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Risk Versus Reward


It is a well accepted concept that the greater the risk that a given course of action entails, the greater the potential reward will be if the course of action proves to be successful. Stocks are a risky investment. Pick the right one and you may be rewarded by your investment multiplying many times over. Make a bad pick and you might lose it all. US Treasury bonds are generally considered the safest investment you can make and the reward is fixed and small. Invest in a Powerball ticket, hit the right numbers and you might win millions of dollars. With odds of winning over 100 million to 1, though, the far better chance is your investment will be worth zero.

Real estate commissions are based on a risk and reward system as well, although not often discussed in those terms by the real estate industry. Real estate agents working on straight commission risk their time and resources by taking listings or representing buyers with no guarantee that they will get paid. The reward comes when they do close a sale and get a nice check, often many times what their work on that particular sale might be worth if paid out on an hourly or flat fee basis. Listing a property entails a risk of time initially in meeting with the property owner, researching the property and comparable sales, preparing a market analysis of the property, and making a listing presentation, all before even knowing if you will get the listing and be given the opportunity to risk even more time and resources. Once a listing agreement is signed, the listing agent may spend considerable time and money on gathering and verifying information, staging, professional photography, virtual tours, advertising, working with potential buyers and agents, etc. Once a contract is signed, the work continues with inspections, repair requests, monitoring loan progress, etc.

Working with buyers involves risks of both time and resources as well. Showing property can be the most time consuming and inconvenient part of the process as it involves making appointments, driving back and forth to the properties and working around the schedules of the buyers and sellers rather than being able to set your own hours. Arranging transportation, buying lunch, helping with child care, etc. can also figure into the equation. After the contract is signed, inspections, repair requests, monitoring loan progress, etc. are all things the buyer’s agent must do from the buyer’s side just like the listing agent does for the seller.

There are a lot of reasons why either type of agent might not get paid, some of which are clearly directly related to the agents competence and work ethic, but many which are beyond the agent’s control and can happen despite the agent doing their job well. Because of that, the deals that do close must pay for the time and resources expended on those that do not. One way to look at this is that the good customers (the ones that close) must overpay in order to make up for the bad customers (the ones who take up time and resources, but never close on a sale).

Recent years have seen some new business models start to take hold in real estate. Listing agents offer flat fee or retainer based plans where the seller pays all or some of the total listing fee upfront in return for a much lower total commission paid at closing. Buyer’s agents can get paid by the hour or collect a retainer upfront, then rebate to the buyer all or part of the buyer’s agent commission typically built in to the sales price on listed properties. The total fees in either situation end up being a lot less than they would be in a straight commission model with the reason being that the seller or buyer has now taken on some of the payment risk previously borne totally by the agent. If the sale does not close for whatever reason, the agent still gets paid something for their time and resources expended. The traditional model works well for those sellers and buyers who don’t want to take on any risk and don’t mind overpaying for their desired results, but for many serious buyers and sellers it makes more sense to go ahead and make a commitment to paying for services in return for a large reduction in the total fees they will end up paying anyway.