RLPP Ep 38: Fee Model Opportunities for Real Estate Agents with Dave Rowan

In Episode 38, I speak with Dave Rowan, CFP®, MBA, about the changes shaking up how REALTORS® get paid and what it means for buyers, sellers, and agents alike. Learn how these shifts could impact your next real estate transaction and discover potential innovative ways real estate agents are adapting to thrive in this evolving industry.

"This whole thing may seem like a challenge for REALTORS®, but it also presents some really interesting opportunities to rethink how they serve their clients." - Dave Rowan

This week on Real Life Planning Podcast:

Takeaway Quotes:

"If you have efficient buyers doing a lot of self-service, DIY stuff, paying an hourly fee can work really well as a fair and transparent compensation model.” - Dave Rowan

"We’re a little bit worried that first-time buyers, who really need someone to walk them through the process, may try and go it alone, which would actually be pretty dangerous.” - Cynthia Meyer

"When you can run fast, inexpensive experiments to try different ways of serving clients and marketing to them, you're probably well served in this kind of environment." -Dave Rowan

"A real estate agent is a fiduciary in the transaction.  They have to be a fiduciary for their buyers or their sellers in the transaction” - Cynthia Meyer

Connect with Dave Rowan:

• Dave Rowan on Facebook
• Dave Rowan on LinkedIn
• Dave Rowan on Instagram
• Dave Rowan on YouTube
• Email: info@rowanfinancial.com 
• https://www.rowanfinancial.com

Connect with Cynthia Meyer:

• Cynthia Meyer on Youtube
• Cynthia Meyer on Facebook 
• Cynthia Meyer on LinkedIn 
• Cynthia Meyer on X (Twitter) 
• Cynthia Meyer on Instagram
• Cynthia Meyer on Pinterest
• Email: cynthia@reallifeplanning.com  

About the Real Life Planning Podcast

Host Cynthia Meyer explores practical steps for real estate investors to build financial freedom and make working for someone else optional.

TRANSCRIPT for Episode 38

[00:00:06] Cynthia Meyer: There have been some really interesting things happening in the real estate agent space and profession and Dave and I were talking about them this morning. We decided we want to record our conversation because what's happening with REALTORS® and real estate agents is happened in a similar way. There was a big change in how financial advisors get paid and so we thought we'd record this and put it out there and see what everyone thinks.

[00:00:36] Dave Rowan: Yeah, so Cynthia I'm really glad we're doing this because, it's probably a decades rare event in the way that houses will be bought and sold and in terms of how- not only REALTORS® will be compensated, but also in terms of how buyers will look for and evaluate REALTORS®, as well.

[00:00:56] Cynthia Meyer: So, (Why do we think real estate agent income models will change? ) for everyone who is watching or listening, just to give you some context, there have been some recent legal decisions in a settlement with the National Association of REALTORS® and a lawsuit initiated by some folks that have decoupled the commissions or fees that home sellers pay to sell their home and home buyers pay to buy the home that's being sold and traditionally the seller paid everything.

[00:01:29] Dave Rowan: Yeah, that was the tradition and, again, correct me if I'm wrong, Cynthia, but I think that the deal was basically it was almost like a semi price fixing arrangement where the seller would post that, "Hey, with this listing, the buyer's agent will get the 3 percent commission."

[00:01:45] And so it was just this unwritten rule of roughly a 3 percent commission that would go to the buyer and roughly a 3 percent that would go to the seller. 

[00:01:53] Cynthia Meyer: So that was the industry standard. That was the recommended compensation. Now, of course, the commissions have always been negotiable. Individual home sellers, for example, have been able to negotiate with their real estate agent. This standard practice that was baked into a lot of standard contracts, the seller would choose 6%, 8%, whatever, and that would be split equally between the buyer and the seller's agent. The price that the buyer paid was reflective of that commission that was getting split to the seller's agent and the buyer's agent and that was like baked into the price of the property.

[00:02:29] Consequently, the property had to appraise, for example, at that price that it was being sold at and therefore it was easier for the buyer if they didn't necessarily have to bring that commission to the table. It was going to be baked into their whole financing structure. They weren't actually going to necessarily have to pay that commission at closing.

[00:02:49] Dave Rowan: Yeah, and it's really interesting.

[00:02:51] It's well, how can this be? We're here in the United States and competition should exist. I guess probably the single biggest driver is access to the MLS and if you don't have access to the MLS, it's very difficult to list and sell homes. Given that REALTORS® are the only ones that have access to that system, it really enabled this decades long process to exist, right?

