Inverse Relationships in Realtor Commission & Compensation
I could write a thesis on Realtor Commission & Compensation. Check out The 10 Components of Realtor Compensation for a summary. In that analysis we learned that market conditions, buyer incentives and your marketing spend are part of Realtor compensation, but how are they related? In this analysis we deep dive into the inverse relationships between Realtor compensation and market conditions, buyer incentives and your marketing spend.
Let’s first look at market conditions. Is rowing a boat easier or harder in a tailwind? Easier of course! The tailwind is a condition, but it forms part of the compensation. You compensate Realtors for how much work they do and in a buyer’s market they’re doing a lot of work showing buyers a lot of options and need to be compensated accordingly. In a seller’s market the opposite is true. In a seller’s market they can do more deals in less time. There is an inverse relationship between the strength of the market and Realtor Compensation. The worse the market, the more you have to pay. The better the market, the less you have to pay. But don’t abuse it!
Buyer Incentives affect the Realtor the same way. Unlike market conditions, these are levers you control – push or pull them to affect demand for your homes. The better the monetary (price, discounts, free upgrades, etc) and non-monetary (reduced/delayed deposits, early permission to assign, etc) buyer incentives, the more likely the buyer is to buy. The Realtor works less and is less likely to share compensation. All of this means the Realtor requires less compensation. And the opposite is also true.
Money spent marketing and money invested in compensating Realtors are both investments to find buyers. There is an inverse relationship between them. We’ll assume for this analysis that the more you spend the more effective your marketing is. The more you spend on marketing results in stronger marketing campaigns. The more awareness and demand for your homes, the less Realtors have to do and the less they need to be compensated. The opposite is also true. Many developers save money on advertising because they see it as risky in that buyers might not come. But Realtors don’t earn a commission unless they bring a buyer.
You must consider market condition, buyer incentives and your marketing spend when designing your Realtor strategy or you might be over or under compensating your Realtor Partners.
For more information, please feel free to email me.
~ Cam Good