Let's Do Away with Loan Origination Compensation

Following up with Tim’s post on getting rid of YSP, I thought I’d share my idea on just getting rid of commissions being paid to a Mortgage Originator all together.  Why stop at the misunderstood yield spread premium when the current system is flawed.   Why should be we be compensated based off of what size the loan amount is when we should be paid based on how much work and time is invested with the client.

Mortgage Professionals should be compensated based on how many hours they spend with each client.

  • This would eliminate steering to other mortgage products which might be more lucrative.
  • Assure that consumers would receive plenty of consultation from their Mortgage Professional.
  • Mortgage Professionals would be compensated for helping consumers with their credit, debt and asset management scenarios regardless of whether or not they ever finance a home using their services.
  • If a consumer really needed to reach a LO after hours or weekends; they could pay overtime to the Mortgage Professional.
  • Mortgage Professionals would change their directive from how many millions in loans they are originating to how much time is spent with each consumer.
  • Consumers could freely select one Mortgage Professional to help with getting ready to purchase or mortgage a home and another to finance the loan with no strings attached or hard feelings from the LO.   Perhaps some Mortgage Professionals would become specialist in such areas.
  • Consumers could select various Mortgage Professionals based on their experience which would be reflected in their hourly rate of pay.   This falls in line with suggestions that Jillayne has made on a having a tiered system of Mortgage Professionals.
  • No more YSP.  (Even though this is silly because mortgage bankers receive compensation on the back end and are not required to disclose it).
  • True Mortgage Planners and Consultants instead of “Originators”.

A big argument I would have against this is that I would not want someone to not call me because they’re afraid of the bill that would follow after I provide hours of advice.

Your thoughts?

6 Interesting tidbits from around the web

  1. Seattle is doing a lot of recycling and New York is listening. Did you know that it will soon be illegal to throw away food scraps? At Chez Ward we feed food scraps to the red worms in the bin so we don’t have to pay the city to haul our scraps away and then pay again to get them back.
  2. The DOJ released a website all about real estate commissions yesterday (beware the Inman paywall tomorrow!). We can argue all night and day about whether agents as a whole are “worth” 2.5-3%, but I’ll tell you this right now: some Realtors are and others are not. The DOJ says that an amazing 70% of home sellers negotiated the commission with their agent. Maybe the DOJ should set up a site on divorcing commisions or the frickin’ health care system, where rates have gone up a lot more than a few percentage points a year. OK, maybe this warrants its own post.
  3. Only “20% to 25% of the homes shown on the Internet (depending on your information source) use home tours and/or multiple photos … It indicates apathy, arrogance, negligence and many other bad words.” No points for trying; all extra photos must make the process of selling the house better, not worse.
  4. Apparently banks are even less rational than sellers about home values in a slow market. Teresa Boardman:

    “They often hire Realtors, but banks make lousy clients … Buyers need to understand that when making an offer in a bank owned property it can take weeks to get the offer presented and then accepted, or rejected. They don’t seem to negotiate offers like other sellers do, they just accept, or reject and wait for a better offer.

  5. Huzzah is a real word. Wikipedia says so.
  6. Lowell Elementary school ranks better than any other school in Seattle (using standardized tests scores). I learned this while ironing a bug out of Estately’s new Seattle real estate page. And I think I just broke the rules.
  7. Bonus: the past tense of help is holp. Anyone who says otherwise is decimating the language.

$100,000 for the "no show" agent

[photopress:thecast_biopict_jerry.gif,thumb,alignright]Joe asked: Ardell, I was wondering if you would care to comment on the Jerry Seinfeld case.

Thanks Joe, for the opportunity to sort out this “No Commission for You!” case. It’s a shame Seinfeld is no longer on TV, as this would make a great episode where they could play the “No Soup for You!” Soup Nazi theme in a different light.

There are a lot of missing facts in the linked story, so I have to expand the information first.

Gist of the Story:

The Seinfelds used a personal manager to view property with the agent, before they themselves viewed property.

