ProOffer.com ties commissions to performance
Consumers can offer incentives for beating price targets
By Matt Carter, Tuesday, July 22, 2008.Bookmarking Sites
ProOffer.com screenshot.A new Web site promises to connect home buyers and sellers with real estate agents willing to work under a "pay for performance" model that rewards them for obtaining the best price for their clients -- or penalizes them if they fail.
While other Web sites let agents compete for clients by negotiating discounted commission rates and rebates, ProOffer.com adds another twist: optional incentive bonuses that kick in when an agent closes a sale that beats an agreed-upon "trigger price" or time deadline.
If a home is expected to sell for around $1 million, for example, an agent might offer to represent the seller for a base commission of 2 percent of any proceeds up to a $950,000 trigger price, plus a 20 percent cut above that target.
If the home sells for only $900,000, the agent stands to earn $18,000, compared with $27,000 under a traditional 50-50 split of a 6 percent commission. But if the home sells for $1.1 million, the seller would pay their agent $49,000 in commissions -- $16,000 more than a traditional commission.
Sites like HungryAgents.com and RealtyBaron.com allow real estate agents to bid for sellers' business by lowering their commission rates.
"We think this will actually have a net positive effect on agent commissions," said Karim Tahawi, founder and chief executive officer of ProOffer.com.
Tahawi said sellers can also come out ahead. Even after paying out additional incentive-based commissions, the seller in the hypothetical example above has $134,000 in sale proceeds they might not have realized with an agent whose primary motivation is to sell a property quickly.
"The proposition is pretty straightforward for clients," Tahawi said. Although ProOffer.com can also facilitate agreements based on traditional commission structures, with a two-part, incentive-based commission structure, "For the first time, I'm paying for something that's worth something to me. I'm paying $1 to get $10 back."
The incentive structure works the other way around when agents offer to represent buyers through the site, with bonuses kicking in below a trigger price that would typically be connected to a property's list price, Tahawi said.
If the base commission is set at 2 percent, agents who represent buyers are essentially earning back commission refunds when they negotiate a more favorable price for their clients, up to the full seller side payout of 3 percent.
Sellers looking for a quick sale may also choose to offer incentives to close a deal within a specified time frame -- 60 days, for example -- either on top of other bonuses or as a standalone, Tahawi said.
"They might commit ... to an agreement that pays 6.5 percent (total commissions) if a property sells within 60 days for $900,000" or more. If the agent can't close the deal within that time frame, the agreement might pay 5.5 percent in commissions if the property is sold before the listing agreement expires.
That incentive system should prove attractive to home builders who are trying to make inroads in reducing large inventories of unsold homes, Tahawi said.
ProOffer.com went public Friday in "alpha" test mode. But Tahawi said home builders, banks and others "sitting on real estate inventory" have been getting private showings.
"They really like it, because for them it's driven by the numbers," Tahawi said. "They are paying for an outcome rather than a promise of an outcome."
For ProOffer.com to work for consumers, agents will have to embrace the site and provide multiple offers for buyers and sellers to consider, Tahawi acknowledged.
"The trigger pricing for sellers, particularly, requires market competition to get a fair price" and prevent agents from gaming the system, Tahawi said. If, for example, only one agent responded to a request by a seller for representation on a $1 million property and tried to set a trigger price of $800,000, that would not be a good deal for the seller.
To encourage participation, ProOffer.com lets anyone submit commission proposals to buyers and sellers looking for real estate agents. For the moment the site is free, but it will probably evolve to a system where winning agents pay a "success fee" when they land a client, Tahawi said. ProOffer.com may also institute a nominal participation fee to keep spammers off the site, he said.
"If there are no barriers to entry from the real estate agent's perspective, clients may get hammered with proposals," Tahawi said. "We don't want each client to have to look at 50 proposals."
With enough experienced agents and brokers using ProOffer.com, Tahawi said, consumers should benefit from the collective wisdom of the crowd, helping sellers price and sell their homes and buyers negotiate the best deal.
The wisdom of the crowd is also the guiding principal behind home valuations site HomePredict.com, another project of Tahawi's San Francisco-based company, My Currency Co.
When the site launched last year, Tahawi -- a former commodities trader who was vice chairman of San Francisco's Pacific Exchange -- hoped it would be better at property valuations than automated models that rely on public records, comparable sales and other statistics (see story).
Tahawi said that although HomePredict.com has drawn real estate investors and others, it hasn't attracted real estate agents in the numbers he'd hoped to see.
"The traffic is OK, but not exactly what we'd wanted," Tahawi said. "It was pretty clear to us we needed to make the incentives strong to get the professional participation. We created ProOffer.com as a response to that."
