit rates remain the same as yesterday, as the Fed held short-term rates steady today. Why? Because despite unemployment concerns, the economy is doing fine (1.4% growth year to date-- thank you exports!), core inflation is under control at this point, gas prices have dropped over 6% recently and it's more prudent to maintain a steady helm when the economy appears relatively balanced. Eric T. Trailer, Principal
3 responses so far ↓
1 Mark Nadel // Oct 17, 2006 at 9:32 pm
Kevin,
I like your approach on this and will reference it when I revise my article. Thanks for taking this to the next level and for your other kind words about the article.
2 Three Oceans Real Estate» Blog Archive » Mea culpa twice over and the annoying cowboy error message // Oct 18, 2006 at 4:32 pm
[...] In response to my post about his recent publication, Mark Nadel responded in the comments section, but when he tried to comment again, he got caught with the annoying “easy cowboy” Wordpress anti-spam message. Mea culpa — that one’s caught me numerous times as well, and I haven’t yet been able to sort it out. He then emailed me: [...]
3 mike simonsen // Oct 18, 2006 at 5:15 pm
I’m a fan of using other “kickers” as well. Why not a bonus/penalty for every day under/over a certain days on market? They do that kind of bonus in the construction world all the time.
The 3% number is so arbitrary and it’s very low compared to other high-service businesses. If I have some important requirements, and you meet them, you should be compensated!
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