From September of 2004, the Seinfeld’s real estate agent showed various properties to their representative.

In January of 2005 the agent showed the property the Seinfelds eventually purchased, to the personal representative of the Seinfeld’s.

On February 11, 2005 the agent again showed the property, to both the personal representative, AND Mrs. Seinfeld.

Then came the Sabbath, that same night, and the agent was not available for a 24 hour period either by phone or in person. That happened to be the day Jerry wanted to see it and he went there and struck a deal with the owner direct.

Seinfeld refused to pay the agent because she was unavailable for the 24 hour period he was ready to go, see and buy.


My thoughts are that the agent should have had someone covering for her during her “24 hour shutdown”. It’s not like it was an unforeseen emergency, like she was rushed to the hospital. This “I don’t work on the Sabbath” is a weekly event. No reason she can’t hire someone to answer her calls, and someone to show property for her, during those 24 hour time periods.

I can see a buyer not wanting to risk losing a property during that time. What if there were another offer that day? Should a buyer lose a house so an agent can take a day off? Or should the agent provide a back up number for them, like a doctor would.

So I do fault the agent for not having a back up person. But it would appear from the facts that the agent was entitled to the commission, and the Seinfelds would not have lost the property, had they waited until Sunday.

$68,745.00 Paid to Rain City Guide Readers

[photopress:dollars.jpg,thumb,alignright]Well I have to admit that it has been a very, very odd year indeed for me. I stumbled into the world of blogging, and I had no idea where it would take me. Well it took me into a totally consumer-centric view of my world.

Transparency turned out to be much more transparent for me, than for my “blogclients”. I started experimenting. I did not change how I worked in any way. But instead of simply charging what I “normally” charged, or what most agents charge, I decided to view the commission as “a retainer fee”. I then changed it at the close of escrow, to what I perceived to be a fair value for the services rendered.

Sometimes I changed it on day one and that worked out OK. But then in some cases, I found that what I thought would be fair on day one, turned out to be too much at the end, and so I “settled up”. Only once did I have to renegotiate what was agreed upon on day one by raising it, and the client and I both agreed on a different and higher amount. We did that about halfway through, as he changed his parameters, and we both agreed the situation was greatly affected because of that. But I addressed it as soon as it was going sideways, so he had plenty of time to change agents if he and I could not come to terms on a new commission. Fortunately that was not necessary, because we both agreed that the original negotiation was based on factors which did not hold true as time went on.

The stories, which I will try to detail on my blog tonight, will be covered in a somewhat vague manner, as I have to retain the confidentiality of my clients. But I will try to give the stories in a way that we can all learn what a true sliding scale of different fees for different services might look like. A commission schedule that is so fair, that no client felt like they overpaid, and several even felt like they underpaid. And the one man who got the service for free, almost forgot that he wasn’t my client at all 🙂

I never calculated the end result of the total monies returned at the end of the day, until tonight. It is almost three in the morning, and no one is more surprised than I to see that $68,745.00 was paid to my “blogclients”. While most of those clients had read both my writings here on Rain City Guide and my blog, I have to attribute the bulk of the clients to having come to my blog via Rain City Guide.

There were a couple of times when I went a bit overboard, and I admit there were a few times when it hurt like hell, especially in the beginning when I was “training myself” to view the settle up at the end as fairly as I could. But I can honestly say that the couple of times I erred with regard to fairness, I erred on my side of the fence. I did that because those particular clients were injured by someone before me, someone in the industry who “did them wrong”. I felt the need to compensate them for what happened to them, before I entered into their world.

Most importantly, when you treat your clients fairly, when you discuss commission issues openly with your clients, both buyers and sellers, everyone is happy at the end of the day. I treated them all like family. I charged them what I might charge my Mother or my Sister or even my own child, well…maybe some more like my cousin 🙂 I charged a fair value for the work at hand. And while even I am amazed at the total tonight, and frankly it hurts…it really does, I know in my heart that every single time, it was a fair assessment of a valid cost for the services rendered.