While both sites could provide user data to strengthen HomePredict.com's valuations, ProOffer.com "is its own standalone site," Tahawi said.
While ProOffer.com must attract users to reach critical mass, the agreements it's designed to facilitate may not be legal in all states. Rules on commissions vary by state and incentive payments may not be allowed.
"There are several states where there are going to be some issues," Tahawi said. "We're facilitating the customer businesses, and expect agents (will know the rules) in their markets."
From a consumer's perspective, the commission structure an agent offers should be only one factor in choosing representation, Tahawi said.
ProOffer.com recommends that consumers interview at least five real estate agents, verifying that they are licensed and experienced in their market and checking references.
"The reality is, it doesn't make sense to choose the cheapest (agent), but the one who creates the most value for you," Tahawi said. "This allows you to uncover who's putting themselves out there the most for you."
Agents can create profiles and upload properties they've represented to help prospective clients find and evaluate experienced agents. In the future, ProOffer.com plans to give agents the ability to bring in content they've created at other sites such as blog posts, LinkedIn profiles or Facebook pages, providing consumers with "a rich fabric to draw opinions from," Tahawi said.
"It's not like you will push a button and say, 'You're hired,' " he said. "There will be an interview process and some due diligence on both sides."
***
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Submitted by Rob Aubrey on July 22, 2008 - 5:08am.
It resembles a net listing agreement. Net listings are typically illegal in most states. The idea that if an offer came in below a certain price an agent may be tempted not to work so hard to see it through.
What if two offers came in at a $1,000 apart, one would generate $27,000 GCI and the other $17,980. The seller would want the second offer because it nets them more the agent would want the first one because it nets them. It takes the focus in the wrong direction.
Submitted by Kenneth Lampton on July 22, 2008 - 5:46am.
The thinking behind this web site displays a lamentable lack of understanding of the real estate sales process. In most cases the price a seller gets for a house is 95% the result of competition in the market and 5% the result of actions taken by his agent. Appropriate pricing, based on a knowledge of the local market, is the key to selling a home reasonably quickly for the most money.
This ProOffer scheme invites agents to be con artists instead of fiduciaries.
I'm sure the Texas Real Estate Commission ( I sell in Dallas) would consider these "performance based" listing agreements to be "net listings." It would be a shame for an agent to have his license suspended for signing up sellers on these types of agreements.
Submitted by RealEstateCafe on July 22, 2008 - 6:17am.
Nearly two years after it's publication, glad to see an bold new business model based on some of the recommendations in this AEI-Brookings journal article: "A Critical Assessment of the Standard, Traditional Residential Real Estate Broker Commission Rate Structure,"
Before you dismiss Mark Nadel's work as anti-Realtor, consider this pull quote from the Inman article above:
Inman: October 11, 2006
Real estate fees inflated by $30 billion
http://tinyurl.com/69b9bs
"Nadel said that experienced real estate brokers may actually stand to gain income over traditional commission rates by charging a fixed rate or hourly rate for services. "Some brokers are, I have no doubt, worth $500 or more per hour -- comparable to the best lawyers, the best accountants," he said."
Anyone want to TweetUp at ConnectSF to talk about fee-for-service business models? Direct message or follow me at http://twitter.com/RealEstateCafe
Bill Wendel
The Real Estate Cafe
Serving a menu of money-saving services for "do-it-yourself" homebuyers & FSBOs since 1995
617-661-4046
Cambridge, MA 02138
realestatecafe@gmail.com
http://realestatecafe.blogs.com
Submitted by Karim Tahawi on July 22, 2008 - 9:30am.
Hi There,
Karim here, CEO of the company that has created ProOffer.
Thanks for coverage Matt and the opportunity to engage with the real estate community. And tank you all for the thoughtful comments.
Regarding whether our system promotes "net listing" as it applies to seller, it is absolutely not because the home seller is keeping most of the money above the "trigger price". Example: If the trigger price is $200k, the incentive is 20%, and the property is sold for $220k then the client is keeping 80% of the money, or $16k of the $20k in price lift, whereas in a "net listing" the broker/agent keeps all of the 20k. Additionally, the agent is getting a "base" commission that is applicable below the "trigger price". The agent is just sharing some fraction of the increased value.
PricePerform also applies to home buyers and agents rebating commissions (for now).
Regarding the point that 95% of price is determined by competition and not agent skill, the model is designed specifically to leverage your point - this is, the contribution of agents at the margin. Our goal is to align more of the financial incentives around that last 5% (or whatever you think your net contribution is) of performance. Remember that even a 5% variation around a $500k price is $50k difference to a client. That is real money.
