Do contingency fees make sense to the home seller?

Contingency feesOne of my favourite magazines – Real Estate Magazine – or REMonline.com, recently posted “Is it time for listing retainers?” Do contingency fees make sense to the home seller? My first thought was, “Are you serious. The public is never going to go for that. Home sellers already think the cost to sell their homes is too high.” But, as I am always saying, “Real estate in broken in Canada. It is time for a change.” Let’s look at the argument and see if it makes sense.

Not all listings sell
According to the article, three-quarters of the listing on MLS at any one time do not sell. That’s not right. I’ve looked a couple of times at the data, selling, sold, and expired/withdrawn and I’ve found that about 37%-39% don’t sell. That is still very high.
Real estate agents usually expect their listings to sell. Home sellers do too. However a large minority of houses listed on the MLS don’t. At least not the first time round. I’ll explain in a moment.

Why do houses not sell?
Houses don’t sell because:
1) The price is too high.
2) They have a fatal flaw or several flaws that get them eliminated from consideration
3) They are passed over for better houses
4) Poor agent communication/marketing
5) Seller makes it difficult
6) The market, the economy
7) Other. We just can’t say. Sometimes a neighbourhood can only sustain so many sales in a given season. Maybe the market for that style of house dries up. Perhaps three bedroom freehold townhouses are selling and three bedroom bungalows aren’t. We just don’t know.

Raw data
As I mentioned above, about 37% of houses listed on the MLS do not sell. That is raw data.
The minimum listing period is 60 days. Rather than extend the listing, most agents after 60 days, will re-list the property so that it appears as a new listing. That means the old MLS number shows that the house did not sell. Sometimes, home sellers will take a break and list later, or list again with a different agent at a new price (or the same price). The result is the same – a new MLS number. The old MLS number is “not sold”. The data is dubious. The house previously listed and not sold is re-listed, and maybe sold the second time round. This could happen a couple of times.
Frankly, I would guess that about 20% of houses listed on the MLS do not sell. That is just a guess. But houses don’t sell for the reasons above and then the sellers
1) Give up and stay put
2) Rent it out

About the MLS
The Multiple Listing Service was created by realtors for realtors. It is a place where all the data is stored. It is the be all and end all of selling your home. It is the place where more than 90% of home sales happen. If your home is not on the MLS, you’re missing out BIG TIME on potential buyers.

How we got here
In the olden days, the local real estate boards collected and distributed the data about homes on the market. The local real estate boards produced “hot sheets” that would be sent to the real estate brokerage at a certain time of day with the new listings from the day before. The boards also produced “the book” – a directory of everything on the market. It is hard to imagine isn’t it, but like phonebooks are mostly a memory now and newspapers and radio will soon be as old fashioned as horse and buggy rides and smoking a pipe, in the olden days we had to wait for the data to come to us.
As an aside, that’s why open houses (agent and public), and yard signs were important then and aren’t important now.

Where we are going
When the Competition Bureau cracked open the MLS allowing for various service levels (full service to no service), mere listing appeared. As only registered realtors can post to the MLS, posting agents, for a fee are now allowed to post your house to the MLS without offering any other services. Mere listing/posting agents haven’t really caught on yet. Home sellers don’t like to pay up front. And posting fees are non-refundable. If your house doesn’t sell (and a lot of houses don’t sell), too bad, so sad, thanks for the cash, dad.
Mere listings and posting agents seem like a compromise, but as mentioned above, the MLS was created by realtors for realtors. We can’t have the general public in there mucking about and monkeying around. The whole thing will end up like Kijiji or reddit. Both are pretty good websites but can you trust them?

Why contingency fees make sense to the Realtor
Whether you are a fan of posting fees or not, they are a nod to the reality that there must be a value placed on the actual service of placing a property on the MLS. As an entity, the MLS is a direct result of the investment of Realtor time and money. The board fees, the national and provincial organizations, the collection of data and the structure of policies and bylaws all culminate to provide a reliable valuation system. This arguably sustains the marketplace for the largest consumer investment of all.

Is it reasonable to expect access to this expensive, labour-intensive system on a contingency basis alone when the failure rate is so high? Couple board fees, virtual tours, collaterals, staging, photos and advertising and the financial burden can become onerous for the salespeople if the property doesn’t sell. Perhaps a posting retainer will soon become the norm for those salespeople who would like to operate a sustainable practice and an elevated, consistent level of service.

Do contingency fees make sense to the home seller?
No. The problem is money. It costs a lot to be a real estate agent. The board fees and brokerage fees, the money we waste on signs, advertising, the good money we spend on great photographs…someone has got to pay for all that.
The Competition Bureau allowed us to offer up our various services in a basket of goods approach. Heres the shopping list. Would you like two open houses or three? That will be xx dollars. Would you like professional photographs? That will be xx dollars. That is never going to work. Same as, I’m going to dedicate 40 man hours at $50/hour to sell your house. That will be $2,000 dollars, upfront. Sign here. Press hard. The third copy is yours. That’s not going to work.

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