It doesn’t break down to a flat fee or a fixed percentage. Some needed a lot more assistance than others. Some found property quickly and some took a very long time. Some sold their property quickly, and some took a very long time.

I’m looking over my list and only $2,175 of the $68,750.00 was paid to someone who “asked for a discount”. Almost all of it, was offered to them by me, without their needing to ask for it. Most of all, my “blogclients” have truly been a joy to work with. They totally trusted me to have their back. They totally trusted me with their most important goal and they totally trusted me not to treat them unfairly in any way shape or form. Not just about the money part, but in all things. Every single one felt I had gone above and beyond the call of duty. And every single one appreciated my efforts on their behalf at the end of the day.

I would very much like to take this opportunity to thank both Dustin and Anna Luther, for this wonderful opportunity. I also thank them on behalf of my “blogclients”, who are all grateful for having Rain City Guide to help them through what might otherwise have been a more difficult process.

The internet is truly a wonderful thing, and we are all learning to use it to everyone’s best advantage. We no longer simply “surf the net” to suck up information. We use it as a vehicle to form relationships, both business and personal.

I need to put the actual stories on my blog because we are really not permitted to discuss commission specifics in a “group” setting, under anti-trust laws. And also because this post is already way too long 🙂

Agents rarely "feel the love" when someone new and interesting joins the party…

The contributors at Rain City Guide (RCG) have been falling over themselves talking about the folks at Redfin. Don’t know who they are? Not a shock. They’re a real estate firm based in the Seattle area with offices in the Bay area of San Fran which has a discount model for services. Earlier this week there was a conference in NYC that Glenn Kelman of Redfin attended and he was slammed by a REALTOR(R) representative. To me, having come from the tech industry, it was the old school getting pissed at the new school and not necessarily playing nice.

Before you think I’m a big fan of Redfin – stop! I don’t really like anyone that is my competitor. Granted, I can actually “like” the people involved but of course I’m also competitive and I’m focused on becoming a top player as well so any competition is considered friendly competition – and competition doesn’t play in my sandbox, so to speak.

I actually had a woman from my office pull me aside Tuesday and ask me to share my business plan with her. My competitive nature kicked in and my first thought was, “why would I share a plan that I carefully crafted and have been tweaking and developing for almost 4 years and which I have a 5 year plan staked out for the future, with you?” Did you mention that there’d be some form of payment for my consultation services? Did you say that perhaps there was some other motivation other than you wanting to succeed after stealing my concepts (which she’s already doing) such as a large donation to my non-profit? Of course not.

The way I know I’m making progress and getting market share, and therefore being noticed, in my field is to watch others copying me. It’s supposed to be the most sincere form of flattery and to a VERY small degree I do like it. However, for the most part we know we’ve hit a new segment when others start chasing us with the same ads, asking our vendors to stop advertising with us, steal our exclusive speakers, and more. But if you want to really get me going then show me your cards by saying something like this gal did to me. I won’t share the full details but I think you get the drift. Redfin, I feel your pain – I just don’t need to give away a chunk of my commission to feel it.

Redfin vs. Establishment

Redfin creates Red Faces

With Redfin I think they create red faces in the market, mostly from competitors, not their very own clients. With all the debating taking place (see last few comments) about variations of service levels and discussion about saving $20,000 in commissions but losing $100,000 in price for an agent’s (implying Redfin or similar models) lack of negotiation skill —an argument I disagree with—maybe the only way for consumers to feel like they are being well served is to set their own benchmarks for the people they entrust to help sell and buy homes. Realtors have exceptional value, but as an industry have allowed foolish internal cultural policy to dim the light. Instead of setting benchmarks for delivery of value that consumers get, industry insiders have to spend copious amounts of time trying to tell each other why a model will fail. If you want meaningful debate, invite consumers on a panel telling why one model worked for them vs. another. APB to Brad Inman…. try that.

