Sharing Risk with a Seller - Win/Win

 | 22 Comments

How many times have we taken a listing at a great (or not so great) commission rate, spent many hours getting the listing set up, taking classy pictures, adding a virtual tour, getting the sign, lock box and fancy color brochures and running repeating ads in the local print media only to have a listing sit on the market too long because the seller is reluctant to get competitive on price, becomes impatient and then fires us and finds another agent? All that expense (including your time) with absolutely no return. Also irritating is when the seller lists with the next agent at a price we were telling them to lower to in the first place!

As an agent we are taking all the risk in every transaction. With SmartPlan™, we can offer risk alternatives:

  • In the standard commission model the agent is taking all the risk.
  • If we were to be paid on time and materials (like a lawyer), the client takes all the risk
  • Sharing risk - an alternative approach used to get paid for what you do and at the same time share some risk with the seller:

How does the "Shared Risk Plan" work?

  1. I price all the up front agreed upon setup and marketing from my fee schedule, usually about 50% of the total cost of a listing. 
  2. Our listing agreement has a place for "retainer fee" to be paid up front and earned when paid (non-refundable). I use it to get an immediate check to pay for my time and expense for listing setup, about 10% of the total. If you don't like "Retainer Fee" then call it payment for "Listing Preparation."
  3. The marketing fee (about 40% of the total) is billed in equal installments over the first 60 days.
  4. We agree on a "success fee." This is the fee that is due at closing when the property sells. It can be an agreed upon fixed amount or a commission (the remaining 50% of the total fixed listing fee). Or, perhaps 50% of the standard list commision on sale price.
  5. We agree on a coop broker commission. This will vary depending on area and market conditions.
  6. Add all of the above together to obtain the total broker fee for the listing agreement.

The standard next question: Why would a client want to share risk? The answer is in the cost of risk:

If we think about in terms of insurance, higher risk equals higher premium!

What about the time value of your money? Think about the standard commission model as a loan to your client:

No loan? No interest. Lower cost.

So, what is the incentive for a client to agree to shared risk?

Fee paid as service is performed: costs less ... no risk premium, no loan interest.
Standard commission: costs more ... high risk premium, interest on the loan.

The cost spread can be whatever you set as a function of the value of being paid for the work you do when you do it. Usually in the 30% range, ie; cost of shared risk is 30% lower than standard commission. Remember time is money.

The advantage of this approach is obvious. Get paid for the services provided even if the seller cancels the listing agreement for whatever reason. Sellers tend to like it because it lowers the cost of the list side fee. There is one catch: If your marketing and service level does not stand out above the crowd, it will be hard to convince a seller to fork over the money to you up front when another agent's marketing and service does stand out and they will take all the financial risk. This is extremely important!

The seller gets superior service, you get paid and the seller receives more of their equity at close. The fee for service (or activity based pricing)  model is as flexible as your creativity

22 Comments

I really love the approach that Merv outlines because it makes for an easy transition from commission (all risk on agent) and fee (all risk on seller). The other thing that I like about this approach is that it's familiar to the consumer: this is similar to how you pay for a contractor, painter or other home service provider - some upfront to cover materials and some labor and the balance at the end when you approve the job done Lastly, this approach weds the seller to you - they're not going to likely fire you and hire someone else with no cause if they've already invested non-refundable money with you. It makes them much more likely to hone in on the real causes if their home doesn't sell. Thanks for sharing Merv - I agree that there are a ton of different ways to apply this concept! Mollie


Note: I originally posted this in 2007 and thought it was important enough to bring it up to date.


It continues to be an uphill battle for sellers to understand the fee for service model. Recently I presented the option to a seller who is tight on equity. They balked at paying anything upfront as a retainer fee as "all the other agents will take our listing for free." Even showing them the cost savings when their home sold didn't sway them. It reminded me once again how the word "free" in real estate makes consumers think they are getting the best deal.