[00:03:17] Cynthia Meyer: Yeah, that's the MLS for people who are watching. That's the Multiple Listing Service. I think is the full name for it, but that's right.

[00:03:25] Being a real estate agent is a profession with standards of ethics and conduct. There, I guess, about 1. 5 million real estate agents in the United States. So it's a large profession; very knowledgeable and like any professional, they deserve to get paid.

[00:03:42] We have some ideas that we prompted us to record this conversation on how the industry might react to this decoupling of the buyers and sellers commissions.

[00:03:53] Dave Rowan: Yeah, and (Will this affect who real estate agents serve?) it's interesting to think about it from the realtor's perspective and also who they choose to serve. If you go into a relationship and that you're going to get 3% no matter what, it may suggest that you focus on one type of buyer versus another. For example, a buyer who is a self serve client, they're on Zillow or Redfin or somewhere else looking at listings proactively themselves and you're just helping them sift through that data and process, maybe taking them a few places. Versus, conversely, and you alluded to this prior to us recording this Cynthia, which is first time buyers may take more time. And so, that could be problematic during this shift until it sorts itself out, right?

[00:04:44] Cynthia Meyer: We're thinking about these first time buyers in particular, and is there a compensation structure that would incentivize the agent, but also take care of the needs of the buyer at the same time? Because we're a little bit worried that the first time buyer who really needs somebody to walk them through the process, who doesn't understand the home buying process. What the inspection process, making an offer, the legal ramifications of that, the financing process, what closing is, what you have to bring to the table for closing all of those complicated questions. 

[00:05:22] If they may not have the cash to bring to a closing, particularly if they're a lower down payment client and they may not have that cash to bring to the table right before it could have it was that amount would have been rolled into the selling class. Or they may try and go it alone, which would actually be, I think, pretty dangerous. This is a legal contract for something that's typically worth hundreds of thousands of dollars.

[00:05:47] You don't want to mess this up. You need- somebody generally needs professional help if they're doing it for the first time. So anyway, (What is a fee for service model?) we want to propose something to the real estate agent community that we do in our respective firms which is called a fee for service model. And a couple of different ways that this might look and Dave, jump in and add your 2 cents at any time.

[00:06:14] So the idea that a buyer would be contracting with a real estate agent to a preset menu of services, right? So it could be- maybe they pay a subscription fee. My clients pay me a monthly subscription, an annual retainer broken up into monthly installments that is going to account for a certain amount of time or meetings to go look at houses for client education ,for walking them through the mortgage process, for example. Be a flat fee for guiding them through the process of making an offer and negotiation with the other side and then participating all the way through the closing process. And maybe that could be negotiable, right? If the seller was really trying to incentivize the selling of the house, they could offer to pay that fee at closing, for example.

[00:07:01] So a fee for service model where it's not a commission, it's a flat amount and agents could feel free to negotiate whatever that amount is given the level of customer service that they provide. 

[00:07:13] Dave Rowan: Yeah, that's a great model and I think it's really, revolutionized the financial planning industry, because what Cynthia and I have found, particularly in working with real estate clients, is they're not always interested in the traditional model that's existed in the financial services industry. Hey, you have assets that you'd like managed and we'll go ahead and charge you a fee to do so and then all of the financial planning services come along for the ride there. The subscription model works really well when someone either doesn't have the assets, say, they're new in their career, or is handling it some other way. It's all tied up in a 401k, whatever the case is and so subscription works really well. Another, and this is as simple as it gets, and hasn't existed among REALTORS® as a fee structure, but hourly can also work well. It's a great equalizer in terms of, if you have very efficient buyers, who are again, doing a lot of self service DIY stuff and just need you periodically. They take up a number of hours versus if you have new buyers or people who are maybe not terribly serious, but want to go around and look at some things.

[00:08:22] That's fine, it's the same rate. Even this conversation, it's really interesting because Cynthia and I are collaborating on a few coaching programs targeted at groups. This may even open up group programs for first time buyers where you bring 30, 40, right? 30 or 40 or 50 people in. Hey, here's what to look for. Here's how to look at homes. Here's when it makes sense to engage a REALTOR®. Here's why it's not a good idea to do this on your own. I think that this whole thing is very symptomatic of, or indicative of- on the surface, it's this very terrible thing for REALTORS®. I get that. We get that totally and I'm guessing some will probably leave, but it also presents some really interesting opportunities, right?

[00:09:10] Cynthia Meyer: Yes. Yes. A real estate agent is a fiduciary in the transaction, right? They have to be a fiduciary for their buyers or their sellers in the transaction.