We are open to rolling out other commission models so please feel free to contact me directly to discuss.
Thanks and I will be at RE Barcamp and Inman this week if you would like to chat some more.
Best wishes,
Karim Tahawi
CEO, My Currency Co.
karim [at] my-currency {dot} com
twitter: ktahawi
Submitted by Sara MacLennan on July 22, 2008 - 10:43am.
The problem, as pointed out by Rob, is that with this model there are many cases where the seller is better off taking a lower offer. What happens in a multiple offer situation? The buyer with the lowest offer might win?
___________________________
Sara MacLennan
REALTOR®
Coldwell Banker Johnston
www.teamjohnston.com
www.EdmontonRealEstateBlog.com
Phone (780) 486 - 8655
Fax (780) 486 - 8654
Toll Free 1 888 EDM RELO
17803 Stony Plain Road, Edmonton, Alberta, T5
Submitted by Lenn Harley on July 22, 2008 - 11:34am.
At first this model resembled a "net listing", but on further reading, it appears to be no more than a complicated negotiating model.
We have had "graduated commissions" in MD/DC for years, primarily used in the Southern MD counties whereby the commission varies, i.e.,
2% on first $100K
1.5% on next $100K
1% on all over $200K and many variations.
That model died after many years.
My impression of the model in this article is that it's a tad complicated. Anytime a commission structure affects the price, market value may be ignored. Buyers and sellers often focus on how much the agent is making rather than the job that the agent is doing for them.
Lenn Harley
Broker, Homefinders.com
http://www.homefinders.com
Submitted by Craig Davidenko on July 22, 2008 - 11:54am.
The real estate business today and forever more will be based on a flat rate commission model. The only way for the agent or broker to earn a percentage commission will be when they bring the buyer to the table. The fact that there are still brokers out there hanging on to percentage listings shows that they are holding on for dear life or life as they knew it. Flat Rate Real Estate is the platform that everyone will have to adapt to.
http://flatraterealestate.com
Submitted by Sol Sek on July 22, 2008 - 4:46pm.
Thank you Karim for helping to make the performance based model
Closer to reality. This is not a new concept for the real estate industry
By any means. We have been testing this model using agents in several states
for several years now. This model somewhat resembles our “Name Your House Values” business concept available at Forsalebyweb.com. Yet, we took the “idea” one step further By incorporating a proprietary process of marketing that has been used by investors and agents since 1999.
There’s much to learn and holes you will find as you further develop the business model. My company has also integrated this using the flat fee concept as well.
Rob, this is not a net listing as there is no fixed/net price on output. The commission is fully adjustable based on performance. The focus is on performance and not on promise. At the end of the day, the agent or company that delivers best on performance wins. Any company can make a promise to obtain a listing or to represent a buyer, yet only a performance based model forces the agent to work hard and penalizes the agent for price inflation, poor marketing and false promises.
Kenneth, although 5% of the result is determined by the agent, it remains the key to getting the house sold. How is this any less valuable than the services offered by agents today? The value of any agent is based on his performance…that’s really what this model is about. The old days it was based on promises, the new market will be based on performance. The consumers can decide before they enter into a contract whereas today’s model headlocks consumers into a contract and creates bitterness when sales result in less than what the consumers expected. I like your comment about pricing being the key and agree it will remain so for the future. However, consumers should not have to pay through the nose when the result comes in less than promised as we see when agents take overpriced listings.
Bill Wendel, I emailed Mark Nadel about his remarkable assessment of the industry. He is right on about performance based modeling. The only flaw I saw in his report was about commission rebates. As the industry move forward, we are going to see many rebate companies change their models again. What will rebate companies do when everybody lists $1 co-broke fee in the mls? Better, what will they rebate?
The real issue to address is, how can real estate companies charge 5-10% when they don’t have 5-10% in equity to pay?
Lenn Harley, the concept is based on performance outcome where as today’s models are based on value projection. It truly is about what the agent is doing for the consumers because the focus is 100% on the performance and result. Perhaps there are hybrid models that can be developed for the performance based concept, but if I were the consumers I would want to pay for result over promise of service. I’d be interested in reviewing a better idea based on performance if you have any.
Craig Davidenko, your comment is right on. Our studies show that no agent, no performance based model can sell a house if the house has no equity to pay the agent.
We, too, have been working on the solution to the real problem faced in today’s market. LACK OF EQUITY to pay commission. I don’t think for sale by owner is the solution, not now, not in the future but sales will not happen without equity.
Karim, again, congratulations for helping to bring better understanding and joining the community of performance based agency as outlined by Mark Nader. I really like your my-currency.com concept and went as far as making a post on the site about a year or two ago. Unfortunately, it was never posted.