No industry benchmarks

The real issue, in my opinion, is that consumers are given no tangible and bonafide benchmarks for placing value received for commission they pay. Why should consumers pay an identical commission like the “negotiable

Woohoo!! Merv's got it DOWN!!

[photopress:sc.jpg,thumb,alignright]At first glance it might appear that Greg Swan and I are like-minded when it comes to commission issues. but not so. Greg and I do agree that the buyer should not be led around thinking they are getting a free ride compliments of the seller, and we are both part of a growing minority in that regard. We do in many ways lead the cause of buyers controlling their side of the fence, though sometimes Greg goes a little over the net on that one.

But Merv has got it DOWN!!! Agents like Merv and I are running the test cases that will prove to be the real answer to all of this. No One Size Fits All commissions. A range of prices for various scenarios. A range of prices based on a collaborative effort of determining the client’s needs…a collaboration between the agent and the consumer.

Merv, I am totally with you on this one, and I too have case studies, though by and large, and specifically as to commission negotiations, I was not planning to unveil mine until Jaunary 2007. You GO BOY! Woohoo! The agent and the client TOGETHER determine the services and advices that the client both wants and needs. The agent cannot participate in the consumer cutting themselves short of what they need, to be successful in the client’s goals. Nor should the agent build everything around a total package of high fee services, that always leads to a win for the agent, by including more than the client needs.

For instance, just closed one where the buyer represented himself, after first trying a “full service”/full fee agent. The seller and I gave the buyer the FULL 3% buyer agent fee. Buyer just moved into his new home and is thrilled! Seller is happy and has moved on, after unsuccessfully trying a full stripped down mls only version, before hiring me. Total fees paid in that transaction – 2%. In another instance, on a different property, a buyer called and said she was going to represent herself. I asked her a few questions and she knew absolutely nothing about what I was talking about and was missing several key details needed to represent herself. Seller and I said NO, you can’t represent yourself, you just don’t have the background of knowledge needed, in this particular case, on this particular property. Total fees paid in that transaction (different fully represented first time buyer) – 6% split 3% to me and 3% to buyer’s agent. Portion of my fee used to make repairs to property. I made more on the one where the seller paid 2%, than I did on the one where the seller paid 6%. So much for percentages…they are truly irrelevant.

The agent needs to be involved in determining whether or not the buyer or seller’s wants and choices, fits the consumer’s objectives AND abilities. The consumer in turn has to be realistic about what they can do themselves, and what they can’t do themselves. It’s a collaboration with neither party “dictating” to the other.

THIS is the model of the future. Just as you can hire an attorney to fully represent you, or to partially represent you to save some money, you should also be able to hire a real estate agent to fully represent you or to partially represent you. But no attorney is going to get into the middle of partial representation unless he makes the judgment call that the client is fully capable of handling a portion of the duties. No agent should hand over responsibility to someone without making the judgment call that they know what they are doing, with regard to the services selected and not selected.

A buyer who assumes responsibility for selection of property, via the internet or other means, should not pay the same fee as one who needs agent advices. A buyer who just can’t assume full responsibility for all lender issues, should not pay the same fee as one who needs no assistance with the lending issues whatsoever. A seller who has everything ready when you walk in the door, should not pay the same as someone who needs the agent to help with getting the property ready for market. A seller who can’t read the contract, should not be able to purchase a service that says “all offers to be submitted to the seller direct”, nor should an attorney/owner pay a real estate agent to explain a contract.

No one size fits all commission! No trading in one “one size fits all” for another “one size fits all”! That’s where Greg and I part ways. I love that Merv…and Pam. Get Merv’s blog on your MUST READ list today!

Get Creative


We lost IT. We use to have IT and now we lost IT and now you can get it on ebay! This IT is that huge chunk of our commission that used to come from being the gatekeeper to the multiple. At a listing presentation our competition was only another agent that charged the same fee (there were a few reduced fee offices but it wasn’t a trend).