Happy to see the creativity flowing. I've been operating a "Flexible Fee" schedule for several years. It is outcome dependent and can reward the seller with huge savings based upon their participation. I use an excel spreadsheet and have broken down all price ranges with 4 different levels of sale (outcome) ranging from a 6.0% commission to savings of up to 40%: MLS sale, In-Office sale, Listing Agent sale, and Hybrid FSBO sale. Seller saves the most money if they locate the buyer. Also, I charge a nominal upfront fee to participate in the program. The higher the upfront fee, the harder it is to compete with other agents (as Merv states) that have good marketing and exposure programs in place. The motivation for the seller to pay upfront is driven by the opportunity for potential savings. The best thing about the spreadsheet is that it is proprietary and can be tweeked at any time. Anyone interested in a copy of my fee schedule, please contact me by email.


Hi Randy, I think the spread sheet is a great ideal. Could you please email me a copy of your fee schedule. My email is phy911@gmail.com.

Thanks, Phyllis Herrington Spokane Wa


Randy, I would love to have a copy. Thank you for sharing. My email is carolinaproperties@ymail.com. Pat Watson


Hi Randy,

Could you also email me a copy of your spreadsheet? alacarterealestate@comcast.net

Thanks, Larry Thomas


Randy, please add me to the list, glenn@nucazza.com thanks in advance,

glenn


Be careful about sharing fee schedules. Don't want to be a kill-joy but Randy, you may want to white out the actual fees you charge - I don't want ACRE to get in trouble with the competition police.

While sharing how one might structure something is one thing - sharing actual fees is kind of counter productive IMHO. It's like prescription medicine - what works for you might not work at all for someone who's market is different.


Can he write SAMPLE ONLY, on the schedule?


Randy, I would love to see your spreadsheet -- even without the fees (as I'm sure my area is far different in price than yours) my email addy is cepetro1@gmail.com Thanks so much!


Randy,

I like your concept very much. Could I join the list of requesters to email me the spreadsheet. Thanks.

steffy@talktosteffy.com


I have a shared risk plan in my toolbox, a wonderful tool for seller education as well as a reminder to me of my value. I had one seller grab it up as it fit their needs, but most still choose the traditional plan. Last spring I was contacted by a seller wanting me to list their property to fulfill a mortgage holder’s requirement of a 60 day listing prior to deed in lieu. I appreciated the sellers blunt honesty, researched the property and mortgage, presented a shared risk “itemized” plan designed to fit this seller’s specific needs. Based on my first seller interview and subsequent research, I did not offer another plan. Sellers declined shared risk: other agents will do these items for free. I watched the property go on the market and then cancel after 52 days in favor of a deed in lieu (per broker comments). My heart smiled. ACRE: thanks for the mind set and access to the tools.


I think the shared risk plan will weed out the people who will waste our time.


Hi Randy,

Please send me your spread sheet to ronbrown@q.com.

Thanks


Barabara, was that the SmartPlan you used?


Since there are so many requests for my spreadsheet, Mollie suggested I post it in the Library. Unfortunately, because it is a spread sheet, my formulas will accompany. Please note that I am not suggesting the actual fees per my schedule, but the formulas that can help you establish your own fees for your marketplace. This is being submitted as a sample only and must be designed for your own use. It should be available shortly.


FLexible Fee Schedule successfully published in Library under: Rates, Fees & Commissions.

As is with everything else I have researched, time "stopped" in 2011. Why? This is some good stuff, Merv.

Great question Mark.
All of this used to be under the ACRE Exchange (forum) umbrella. I pulled it and created this site when Mollie handed the baton to Jennifer. Jennifer is great but she is not the evangelist Mollie was ... and she admits it.

I'm not actively marketing this as I have been focused more on my Web business.

You certainly are a breath of fresh air. Glad to see you poking around.
Merv

Please email spreadsheet

SoldByKeithS@gmail.com

Keith,
Thanks for your request. Spreadsheets are not free. Let me know if you would like to learn more.
Merv

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