The Raging Debate over Retainer Fees vs Paid at Closing in Real Estate

The raging debate over Retainer Fees vs Paid at Closing in Real Estate has sparked some heated fodder online recently. The existing business model most Real Estate Brokers employ is to defer compensation until closing at such time it is paid by the seller, via the Seller’s Listing Brokerage.    In order for consumers to understand why this topic is under discussion one must first understand how compensation works.

Real Estate Agents, under State law, must be  employed by Real Estate Brokers.  They are however “Independent Contractors”, working under the supervision of a Principal Broker. Meaning: they set their own hours, pay their own fees to the local Real Estate Boards, pay for their own advertising, cell phones and transportation and taxes.   In short, operate a small business within a larger business brokerage. 

Deferred payment or compensation payable at closing was designed to be a convenience to the parties involved and to simplify how the compensation was disbursed.  If you read the fine print, in most states what a consumer is paying a Real Estate professional for is to coordinate a transaction between a seller of Real Property and a Buyers of Real Property.  In other words find a Ready, Willing and Able buyer and prepare a Purchase Agreement, specific to the Real Property the seller is selling.  Sounds simple right? Used to be.

Then came the Short Sale.

The entire Real Estate Industry fell under enormous pressure five years ago, when the housing market collapsed which was fueled by the mortgage meltdown, which triggered an avalanche of distressed properties, and loan defaults not seen in this country since the Great Depression back in 1929.  

As a result, banks and other lenders created a stop gap between defaulting property owners and foreclosure. This was the introduction or birthing period of the “Short Sale”.  In a Short Sale, the lender must consider agreeing to take less than a borrower owed against a property (which has depreciated in value ), and due to financial hardship the borrower has suffered which is directly impairing their ability to repay the loan against it. In other words, they owe more than it is worth, and cannot continue to make mortgage payments.

By Lenders inserting themselves directly into the Business of Real Estate (By not only controlling the money flow for home loans, and the subsequent foreclosure filings, but needing to obtain third party approval to accept less than was owed by investors, and mortgage insurance companies, compounded by  the sheer volume of unprecedented loan defaults, the process of buying or selling a  home in default, became a lengthy one.

So, no longer was the process of a “Meeting of the Minds” a simple one.  Transactions between Property Sellers and Property Buyers transitioned from 30-45 days (before the mortgage meltdown) to 180 days or longer ( in the midst of the unfolding crisis)  Leaving the Real Estate Professionals lingering unpaid in the process, and often having to re-sell the properties more than once; without compensation as frustrated buyers walked away from closing tables throughout the U.S.  A typical short sale transaction often experienced as many as 3 failed deals before it closed.  Three times the work, for 1/2 the pay, as commission is based on the sales price. At the peak of the market there an estimated 3 million active Real Estate Agents. Today, just over 1/3 still remain in business. (Approximately 1.4 million)  It is no surprise the exodus from Real Estate Agents was forced due to the turn in economic conditions.

New regulations were needed and subsequently imposed to streamline the time lines which lenders were required to respond by.  The ripple effect had indeed rocked the Real Estate Agents boats.   Real Estate Brokers were impacted largely too.  The sustained expenses of running a traditional Brick and Mortar Office, skyrocketed.

In addition to the cost of  rent for office space,  Insurance, phones; the cost of office supplies, and gas doubled and tripled in some cases when the Brokerage had to re-sell distressed properties repeatedly after a deal collapsed.  All without compensation.

Business models of large franchises are designed on a  pyramid platform. A Principal Broker being the pinnacle, and layers and layers of agents working deals to support the platform as a whole.  In boom times, the more agents would produced sales the higher their ranking was and the more favorable the compensation package from the Principal Broker would be.  That was the incentive to “perform”.  By 2007 however, nothing was selling.

The pressure on Real Estate Brokerages across the board from largest to smallest was universal.  Many large Franchises closed operations in distressed communities, leaving agents to scramble to find new Brokers or pursue other fields to feed their families.

The lack of cash flow, meant trying to sustain a tradition Brick and Mortar Real Estate Office; was implausible for many.  That compounded with the surge in Internet based information has forced many Real Estate Brokerages to alter from traditional business models to ones which generate revenue more efficiently since the process has so drastically changed.

Even though time frames imposed on lenders selling distressed properties have significantly been streamlined, the delays in new loan approvals have proportionately  increased.  Taking buyers  longer to obtain loan approval, and pressured by a rise in minimum credit scores.  These adjustments to the way Real Estate now changes hands offer little relief to beleaguered Real Estate agents who are still working twice as hard for half as much as they did when the economy was better.  As a result, some Real Estate Brokerages are considering a “Retainer Fee” as a way of offsetting running expenses and eliminating prospects who drain their resources fruitlessly. Like chauffeured window shoppers .  If you were seriously considering buying a property would you pay a retainer to the Buyers Agent Brokerage? (Credited at closing of course)