This is far from being a "new" concept. Yet, I agree we all have to invent "new" ways to tackle today's problem. Lack of equity.
Sol P. Sek
CEO/Founder, Forsalebyweb.com
Where You Name Your House Values!
Submitted by Craig Davidenko on July 22, 2008 - 7:21pm.
Sol,You are spot on as well!Thanks for your comments. All aspects of todays real estate market point to flat rate. The mortgage companies are doing it. The cell phone companies are doing it. The cable companies are doing it. Every viable business today is doing it.
With the flat rate plan the seller pays a flat rate to list on the MLS ( equivalent to maybe 3 or 4 weekend ads in the local news paper ) If a broker brings the buyer to the table the seller pays an agreed upon commission. If the seller finds the buyer they pay nothing more. The seller gets to have their cake and eat it too! The fact that most homes will not appraise means that agents and brokers alike have to come to grips that percentage listings are a thing of the past.
http://flatraterealestate.com
Submitted by Sol Sek on July 22, 2008 - 7:57pm.
Thank you Craig. The bottom line is it's not the consumers' responsibility to come up with a model that profits agents or to get properties sold. They simply want to pay the least commission with maximized result.
Great service is no long what consumers are looking for, it is what every consumer expects regardless of the commission model used. If the value isn't there you can be certain the consumers will seek hybrid offerings.
It appears everybody is reactiving to Karim's model out of fear, when a close look at his product shows the real focus is lead generation. Performance based output is merely an option that consumers can choose/request from agents using his agent referral website.
Sol P. Sek
CEO/Founder, Forsalebyweb.com
Where You Name Your House Values!
Submitted by NYC Mom on July 23, 2008 - 11:50am.
Hiya,
I stumbled up to this conversation. I am a thinking of moving out of th city (SF) and am looking at real estate commissions. From a home buyer and home sellers perspective, let me say I love this proposition. The narrative among everyone I know is that agents are overpaid here - does it really make sense for a seller to pay $100k commission or more? Well, I guess the REAL answer is MAYBE, YES. This new commission model, if I grasp it correctly, is where the rubber meets the road because it clearly links that last bit of contribution, that makes the most difference to me, to compensation. If an agent can add dollars to my piggy bank then they deserve a cut - whether that is a net 1% or a net 20%. Why stick to some arbitrary commission? Set it free and maybe we all win. Look for me on prooffer very soon.
Submitted by Karim Tahawi on July 23, 2008 - 4:34pm.
Thank you all for the comments. We have received a lot of support, online and off, over the last few days. Let me know if you would like to see other models added :)
Cheers,
Karim
Submitted by Sol Sek on July 23, 2008 - 7:06pm.
NYC,
Exactly! Consumers want to have some form of measurement stick. People would rather pay 20% of the incremental result than 5-7% when the result comes in less than promised.
It some way it's like bringing transparency to the commission game. Both sides see, understand and agree
from start to finish.
Sol P. Sek
CEO/Founder, Forsalebyweb.com
Where You Name Your House Values!
Submitted by Karim Tahawi on July 24, 2008 - 5:06pm.
Based upon recent recent feedback from a very thoughtful agent, I would like to emphasize the three objectives of ProOffer:
- Our first objective is about offering 'pricing variation'. To understand what I mean, lets look at an analogy. Everyday, people walk around using 'price signals' to understand things such as quantity and quality. Think about sporting events and the way different sections are priced. Or banking where there is everyday services, premium services, and private client services. Price signals are embedded in how we differentiate products and services. The problem we see in real estate is that most agents price their services the same regardless of quality. So the here is the point: *** the price signal is saying to everyone that ALL real estate agents are the same***. We all know that is not true. Our goal is to take this assumption on and help agents achieve pricing power that signals to clients their capabilites.
- Our second objective is about aligning financial incentives. That is, we want clients to define their needs and to be able to structure a commission model that is suitable to mutual objectives. We think this is the easiest path to finding and paying the agents that are talented. Because most home buyer and home sellers are motivated by price, we created some initial price solutions called PricePerform. Additionally, because sellers are increasingly motivated by timing, we also created TimePerform to align objectives around getting a quick close.
Our third objective is to make it easier for clients and professionals to meet so that each side can have more time to focus on whats really important - transacting.
Hope that helps.
Submitted by Steven Sheinfield on July 30, 2008 - 6:07pm.
I think this makes all the sense in the world. This makes want to hire an agent and worry much less about if that agent is doing the right thing. They will have to to get paid. All the nightmare stories my friends have told me are born of incentive problems IMHO. Sign me up!