Incentivizing Agents: The Secrets to Boosting Real Estate Commissions

The real estate industry is constantly changing, but one thing that stays the same is incentivizing agents. In this episode, we will discuss simple and easy-to-implement strategies that can help you boost your commissions.

Transactly organizes and coordinates the very messy and often chaotic closing of a real estate transaction. Whether you’re a real estate agent, broker, team, or an entire office, you can use our application or one of our Transactly Coordinators to organize and manage your home sale transactions.

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Incentivizing Agents: The Secrets To Boosting Real Estate Commissions

Back to when you talked about the evolution of the industry, these are some of the things that are changing, the commission structures. Appreciation for when you ask for a discount as a homebuyer, or even a seller, you got to appreciate this infrastructure. Sometimes it might be the individual agent that eats it. I'm a believer, when I ran a company, I was a believer that the more we pay our sales team in commission, that's amazing.

I want to be writing a big check. You want to be paying high taxes, if you have to, at least. It's the same here, you want to incentivize your agent. This is more human psychology than a case study. At some point, you would think that there is an incentive to work harder on a property where you are going to make more commission. This is why incentives exist. This is why M&A bankers, for example, may get a tiered commission.

I did that when we sold our company. It was quite funny, we had Goldman Sachs, and we set a minimum, I can't say the exact numbers. I want to keep something confidential. Let's pick a number, $500 million, $600 million, whatever. After that point, the commission starts to scale and it gets more and more aggressive.

That to me speaks to the human psychology that perhaps some people are motivated by money. It has a different incentive too, if the discounts are too severe, then perhaps the agent might not be motivated. Do you agree with that or do you think houses will sell hotcakes when the market is there and the commission is something that's up for negotiation? Do commissions drive performance?

Commissions can drive performance. They should be indicative of the quality of the person or company that's representing you as well. I have seen some interesting stuff because it's gotten so competitive. That's the good thing about these types of markets. You see some real creativity and for the first time we see now like, “If we sell your property within X days.” It used to be more commission but now it's less commission.

Some of these I have seen because it's not taking as much effort, at least in a general sense. It's because it’s so competitive from the buy-side that you will see buyers waive inspections. You will see them waive all kinds of contingencies because a lot of properties are getting twenty or more offers. The listing agent is negotiating the best of those and then bringing it to a close with their transaction coordinator or coordination team if they have one.

As opposed to if it were 30 days, constantly going through those showings, trying to persuade that person that viewed it that this is the right property for them, and negotiating that offer, with a little more leverage than they currently do at the moment. It's certainly interesting, you see things move quite a bit.

If they don't move quite a bit, then momentum is lost. Unfortunately, the house ends up on the block and it feels like, “Something is wrong with that home.” The momentum is lost. There's an art to orchestrating a quick closing and everyone wins. It's an IRR concept in the investment world. IRR, Internal Rate of Return. It's the amount of money you make as a percentage of the time that's there. In some ways, if the IRR is very high, even though you are making less but the transaction closes very quickly, you made a lot on your time value as a percentage relative to letting it drag on and making a bit more.

There's something that's not allowed in most states from a licensing perspective, which should be allowed in a market like this, and their net commissions, where let's say, “We sell it for this price and anything over that then I receive in commission.” The reason being is that we are seeing better and better valuation data. We can get a good idea of what this home is worth in a generalized sense, not knowing anything inside of it.

Also, not knowing about the current market dynamics and those multiple offers but that's where a great agent steps in this market. They can go, “We agree that whatever data we are looking at, that's the home price as is but you are going to have twenty offers, and generally, they are coming in over X percent, and we should do it this time because it's going to generate the most interest immediately after,” whatever it is. We take it from a pocket listing to active, keep it a pocket listing or do it directly after an open house.

There are a lot of human dynamics that get involved and that agent can navigate through that and get that price right towards not so high because you are going to get multiple offers that you can scare people off. Maybe it's a little lower than the market so you get people that overbid into an escalation clause. That's the insight that a lot of agents are providing in this competitive market, even though houses are selling like crazy, and it's very easy to sell because it's low inventory. You can quickly go wrong or sell yourself short if you don't do that right. For what that's worth, those are some interesting value adds that are happening from an agent standpoint.

That goes back to why the human aspect of this is very important. You are ultimately trying to convince someone to sell their prized asset. You've got to convince them that you want to put this under market so you have a competitive process rather than overpricing it. A lot of homeowners are very stubborn. It comes down to a lack of trust, potentially. Do you agree with that?

Yes, absolutely.

That trust perhaps stems from the fact that, “This agent is going to get paid a big commission no matter what, whether it sells for 10% lower or whatever, they are going to get a big chunk.” They want it quick and easy but it's not necessarily like that. An agent prides themselves on getting the highest price they can for that. Agents have not just a fiduciary duty to their clients, to give them the best value. They get a buzz out of that. It's a game.

Commissions can drive performance. They should be indicative of the quality of a person or a company that's representing you as well.

There's a risk to it. Even though it may sell incredibly fast, all kinds of things go wrong in those 30 to 45 days it takes to get to closing. When it does go wrong, you are back to the drawing board. The agent doesn't get paid unless that thing sells.

Tell us about the human element of change happening in the real estate industry?

We've discussed a lot of a human element but with the technology that's being applied to it, you see some of these teams allowed to be a lot more productive. We are seeing brokerages be allowed to be a lot more productive as well. The part that's still a little bit lacking is the consumer experience. There's still not much that's driving that consumer from beginning to end. If you think about it just from the brokerage aspect, maybe you have something but everyone is fighting to deliver this experience.

