Percentage Commission or Flat Fee Real Estate: Which Makes More Sense?

For more than a century, the standard compensation for real estate professionals has been based on a percentage of the property's sale value. Is that the most reasonable way for the industry to work? Is there a better way?

First, some context:

Commissions are common in sales industries. If you sell widgets for XYZ Corporation, you are most often compensated with a percentage of each sale you make. If you're a talent agent, you earn a cut of your client's earnings on every job she or he gets through you. In theory, commissions are in place to attract aggressive and persuasive personalities and give them a stake in what they do for you. For example, a car dealership wants to move as much inventory as possible. Thus, they will use a commission pay structure so salespeople will push customers to buy quickly and spend more. A larger number of service industries offer a flat fee for a service. You might spend a flat fee of $40 on a piano lesson or $100 to have your teeth cleaned at a dentist's office, based on the knowledge, time and material costs involved.

Which kind of service are you seeking in a real estate professional?

Are you looking for a cutthroat, high-volume salesperson — someone who might be aggressive on your behalf, but would be just as eager to have you sign any deal to move on to the next client quicker — or are you seeking an agent as a knowledgeable advisor to help you navigate the process and make an informed choice?

Most people see an agent as an advisor, expecting to buy or sell a home based on a fair and reasonable market rate with the agent's help. Consumers rely on their agents to avoid being ripped off, but don't maintain illusions of being able to rip somebody else off. They see their real estate agent the same way they'd see a financial advisor or counselor, providing a service for a fee based on the work performed. Examining the above argument, we at TRELORA have deduced that real estate commissions don't make much sense, hence the reason our flat fee real estate model was realized.

The price of a home is immaterial to the agent's job.

It does not take five times as much effort to sell a $1 million home as it does a $200,000 home. A person would not pay someone to file his or her taxes based on a percentage of the income being added up. Does an agent who charges a percentage commission do $54,000 worth of extra work compared to a flat fee real estate agent in order to sell a $1 million home? 

Any homeowner who is still paying a percentage of a home’s value in order to buy or sell should take a hard look at the services they are receiving and ask themselves, “What would these services normally cost in any other industry? How much should an agent earn per hour or per sale? What does it really cost to represent a buyer or seller in today’s market, which is so rich with technology and information?”

In Denver, educated buyers and sellers are realizing that the representation of a real estate professional should be based on a service fee rather than a percentage of a home’s value, which is what TRELORA provides. Most real estate professionals are responsible and honest, and most consider themselves knowledgeable experts in the market, not slick salespeople. They want to make a decent living and help their clients get a fair and positive deal. The incentives and structure of this antiquated industry are not working, and it's time to redefine the way real estate functions.