Every so often, I think it's worth reminding people about how real estate professionals get paid. It often bears on how we answer questions about clauses in our listing contracts, for instance, and reminds us that our field is often misunderstood.
Most clients have a vague idea that real estate salespersons are independent contractors. I suppose that, if they really thought about it, that would lead them to realize that we live on commissions, and those are earned only when transactions close. We have no salaries, no benefits, and no guaranteed payments for the work we do. Our listing agreements entitle us to get paid only when certain conditions are met, and must be in writing. Our buyer broker agreements, which many people are actually told by attorneys not to sign, are required in order for us to show property not listed by our own company, and are necessary documents in any claim for a commission.
Clients often request that certain clauses be removed, or ask why they are present. The answer is usually that we are trying to point out in advance when compensation is owed. One good example would be lease renewals. Owners often forget, once a tenant has been in place for a while, that a real estate agent was responsible for bringing him in. We can only get paid for the original term at the time of the lease signing, and then we bill again if and when the lease is renewed. Sometimes owners ask why we request a month's rent as a commission on a lease for one year or less. There, it's simple economics: it costs us more to put up and take down the sign, enter the listing into marketing channels, and complete the lease and paperwork than we can earn, if we're not careful. We don't control the negotiations, so it's not up to us to decide how long the lease should be. Therefore, we need to make sure that the minimum amount we receive will cover our expenses.
There should be another system to handle these issues. In NYC, for example, apartment tenants pay their own brokers 15% of the first year's rent at the time that the lease is signed. Other similar advisors, such as attorneys and investment bankers, receive retainers against future fees, when assisting commercial clients. Having us front all the costs and using our time without upfront compensation is an outdated model, and will probably change some day. The only reason it hasn't changed yet is akin to the old saying that Willie Sutton robbed banks because that's where the money was; owners and sellers pay commissions because they are receiving the cash at the closing or signing. If banks allowed buyers to finance the commissions in the mortgage amount, for instance, I think the system would change quickly. It makes sense that people should be paying their own professionals, and that they would be owed something for their time. It can't happen quickly enough for us!