Can Fee-For-Service Help Broker Profitability?

Source: Realty Times ©2001- Blanche Evans

Is fee-for-service the same as discounting? A lot of brokers and agents thinks so. But fee-for-service advocate Julie Garton-Good has the opposite view - that fee-for-service is a way to restore profitability by monetizing consulting services that brokers and agents have been giving away for free under the commission system.

"Doing a CMA for free and leaving it on the seller's kitchen table? Now that's discounting," says Garton-Good, the only woman to make the NAR's annual "Most Influential" list twice, once in 1997 and again in 2000. "If the industry is going to give away hours of work, then I tell people I have nothing to lose and everything to gain."

Garton-Good believes the loss-leader sales approach is causing the real estate industry to lose profits. According to a 2001 National Association of Realtors' report, The Changing Landscape, brokers are only clearing about $150 per transaction side, on commissions averaging 4.2 percent.

"We have focused on gross dollars, not net profit," observes Garton-Good. "The scary thing is to figure out what your break-even profit is for various things. When I tested a roomful of agents, only 10 percent of the people knew what their brokers' profit on them was. They don't know what the broker needs to glean from a desk. They focus on gross dollars generated, and it has nothing to do with profit. This is the whole problem. Until people start thinking in terms of show me the profit and stop thinking in terms of commissions, we are going to continue to go down. That's why there are so many acquisitions, you would think profits would be at an all-time high, but instead they are at an all-time low.

If they don't have profit at six or seven percent how can they be profitable at 4.2 percent? The solution is unbundling their services - analyze what services they want to provide," says Garton-Good. "What types of things do you want to see your company known for? It might be luxury homes, or resort property, but you need to be a specialist, or you could have an office where your agents are specialists. But you have to dissect how you can do those things more effectively, or charge for some of the things we are currently doing for free."

Garton-Good decided that she could help shore up broker and agent profits while restoring the prestige of the industry - encouraging brokers and agents to promote consultations instead of sales. She began to visualize a nation of consultants, rather than licensed salespeople. "I debriefed over 200 consumers five years ago, and I started asking them what did you like about the real estate process, what didn't you understand," recalls Garton-Good. "There were seven consumer realities, five of which dealt with money. It is amazing that the industry has done as well as it has because the majority thought that commissions was a stupid way to do business."

"One lady said, 'If I needed someone to tell me whether to improve or sell, I would be willing to pay for that advice, but until now, all agents would suggest is to give them the listing."

Garton-Good went so far as to found a new organization which designates real estate salespeople as consultants. The National Association of Real Estate Consultants (NAREC) provides a training platform and the C-CREC designation for brokers and agents who want to provide their services on a consulting basis, as in fee-for-service.

According to Garton-Good, technology has changed the needs of the consumer, and it can help the agent to reinvent themselves as consultants. "Consumers don't want to be sold," says Garton-Good, "they were smart enough to ask for what they need, and they said they would pay to obtain it."

There was just one little hurdle - the closemindedness of most broker-owners, says Garton-Good. "People don't want any more change, and that's typical of the demographics. Most brokers are over 50 years of age," explains Garton-Good," but many also lack a business background, or otherwise they wouldn't be doing transactions that clear only $150 per side (according to a 2001 NAR Trends Study - The Complete Landscape.)

"The problem is that they don't know what their time is worth, what their hourly rate is for certain tasks," says Garton-Good.

She teaches them in her classes. "We have everyone figure out what their hourly rate is, what their time is worth, take what they want to earn, and go backwards," explains Garton-Good. "If someone wants to earn $75 to $200 an hour, then we help them determine their walk-away power. For example, why do open houses if they aren't profitable? How long is an open house? What results should an open house have? If you don't get the results you want, you just lost $450. So their assignment is determining what is no longer sound for them to do - then they can decide if they want to delegate it, drop it, or operate it in a different way."

"We have to start specializing, and walk away from things that aren't financially prudent," continues Garton-Good. "Now agents are having assistants or sellers show the property. A lot of sellers would like to have a financial rebate for showing their own home."

So why is Garton-Good against the commission system? "It's more friendly to other agents than to the consumer," she says. "Consumers complain that brokers split commissions with competitors but won't give the consumer the benefit. I think resistance to a consulting system is not knowing the difference between discounting and unbundling services.

"Some brokers come to my classes to fight against it, but they leave understanding that if you unbundle your services, you won't be getting less - you will be paid as you go, rather than on a contingency."

The second roadblock to change is what she calls the 'Holy Grail of percentage commission.' "Some people don't understand that they aren't entitled to a percentage commission just for showing up," says Garton-Good. "and just because it is a big percentage, it has nothing to do with profit. Yet they don't comprehend that someone will write them a check for $150 for an hour of their time. That's better than basing their business on something they can't control."

Garton-Good knows that she still has a lot of converting to do. "The good news is that as of October, I see a real turning the corner, but people come to class and they want real ways to implement change.

The hurdles that remain:

1. Transitioning. Brokers are unsure how to incorporate fee-for-service so that they won't potentially lose full-service business. "Determine what your diamond-level product is and don't touch that, but when you see an opportunity to unbundle services, take it," suggests Garton-Good. "When you show that you have different approaches, the consumers love it. The consumer will not take your option, but the agent will obtain the business. You know that you aren't going to sell your diamond-level service to a FSBO, so your unbundled services may serve to get some business you wouldn't have had otherwise, without giving away your time and expertise."

2. How to unbundle and still include high fixed fees. Fee-for-service has to cover fixed fees or it doesn't work. Your ability to do this will depend on your ability to generate enough fees to cover such things as franchise service charges and E & O insurance. If your E&O insurance is $500 a transaction, then your fees have to include that.

3. Being creative with marketing. "I can't tell you what to charge and how to do it," says Garton-Good. Brokers want to be spoon-fed, open a vein and pour it in. To the degree that we thought that buyer agency shook up the world, this has more impact, you are dealing with reaching into the pockets of every real estate agent in the country, but all transactions begin with needs assessment before any selling is done. That's where consulting can come in.

4. Consulting doesn't reduce liability yet. "The large E&O; companies haven't rated anyone calling themselves consultants, but over time, I think it will help E&O premiums go down, but right now there is a Catch-22," says Garton-Good. "If as an agent you do over 60 percent of your work in another fashion, your premiums would go up, so you can't change until you admit that you are changing. Once you admit it, you get penalized for it, even if you can get consensus from clients that you are only doing certain activities, and that the client signs off on what you are doing."

But, Garton-Good is hopeful. "If you are being more professional, and the more education people have in the industry, the more they are going to gravitate to the consultant approach rather than strictly selling," she forecasts. "Because they won't be afraid to charge for their time."

"We teach them no more free comps, if the local practice is not to charge, then don't leave the comps with the consumer," she says. "It takes guts to say, 'I'll be glad to sell you a copy of mine for X and walk off. If they want it, they can pay, if they don't want to pay, you are no worse off because they were going to use it against you anyway."