A New Option for Real Estate Commissions that Further Aligns Incentives

A New Option for Real Estate Commissions that Further Aligns Incentives

Ken DeLeon, Esq.January 1, 2016
DeLeon Insight - January 2016

 

Real estate commissions have traditionally been based on a transaction-based model as opposed to a performance-based model. When the time comes to resell, regardless of whether the home doubles in value or declines by half, the real estate agent who helped the buyer purchase the home expects to be paid the same percentage when selling the home. Even when the homebuyer loses money, the agent still expects to be paid at the same rate. The marginal decline in commission due to a drop in the home’s value is trivial when compared to the economic impact on the sellers.

In continuing efforts to fully align incentives between the firm and its clients, DeLeon Realty introduces a new, optional, performance-based model in which commission is only charged on the increase in the home’s value, not on the entire sales price. Thus, DeLeon Realty only benefits from the profit that was generated for the client!

This new model has many great advantages for the homebuyer, including:

1) Aligned incentives between the client and the agent.
In many other industries, an agent’s compensation is tied to performance. The advantage of this is that the bad ethics encouraged by the current model, which causes buyers to worry that their agent is only looking for a quick sale and not a good deal, are eliminated. With aligned incentives, the agent only wins when the client wins.

2) Ethical and economic fairness.
Under the current transaction-based model, the client can lose a lot of money while the agent still makes a nice profit from the sale of the home, so the unfortunate client bears the full brunt of any loss. With our new model, we do not make money if the client does not make money. If the client does not realize a profit, then DeLeon Realty sells the home with no profit. When the client makes a great return, DeLeon Realty receives a share of that success, and everyone wins.
 

3) Trust is built into the model.
Under the current system, homebuyers often question if their agent is on their side. While there are some good buyers’ agents who seek to find their clients a good value, this is due to their good ethics and not a result of the model. Under the transaction-based model, the more the client pays, the higher the agent’s commission. Not only are incentives not aligned, but they are inversely aligned! Consequently, buyers rightly fear that their agent will make them overpay just to win the deal. By overpaying and closing quickly, the agent both receives a larger commission and saves time, but does not make the most of the clients’ money. Conversely, if both parties have the same goal and desire to maximize profit, then the clients can trust DeLeon Realty to direct them to, and then advise them to purchase, the home with the greatest profit potential.

4) The illustration of our belief in the continued appreciation of Silicon Valley real estate.
DeLeon Realty has analyzed the market and the fundamental trends driving the supply and demand of homes in Silicon Valley. We continue to project strong appreciation. I rely upon my mathematics and economics background to direct clients to the neighborhoods providing the greatest potential profit. The goal is for us to be trusted advisors, putting skin in the game and happily placing our bets right next to those of our clients. Would you not want a real estate brokerage that is willing to stand behind its performance? It is disconcerting to buy through agents who are not willing to share in both the potential risk and gain of the communities in which they sell.

5) A hedge against a falling market.
Money matters much more in a down market. This performance-based model has an added benefit: if you lose money on the sale of your home and need as much capital as possible, the cost of selling your home will be much lower.

6) The role of the agent turns from facilitator to consultant.
Much like a venture capitalist, who is also paid for performance and provides the best advice to his/her clients, your agent becomes a true fiduciary through this model. A performance-based model incentivizes your agent to give you the best insight and analysis for a winning strategy.
 

7) A long-term, synergistic relationship is formed.
Any major improvements, such as remodeling a kitchen or bathroom, will be added to the basis of the home and will not be considered as part of the profit. DeLeon Realty is incentivized to provide the client with the best contractors who will do excellent cost-effective work to increase the return on the investment of the remodel, resulting in a greater sales price and ultimately profit when the home is sold. DeLeon Realty will utilize our complimentary construction consultant to provide the best team and work to minimize costs to the client so that both the client and DeLeon Realty ultimately profit from the remodel when it comes time to sell.

This optional new model is available to DeLeon Realty homebuyers who purchase a single-family home in one of the cities that DeLeon Realty serves. Further, my team and I will provide you with a confidential “not to exceed” price. This functions as a limit to the amount you should pay for a particular home. You are free to pay more than this amount, but you will do so with full knowledge that you are overpaying. This is a tremendous advantage that lessens the likelihood of your overpaying and is unique to DeLeon Realty.

How Does It Work?

Within 30 days of purchasing a home, you sign an agreement with DeLeon Realty that sets future commission when selling your home through DeLeon Realty to a percentage of the profit based on the home’s appreciation, rather than the sales price. This aligns incentives, provides you with more confidence during the buying process, and ensures that DeLeon Realty is focused on your goals and needs. When purchasing your home, the commission is paid for by the seller, so no fee is due upon purchase. If you make the selection at the time of your purchase, DeLeon Realty will be the listing agent when you decide it is time to sell your home. There is no team more motivated to get you the most profit on your home than the team with a shared, vested interest in getting you the highest price possible.

Details on this model are available during a client consultation.

Note that this is just an option. You can certainly choose to not go with this alternative business model if you also anticipate continued strong appreciation in pricing for Silicon Valley homes. Even if you do not choose this option, would you not want to work with a team that is willing to assume some risk and tangibly illustrate that it has clients’ goals and returns on investment as its top priority?

There are additional benefits to this innovative new model when it is time to list your home, including:

1) Motivation for the listing agent to get the highest price possible.
With this new model, the listing agent is more motivated, getting a larger percentage of the total profit versus a smaller percentage of the total sales price. Each extra dollar obtained results in more profit for both you and the agent. While the alignment of interests is better when listing a home than buying, this model provides even more incentive for the listing agent to obtain the greatest profit possible for you. Consequently, the agent will likely increase marketing efforts since the agent will get a larger percentage of the marginal gain.

2) Your listing agent becomes a trusted advisor.
Often, homes will be listed for sale during terrible times like the summer doldrums or around the winter holidays. This may be the result of a listing agent’s financial needs or a lack of concern for optimizing the sales price of a client’s home. With the increased motivation from this new model, an agent is most likely to direct clients to the optimal selling seasons of spring or early fall. When you create a proper alignment of interests on both the purchase and the sale of a home, good ethics are built into the model. Under this model, there is less need to monitor the agent when buying and selling your home, as the agent is already incentivized to ensure you both win together.

Call DeLeon Realty now at 650-543-8501 or email ken@deleonrealty.com to discuss the option of aligned interests and partnering with a real estate brokerage focused on maximizing the return on your investment. DeLeon Realty — the only brokerage in the nation willing to stand with our clients!