When you sell or purchase, let's talk about the buy-side, you have an agent most likely that's helping you with the negotiations, and the paperwork, and then just steer everything to closing. You also have the title company. More than likely you have a lender involved. Maybe there's a home warranty, there are movers and your utility connections. All these things, all those are different humans that are getting involved and coming at you as a homebuyer. Everyone wants to monetize that aspect as well.

Where everyone is still getting it wrong where you got to focus on is, at the end of the day, it's the homebuyer that matters because none of you would have any of this going on if the homebuyer weren't able to spend the money to make this happen. Let's focus a little bit more on that experience for them and bring all these somewhat desperate people in this greater transaction together to deliver that experience. Even some of the more progressive companies are wanting to own each one of those elements and it's very challenging from a regulatory standpoint to execute that. The human element needs to be enabled by technology to bring that together for the consumer.

There's a lot of change happening with empowering different vendors and large players in real estate. What could be done on the consumer side when you allude to improving that experience? Could you be specific? Have you seen examples of where that's being done well and how?

I don't see anyone, quite frankly, doing it very well. Not that I've experienced it. If they are out there, I would love to hear about them. It's a problem that we are tackling but it takes quite a bit of time to get there. In my company, Transactly, we assist agents from contract to close, and then we have to coordinate with all those other parties. A lot of that is still very manual and technology is being applied to it. At the end of the day, it's for the consumer that this is happening and it's a tough challenge.

Which stakeholder is going to get there? To me it seems that it's the agent because the agent ultimately is going to be asked, “Can you recommend a mover? I've got to sort this cleaning. How do I work with a title company?” If an agent only focused on sales and hunting, how are they supposed to even develop the expertise needed to be a friend to the homebuyer and to help refer? You then said also monetizing? I've seen this. A lot of tech-enabled technology platforms want to take a commission or make money on the title, the financing, and all of that. Is that the way to go here? Is that where agents should be playing?

You are right. The agent sits at the center of it. They own the experience or anyone that attempts to step in and commoditize the agent, which some companies are doing well there. The challenge with agents or any of those companies getting in is a regulatory challenge. You can't take kickbacks from a title company. You may own the company but you still have to create a Chinese wall in between those. From a shareholder perspective, you gain some value. Agents necessarily can't get into it. The brokerage that they align themselves with can. The agents can do it from a strictly handshake referral, “I use X, Y, and Z services during this transaction because they deliver a phenomenal service.” That does happen.

Even though regulation prevents all we can say is an over-the-table formal transaction, it happens under the table or this implicit agreement. This happens in every industry, not just real estate, where vendors do business with each other frequently, and sometimes at the expense of the end consumer who will only do business once with that agent.

It happens at the brokerage level. Every single brokerage that I've ever talked to does stick their hand out and looks for that for you to get in front of the agents and consumers. The agents though are a little bit different. Most agents want to make sure you are not going to screw things up for them so they can get their commission at the end of the day and their clients get the home that they want. That means most agents have a lender that they prefer to use. They have a title company and inspector that they prefer to use because if anyone is going to screw up a deal, it's going to be one of those.

If you can't get things through underwriting on time and the same thing with a title. If the title can't get a clear title in time, the inspectors are maybe way too overzealous and scare the buyer away. Maybe misses something that the buyer then finds at a walkthrough. Who knows? Those people, there's typically very close alignment with the agents and they don't care about the kickback. They just want great service for their client and a smooth transaction for everyone.

It seems that's where agents should focus to protect their commission and provide value. Otherwise, if you try to monetize everything, in the long-term, things will go down and you will refer to the wrong vendors, too. This isn't a commodity business. This is still the frustration with real estate. It's a very relationship-driven business.

In some ways to a fault, because relationships don't scale the way technology can scale, at the end of the day, reputation is key and there are a lot of unscrupulous vendors out there. You are right, one small aspect could derail an entire process. What's worse than a property that has been on the market and overpriced is a property that was in contract and then is back on the market.

Even though houses are selling like crazy, you can quickly go wrong or sell yourself short if you don't do it right.

It’s painful for everyone.

That’s a word that is difficult to come to terms with. “Why did the deal fall apart?” is often the first thing the homebuyer and even the other agent on the side will say, “Something must be wrong.” We don't want to fall into that so we want more time to close this deal. We want to have more contingencies. That's a bad situation. Sometimes it's so bad that the advice you are given as a homeowner is, “Maybe we take it off the market, we wait for another cycle, do some renovation and furnishings.” If that home is unoccupied or that homeowner needs to move, that's a very bad situation. That's a huge cost.

You know the cycle well. You have been down this path a few times I assume.

This is an interesting trend that's happening. For the first time in history, we are seeing institutions competing with consumers. More and more transactions on the residential side are coming from iBuyers and institutions in some markets like Texas, a large, healthy percentage, I don't have it at the top of my hand but very high double-digit percentages. We are talking 20% to 30%, to me, that's still high. These are coming from investors and those investors are competing against your consumer. That's creating a dynamic we've never seen in history before, what I call the institutionalization of the single-family asset class.

As I said before, what happens with that inventory? Are people going to be okay with renting when they can't find inventory? I don't know. I can't believe that everyone will be.

What are some of the hottest markets that you are aware of throughout the US?

Anything that I will point out or what you can find in headlines like Austin, for sure. Texas, in general, has been phenomenal. Florida has done incredibly well. A lot of this data is just from looking at our internal data. It's some of the markets that you would imagine. Even California has done incredibly well and we are seeing a big uptick there too.

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About Zain Jaffer

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35,” and the “SF Business Times Tech & Innovation Award.” He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.