[00:09:19] And so I could see this being very complementary to the long term goals of how they represent buyers and sellers.

[00:09:28] Dave Rowan: Yeah, and that's it. I think that we're just scratching the surface here of how this will play out, but I think that in any industry as circumstances and rules and other things change, REALTORS® and other professionals who can continue to add value to their clients, will do well. 

[00:09:49] Cynthia Meyer: So just tangentially thinking about let's take to 2 different additional groups, one is the real estate investor and the other is the luxury home buyer or the luxury seller.

[00:10:00] (How could real estate agents work with investors now?) First on the real estate investor side, I think there's absolutely a market for some kind of flat fee service where the real estate agent is helping the investor client evaluate deals; maybe seeing a property on their behalf if they're an out of state investor. Walking them through the offer mechanics as is typical and participating in the closing. Helping them through all the legal process of buying or selling a property. And a real estate agent who is really savvy about real estate investing and understands what the real estate business owner is looking for in a transaction, which is a totally different ballgame than what a homebuyer is looking for.

[00:10:42] So it really create a specialty niche around that in which they were paid well to work with that clientele. 

[00:10:49] Dave Rowan: Yeah, and, there's also even (How could real estate agents use a blended fee approach?) talking about luxury buyers, there's also blended approaches as well, where if you're a realtor, you may say, okay, I have a 2000 dollar minimum, I'm just picking a number.

[00:11:04] It's not a right or wrong number, but let's just say it's 200,000 or 3,000, whatever it is. And you may then say, though, if the sales price, let's just say, see if it's 3000 exceeds $300,000, you may then charge a percentage above and beyond that because it's a more valuable transaction and there's more at stake for the buyer.

[00:11:29] And so you can even do a blended approach as well, where you cover your flat fee, but then for larger homes you may tack on to that. 

[00:11:37] Cynthia Meyer: Or if like many luxury properties, there's a level of marketing that the real estate agent puts into the transaction which is typically above and beyond what goes into selling, just an entry level single family home.

[00:11:51] So they may be creating custom websites. They may be videoing the property, doing a video commercial for the property. They might be spending $80,000 of their own money to improve it or to stage it or whatever. Again, that for the seller can still, under the current- the new system, which is yet like the rules aren't completely written yet, could still cover that in a commission based fee, but it might be worth it to explore some kind of flat fee packages.

[00:12:20] Dave Rowan: I think you're on to something really interesting, which is also a la carte services. 

[00:12:27] Cynthia Meyer: Yeah. 

[00:12:27] Dave Rowan: It's here's the baseline package, but then that's it. If you want help with advertising or materials or staging is interesting and rolling that into something that REALTORS® do. 

[00:12:40] REALTORS®. I have no knack for that whatsoever. REALTORS® look at homes all day long and see what they appraise for and what makes sense and doesn't. And so, really fascinating to think about how this could play out.

[00:12:52] Cynthia Meyer: Yeah, and so, of course, here we are as financial planners who work with real estate investors and we're coaching people to create multiple sources of income for themselves.

[00:13:02] So, this is armchair, if you will, but I'm guessing and tell me what you know about this, Dave, I'm guessing that this may require not just national standards, but this may require some state by state changes, right? Because our- I think this is all regulated in the state level, isn't it?

[00:13:18] Dave Rowan: It is. It is absolutely. And it will because again, and you said this both during this and also in a prior conversation, I think we're both of the mind that in particular, first time buyers need to be protected here in this process. And so, I'm sure safeguards and rules will be put in place to govern some of what can and can't happen situationally.

[00:13:40] Cynthia Meyer: (What is the opportunity now for real estate agents?) For all of our real estate agent friends and colleagues and clients that we have, buckle up. There are some changes coming. Look at it just like a recession is an opportunity. Look at this as an opportunity to put yourself ahead of the game and create a structure that creates wins for you and wins for your clients.

[00:14:01] Dave Rowan: Yeah, and I think that the other piece of it is and Cynthia and I do this often in our practices. This is going to be a very quickly evolving situation. So, it may require some experimentation, both to see what works for you personally, but also as these potentially new state and other rules get put in place and so when you can run fast, inexpensive experiments to try different ways of serving clients and marketing to them, you're probably well served in this kind of environment. 

[00:14:30] Cynthia Meyer: Dave, as always great conversation. I have a feeling we'll be revisiting this.

[00:14:35] Dave Rowan: Oh, I think so. Yep.

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