Remuneration structure is problematic

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Sales agents aren’t paid for their advice and guidance, they are paid for an outcome.

Topic – The industry from the inside out

Mentor – Veronica Morgan

  • Conflict of interest?
  • It limits the professionalism
  • What is the value proposition

Marketing Monday – When marketing for new leads be careful you don’t over focus.  Think ‘long term marketing’.

Transcript:

Kevin:   There’s been a big move to change the way real estate is conducted. We’re talking here purely about from a professional side. This is agents, buyer’s agents, mortgage brokers. This week we’re going to devote the shows to looking at the industry from the inside out. What do we need to do to make some changes? Very passionate people in recent times, John Cunningham certainly amongst them, who have been advocating the need for change. We’re going to weave our way through the week by looking at where the industry is now. We’re going to unpack it and look at each of the elements and then try to put it together again towards the end of the week, a big task. Helping me to do that is Veronica Morgan. Veronica is from Good Deeds Property Buyers. She’s a passionate advocate for the pathway to professionalism, and she’s also the cohost of Elephant in the Room Property Podcast. Veronica, thank you very much for joining me. I’m looking forward to our conversations this week.

Veronica:   Good to be here, Kevin.

Kevin:   I know you’re very passionate about this. We’ve looked at the five different areas we want to have a look at. We’ll firstly look at remuneration. You think the structure that we have now is problematic. Talk me through that.

Veronica:   For many, many years I’ve really felt that it’s difficult. Real estate agents, let’s talk about sales agents for a minute. Sales agents are in a difficult position because they are only paid by the vendor if the property sells. It is actually quite difficult for them to at times, and a small percentage of times, for instance, where it might be advisable for them to advise their vendor not to sell, or to wait for a higher offer or for another offer, or deal with another buyer with better terms or whatever. It makes those decisions and those recommendations really quite tough because at the end of the day they are reliant on that vendor selling that property in order for them to get paid.

Veronica:   I was a sales agent for six years. It used to frustrate me when I was a selling agent that I’d be giving a lot of very good advice, and I wasn’t getting paid for my advice. One of the reasons I jumped the fence to become a buyer’s agent, that was 11 years ago now, was because of that, because I could actually be in a position and I am in a position now where I actually do charge a fee for services, where I charge for my advice. When we’re talking about this pathway to professionalism and the idea of real estate agency becoming a profession, which I think is fantastic, but you look at other professions, do they charge purely on the outcome or do they charge for their advice? If you’re going to become a trusted advisor, you need to charge for your advice, I do believe.

Kevin:   I guess a good example of that would be accountants or tax agents. They’re not really paid based on the size of your tax refund, are they?

Veronica:   Absolutely not. There’s no one that I can think of. An architect is not paid a commission on … What could an architect be paid a commission on? The shortness of the period of time it gets through counsel. It becomes picking some of these markets. You’re only going to be paid for one aspect of what you do. I think that’s a real problem. I think that a lot of real estate agents and the calibre of real estate agents that is going to take this pathway to professionalism, they give very good advice. I do think that as an industry, we need to look at the way in which they’re remunerated because I don’t think that is, what’s the word, congruent with this idea of becoming a professional.

Kevin:   If I could make a couple of points here, I think Purplebricks has taken us part way to that where they charge a listing fee and not a success fee, which is really the difference between the two models where the consumer will actually pay a fee regardless of whether they sell. That takes away the conflict that you talked about, getting the highest price, and therefore getting a higher commission.

Veronica:   Which is sort of interesting in that particular model, and I do recognise that. But in order to be able to get that across the line, they’ve had to make it cheap.

Kevin:   That was the second point I was going to make. I think that’s almost like a race to the bottom. I just wonder what agents would have to do to justify an upfront fee that is commensurate with their current commission level, which is really what we’re talking about would need to have to happen. Otherwise, you’re going to go into the Purplebricks model.

Veronica:   Look, obviously I just want to start a conversation on this because there needs to be a lot of stakeholders getting involved in talking about what the possible options could be. Obviously consumers, there needs to be a real education piece on the consumer side of things to see what are the benefits of actually paying for that advice. Consumers love to whinge if we feel that we’re being ripped off, but we don’t necessarily want to pay in order not to be ripped off. You get my drift?

Kevin:   Yeah, I do.

Veronica:   I think everyone plays a part in this. I certainly am not thinking that agents are all bad at all, at all, in fact. I think that they’re a little trapped by the whole mechanism as the way the industry operates. I think by looking at turning into a profession, there’s maybe an opportunity there to look at a way to differentiate the type of agent that’s going to become a professional because let’s face it, not all of them will or can.

Kevin:   That’s right. I guess if you look at it too from the seller’s point of view, they’re saying, “Well, a commission base means the more commission I pay, the more money I’m going to get in my own pocket, so therefore that’s an incentive for the agent not to just simply get me to take an offer just to get it off their books.” There’s an incentive there for the agent to get a higher price. How do you overcome that one?

Veronica:   Yeah, except that if you’re getting a 2% fee or 1.5% fee, that’s a very, very small percentage.

Kevin:   Yeah, I accept that. However, that’s not how the seller looks at it. The seller will look at it and say … They don’t do that calculation. They simply say, “Well, it’s commission-based, so therefore the more money I get, the more money the agent gets.”

Veronica:   Once again, it comes down to conversation education.

Kevin:   It does.

Veronica:   There’s a Freakonomics video on that exact topic. It’s in America. Basically it’s an episode that’s put together between, I think, a journalist and an economist, so neither of them have got any real estate experience. But they posit the idea that a real estate agent will actually have their property on the market for longer if it’s their property than if it’s a client’s property, and for those reasons.

Kevin:   Actually, I’d love to get a hold of that. Can you send me a link to that?

Veronica:   I will send you a link to that. Yes, I will.

Kevin:   You send me the link, and we’ll make sure that it goes into the commentary below today’s episode. We’re going to leave it there, Veronica. Thanks so much. Monday morning and we’ve only just touched on the subject of the change in the industry as we move toward this pathway to professionalism. My guest, Veronica Morgan, will be back again tomorrow and talk about investment advice tomorrow. Thanks, Veronica. Talk to you then.

Veronica:   Pleasure.

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