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What is Contingency?
Which is better Contingency or Non-Contingency real estate commission?
How can real estate buyers get a rebate on their next transaction?
How can Sellers get reduced sales commissions?
Contingency is defined as – Dependence on chance or on the fulfillment of a condition; uncertainty; fortuitousness: .
A contingent event is a chance, accident, or possibility conditional on something uncertain:
Let me help us discuss this in context.
In 1994 I was licensed as a real estate agent with Coldwell Banker in Houston. The have both company offices and franchise offices in the United States and around the world.
With approximately 80,000 agents, they sell and lease residential and commercial properties.
In 2010 I decided to be an independent broker and have No agents, thus allowing me to have more time to help important clients.
One reason for leaving mother Coldwell Banker, was to offer the public, the option for non-traditional compensation fees.
An attorney will work with a client on a contingency or Non-contingency compensation plan.
With a contingency pay plan, the attorney bears the cost of the research and court costs, however the attorney may get 40% of the awards to the client. A $2,000,000 award to the client would thus yield $800,000 to the attorney. Hopefully that would be more than the costs incurred by the attorney.
However, the attorney might prefer to work for an hourly fee which is not contingent upon a successful result. The work might entail legal research or require a lawsuit which is not likely to be successful.
The attorney would probably require the client start with a startup retainer fee. For 60 hours of work at $400 per hour, the attorney would bill $24,000 legal fees.
Although I have no scientific research data to prove these numbers, we agreed that real estate brokers get paid by 25% of their customers.
Meaning that brokers work on contingency and only 1 of 4 customer relationships resulted in a pay day.
How can that be?
Last year, I was helping a client to buyer a home in partnership with his brother. I had previously helped him to buy a commercial property. Since he trusted me and I also had many years of experience with residential homes, we started looking for a home.
He as preapproved by a mortgage broker.
As it turned out, the mortgage broker encouraged the buyer to finish his tax return in February to help get preapproved. The mortgage broker told the buyer that it takes 30 days for the tax return to be recorded and transcripted online …. As proof to the lender.
However, the mortgage broker did not know to tell the buyer that the buyer also had to pay the income taxes and did not know that the buyer waited until April 15 to pay the taxes.
When we submitted our offer to buy a home in March, the buyer’s transcript had not yet been put online until June and the seller of the home would not wait and offered the home to another buyer.
It was actually kind of crummy, because the he was a first time buyer.
He did not know that 15 year old homes can have movement which causes small sheetrock cracks, which can be easily patched. Welcome to Houston. He did not believe me that small sheetrock cracks may not be major repairs, but should be seen by a licensed inspector. The buyer decided to not trust me. But his brother phones me frequently to have a nice pleasant discussion.
Once I was helping a man sell a home and found a buyer. He was distraught be the divorce of his wife and committed suicide one week before the final closing docs were to be signed.
Some buyers can not find a home which they want.
The point is that agents waste a lot of time which does not produce a pay day.
As a result, real estate brokers must receive a 3% real estate sales commission to make enough money to offset the wasted time with the nonproductive 3 of 4 sales relationships. When they charge 6%, then half or 3% get transferred to the other broker representing the buyer.
When a broker represents a buyer, then the seller broker transfers half the 6% commission to the buyer’s broker.
So usually a transaction results in a payment of 3% of sales price, which is paid to the broker.
Many people think that brokers are overpaid because of high sales commissions, but after accounting for all costs of doing business to keep the door open, brokers only make approximately $200 per transaction net net net. The bulk of the sale commission goes to the agent, the only gets paid for 1 of 4 client relationships.
Often we see advertisement for discount brokers offering discounted contingency sales commissions. Those are usually brokers who are desperate to find a client. The end result is …. Those discount brokers close their doors or stop offering discounts.
We can always find anything cheaper. I shop at Walmart sometimes, but I drive a nice new luxury car. I frequently shop for the beat price on commodity items. The question is ….. are real estate brokers a commodity. Are some brokers better? Do a broker have more value than another broker?
Maybe real estate brokers should offer non-traditional compensation options to their real estate clients.
There could be several options.
For sellers, the broker could work like an attorney and charge an hourly rate with a startup retainer.
For buyers, the broker could also charge an hourly rate with a startup retainer, however give the buyer a rebate of all earned 3% sales commissions transferred from the seller’s broker to the buyer broker.
Essentially, we are talking about risk. Who is willing to accept the risk of contingency or non-contingency? The real estate broker or the client?
There are several reasons that a buyer would not agree to pay to receive a rebate.
The buyer is not sure he wants to buy.
Buyer is not sure he can get a loan.
Buyer does not know and trust the broker.
In the past I have offered a compromise to both buyers and sellers.
If a buyer pays a startup fee of $1, when the buyer hires me as broker by signing a representation agreement, the buyer then receives a $3 rebate at the final closing table. A $5,000 start up fee would allow a $15,000 rebate to buyer at final closing table.
The State of Texas Real Estate Commission requires that I disclose that this is subject to agreement by represented parties.
In actual experience, most clients did not want the risk and decided that the broker should bear the risk and get a bigger contingent pay day.
Some clients have paid the startup fee and received the big rebate.
Most clients did not want the risk of Non-contingency and preferred to hire me to be paid based on a successful contingent event. They decide that the broker should bear the risk and get a bigger contingent pay day.
I have no preference of contingency or Non-contingency and I continue to be an excellent broker.
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