Friday, July 31, 2009

Fixed Fee Realty?

The concept of a fee-for-service Realty agency has been thrown around a lot but the old commission-based model still seems to be the only game in town. I happened to pick up a copy of this week's Business in Vancouver newspaper and find this article on the last page:

Auto advocate does the legwork for car-buyers (subscription; if you want to read the whole thing, find a copy or pay the subscription fee)

I will quote from the article so as to make my point:
After working in auto sales for years, - something he admits he wasn't very good at -- [Rob] Fournier decided to launch Burnaby-based Cornerstone Concepts in 2007 and took it full time in February 2008

The purpose: to act as an advocate between members of the vehicle-buying public and new, used and private car dealers.

Sounds like a Realtor but for cars. Perhaps he's an... Autotor? Actually he's not. There are places around that will act as brokers shopping for a car but here Rob's business model, or at least how he spins it, is a bit different:
While similar to car brokering services, Cornerstone Concepts does not accept money from dealerships for bringing in potential buyers or making sales on vehicles, according to Fournier. "We are completely unbiased."

Fournier charges $700 for finding new cars for his clients and $850 for used cars, including taxes. His fee covers vehicles priced from about $5,000 to $90,000. The used-car fee also includes CarProof, a vehicle history reprot, a BCAA mechanical inspection as well as a BCAA membership

So he's not really like a Realtor at all. He gets a fixed fee and makes a fixed amount ensuring he can match a car with the client. The way Fournier is selling his business is that he exclusively focuses on his clients' best interests without being induced to work for a buyer-paid commission.

I don't know how Fournier's company's sales are doing but I can see a definite business case for such a service. He purports to be grossing six figures on an annualised basis. His business is operating on his clients trusting his expertise and honesty, something to be honest I see generally lacking in the real estate business.

So for all Realtors out there looking for a tangential journey in the real estate world, such a parallel client-focused fee-for-service business could generate some noise, especially in a few years when some more tentative clients start looking to buy property again. The key, of course, is experience and trust, the latter is hard to gain but very easy to lose.


mohican said...

I would be a HUGE advocate of moving to fixed fee models for:

1) Real Estate Sales
2) Mortgage Brokers
3) Financial Planners / Investment Advisors

There are way too many misaligned incentives that pit the 'expert' against the consumer when it comes down to giving good advice.

patriotz said...

I would not want to pay an agent a fixed fee for selling my house. The agent would have no incentive to get the highest possible price. That's the reason salespeople of all types are paid commissions.

On the other hand, I just might pay an advocate a fixed fee to help me buy a house. This person would have to be making a living acting in the interest of buyers alone, though. I wouldn't pay a car salesman to help me buy a car, I wouldn't pay a wolf to look after my sheep, and I wouldn't pay a realtor to help me buy a house. And before someone brings it up, the present "buyer's agent" is paid by and acting in the interests of the seller.

jesse said...

There are already Realtors who specialise in buying but unfortunately their pay structure puts upwards pressure on prices. I am at a loss why the same house, one on a cheap lot and one on an expensive lot, should have tens of thousands of dollars difference in fees for the buying agent. From the buyer's perspective the service provided is exactly the same, with a few more dollars at play at the more expensive lot of course.

I do think that a (brave) Realtor could make a real splash with a fixed-fee and straight-shooting business model.

squidly77 said...

hitlers bubble..a little humour
a little bit of humour for a slow sunday night

Anonymous said...

Fortunately, realtors do have the ability to set whatever commission rates they desire. If one decides to set a fixed rate and there is sufficient consumer demand, others will follow. Until then the status quo will prevail.

Warren said...

There's a pretty good reason sales of almost any good or service in the world of capitalism is commission based. Sure RE is a "big deal", but that means just do your homework.

jesse said...

"There's a pretty good reason sales of almost any good or service in the world of capitalism is commission based."

Howgwash. Do you think the general manager of the Vancouver Canucks takes a commission every time he signs a player to a multi-million dollar deal?

patriotz said...

No, the player's agent does.

Who is the buyer of the player's labour and who is the seller?

jesse said...

"Who is the buyer of the player's labour and who is the seller?"

Well if we go with the Realtor model, Mike Gillis, the buyer agent, gets around 50% of the commissions when the player is signed to a contract. But don't worry; deep down he's working in the best interests of the Canucks ownership and besides the owners have to okay every deal anyways.

patriotz said...

Of course in RE both the "buyer's agent" and the listing agent are agents of the seller. You are incented to work against the interests of the buyer if you are paid a sales commission.

Which is Warren's point really.

jesse said...

"You are incented to work against the interests of the buyer if you are paid a sales commission.

Which is Warren's point really."

I'm not sure what his point was exactly but it is not always true that those brokering large value TRANSACTIONS are commission based. Real estate happens to be one of the exceptions that accepts buy-side commissions as the norm. Auto brokers -- with the exception of Mr. Fournier, the subject of this post -- are another.

Try talking to high-level corporate purchasers and ask them about the chances of moving to a commission-based salary for capital purchases they perform on behalf of their employers. Not a chance.

As for Realtors "demanding" a commission, I think the terminology is reversed. A Realtor tenders a fee for service, with a commission structure, and the customer can choose to accept or reject that tender. There is no "demand" from the Realtor; the demand for the fee structure come from the customer with the supply coming from the Realtor.

The reason it's important is that "demand" infers a control. It is always the case the customer has control over the transaction since they hold the money, though recently real or imagined desperation can make the reverse seem true.

Rob said...

Hi, I know this is an old post, but my name is Rob Fournier. The owner of the business from the BIV article.

I wanted to post a reply.

I started my business back in 2008 and although I had lofty goals, our company never succeeded. One of the things I can see that would make this business model work is high volume, systemized protocols. I no longer help people buy vehicles because of the time associated with doing due diligence. Had I I had the money to invest in systems to help speed up the process it would have worked, but not having a lot of capital to start this model was a challenge.

I haven't given up trying to make this model work, I've just shifted my focus to helping people who have been in car accidents. For a set fee we work as consumers advocate to make sure they are being compensated fully by insurance companies. I'll let you know how this model goes :)