But they don’t need us anymore for that. They can get it on ebay. And they can get listed for under $400! Of course, taking and uploading the listing in the multiple is just the beginning, but if we’re going to separate out tasks like the actual listing going into the multiple, why not separate out all the tasks and see what they’re really worth. I agree that uploading the listing is a pretty simple task and a lot of agents just fax it in so it probably is only worth $400 (you have to be registered with the mls for this, plus it involves contracts and accuracy of the listing information)….. if that’s all the service a seller wants.

So, last summer I decided to address all of the things that agents do by breaking up the tasks and establishing a monetary value to each. It’s the ala carte menu of listing services and I googled and googled but couldn’t find anyone with anything complete enough online. I even took the coursework to get licensed as a consutant from the National Association of Real Estate Consultants (NAREC) so I could see if someone had already done all that work.

I separated out the tasks ranging from $20/hr for real estate data input, filling flyer boxes, dropping off keys, etc. (a high school kid couldn’t do all of this) to $300/hr for negotiation and problem solving. Wow, I was surprised at how often I worked for $20/hr. I tried to figure out what I’d be charged by different people doing different levels of work and then added a profit margin.

The $300 work i assumed would be done by the senior agent taking the listing and running the team but personally doing tasks that take a lot of experience and skill like price opinions, market timing, the totally important negotiations with both buyers and the buyer’s agents and solving all those problems (I had a list of 88 things that can go wrong with a transaction). Personally, this is where I’d prefer to spend my time.

The results are on the LTDre.com website if you want to see how it works. My slick computer tech even built it to automatically compute based on different packages and house price.

What got me thinking about this was today’s Inman article on bloated commissions and how much I agree with it. The article suggests, “consumers would benefit most from fee-for-service real estate companies that base compensation on flat fees, hourly fees and other specific payments for services rather than relying on a commission rate that is based on a percentage of the sale price of a home.

The "Goldilocks" Principle

[photopress:images_1.jpg,full,alignright] I know that applying the “Goldilocks Principle” puts me in the category of “hopeless utopian”, but hey, for one solid year, until December 31, 2006, I am going to stay in this thought mode.

I’ve tried various commissions with various people, and for the most part disregarded anything I’ve ever known, and everything that anyone has to say on the subject. I say “for the most part” because you really can’t erase your brain. But you can test and try varied options, just like Goldilocks rested herself on the three beds before deciding which one was “just right”.

I find that all of the rhetoric available on the topic is pretty much bunk. Reality is, it depends on the sale price/purchase price. I plan to do a “year in review” on 1/1/07, my blogging anniversary, to post my experiences and conclusions. But since this topic keeps coming up in the comments of various articles with everyone spouting out percentages, or flat fees, or hourly fees, etc., I thought I’d at least post that the results of my experiments are absolutely hinged to price of property.

The other reality is that my “awakening” with regard to commission issues started three months BEFORE I started blogging, and being in the Blogosphere really isn’t what turned my head with regard to commission issues. What turned my head was when I, myself, purchased a house for $850,000 with $59,500 of commission issues plus $22,000 of other credit issues thrown into the mix. Trust me. There is no question in my mind that I, the buyer, am the one paying for that whole $81,500 in my mortgage payment. I’m not complaining. I structured everything that way for a reason. But overnight I realized that the buyer pays the commission…no question.

I also realized that it didn’t bother me on the 10-12 properties I purchased before this one. So price of house does matter. The experience revolutionized my whole thought process with regard to real estate commissions. Nothing causes you to “get real” more than putting yourself into the equation, and experiencing it personally, from the inside out. So for now, I’m trusting my own judgment and using “The Goldilocks Principle” when determining the fairness of commissions. A full year of experiments, and then I’ll come out the other side and see where I’ve been and which feel “just right”, which were too high and which were just not enough.

For now…price matters is the key, and almost none of the discussions anywhere, focus on different fees for different home prices. So basically, they are ALL wrong.