10 Components of Realtor Compensation
How to Nail it Every Time.
If I were to ask a room full of developers how they’re compensating REALTORS®, half the room would quote the commission they’re offering and half would quote commission and bonuses. The fact is you’re compensating REALTORS® 10 different ways in every transaction whether you know it or not.
So why not know it?
When you’re ready to talk REALTOR® compensation or REALTOR® strategies, have this list ready:
- Commission Rate. Commission Rates in Western Canada are relatively low. In Toronto and the U.S. commissions range from 3-7% of the purchase price. Here, industry standard commission for presales is 2.5575% of the first $100,000 of the purchase price and 1.1625% of the balance. They’re long, overly complicated numbers, seemingly intended to confuse, but for lack of a better idea that’s what most developers pay. If you want your commission to motivate a REALTOR® why not make it easy for them to calculate?
- Bonuses. Not all projects offer REALTOR® bonuses but most do. I could probably write an Insight about bonus strategies alone (let me know if you want me to) but I can cover the basic types here:
- Flat Rate Bonuses are usually a flat dollar amount per deal and basically intended to give REALTORS® extra motivation to work hard to promote a project for a limited time.
- Unit Type Bonuses offer higher bonuses for larger homes and smaller bonuses for smaller homes. This prevents paying proportionately more compensation on smaller homes than bigger ones.
- Supply Bonuses reflect a developer’s intention to promote one home or group of homes over others, usually because of excess supply. Bonuses are higher on homes in great supply and lower on homes in great demand.
- Escalating Bonuses motivate a productive REALTOR® to be loyal to a project… to bring more and more buyers to one project rather than spreading them around different projects. These bonuses increase as the buyer does more and more deals.
- When to Pay. Developers want to pay later and REALTORS® want to get paid sooner. Cash rich developers can save money by paying less commission sooner and other developers must pay more to achieve the same amount of motivation if they want to pay later. Here are the most common options for timing of commission payments:
- A few developers advance 100% of the commission when the deal goes firm.
- Most developers advance 50% of the commission when a deal goes firm and pay the balance at completion.
- A few developers advance a portion of the commission when the deal goes firm, another portion when they hit the sales threshold for construction financing and the balance at completion.
- Very few advance 50% when they hit the sales threshold for construction financing and the balance at completion.
- A few developers pay all at completion; usually for projects under construction nearing completion.
- Commission Risk. Who bears the risk of the commission if the buyer does not complete? Most developers put the risk onto the REALTOR®’s brokerage. This is because the developer’s contractual relationship is primarily with the brokerage, not the REALTOR®. The other reason is the brokerage is likely not going anywhere whereas individual REALTORS® are more likely to move away or quit the business. More and more brokerages don’t forward presale commission advances to REALTORS® as they do not want to accept the liability to repay the commission to the developer if the deal fails to complete. If the REALTOR® is not going to get the commission from their brokerage, what’s the point in advancing it? Developers wanting to avoid the commission risk of non completion will have to offer more commission than developers willing to carry the risk themselves. In other words, the commission offered is either enhanced or depreciated by the risk component.
- Marketing & Sales Tools. Many developers overlook this one and expect REALTORS® to risk their own money developing marketing and sales tools and hosting events. The most sophisticated developers understand that money invested in events, cards, brochures, models, web sites and other tools provided to REALTORS® is money well spent. However, REALTORS® don’t get a regular paycheck and have enough risk to deal with. So if you provide them with personal marketing and sales tools that make selling your project easy you will get better results.
- Inventory Allocation. Of the non-monetary forms of compensation, this is the biggest. What is the point of an impressive commission rate or a fancy bonus system if a REALTOR® doesn’t get the home their client wants? In a seller’s market we spend hundreds upon hundreds of hours on home allocation to ensure every REALTOR® gets the inventory they need. Every hour spent on this earns the developer huge returns as the better the allocation process, the easier the homes are for the REALTORS® to find buyers for and the less they need to be compensated.
- REALTOR®’s Client Relationship. To truly understand REALTORS® is to know what they care about more than money. Their client! And what their client thinks of them. They want more than anything to maintain a good, long term relationship with their client. Anything you can do to elevate the buyer’s perception of their REALTOR® is money well spent. And it’s not even money! It’s service mostly. Making sure their client knows how important the REALTOR® is to you and the benefits the buyer receives by working with them.
- Purchase Incentives. A REALTOR® who buys into the building will likely bring 10X the number of buyers as a REALTOR® who doesn’t. This is especially true in high rise projects. It is therefore a wise investment to offer REALTORS® incentives to purchase themselves… things like discounts, free upgrades and reduced assignment fees.
- Brand Elevation. REALTORS® each have a brand. It’s what the market says about them – and it’s extremely valuable to them. In the way you’re working them you’re either elevating or depreciating their brand so it makes sense to be aware of it. Some ideas to elevate are to give them special treatment that sets them apart from other REALTORS® or to publicize and celebrate their performance on your project. The stronger their brand gets, the more clients they get and even their relationship with each of their clients gets stronger and more time efficient.
- Bespoke. When it comes to REALTOR® compensation, some developers waste hundreds of thousands of dollars putting square pegs in round holes; usually because they don’t know how each REALTOR® manages their business. At Key we work hard to know how each REALTOR® gets and keeps clients. This pays huge dividends to a developer when it comes to compensation. For example, if a REALTOR® shares their commission with their clients you need to know because it will affect your REALTOR® Compensation and Buyer Incentive strategies. Do they have referring agents like bankers, car dealers, immigration firm partners, mortgage brokers, etc? If so, their compensation needs to accommodate their business model.
For more information, please feel free to email me.
~ Cam Good