As the Internet intensifies mortgage rate competition, it seems like more brokers are competing on price than ever before. In turn, more brokers are using their commissions to buy down interest rates.
This is exactly what you don’t want to hear if you’re a brokerage firm executive who relies on percentage-based splits/royalties. Increased use of buydowns is directly threatening the revenue stream of those firms.
That’s why it was interesting to hear of an approach being tried by one particular brokerage company (which can’t be named, unfortunately). Theirs is an approach that reflects the times, but one that also has repercussions for agents’ earnings.
As those in our business are well aware, many brokerages, broker networks and broker franchisors take a percentage of their agents’ revenue. That “split” to the house can be 5%, 10%, 15% or more. The problem is, if an agent gives up half their commission to buy down a rate, a firm with a percentage royalty model sees their revenue cut 50%.
That said, the one crafty firm mentioned above has what it thinks is a solution. It has re-written some of its broker contracts so that its cut is based on “standard commissions.” In other words, the percentage split is calculated on the commission the agent would have received if he/she had not bought down the client’s interest rate.
The ramifications for agents who sign such contracts are clear. If, for example, a normal commission is $1,000 but the agent’s actual commission (after buydown) is only $500, he or she is stung twice. Not only does that agent earn less absolute revenue, they also shovel a significantly greater percentage of their income to the house.
This begs the question: will more brokerages implement this model?
If they try to, it may be at their own peril. Most successful agents won’t stand for lower compensation and higher-effective splits. Brokerage firms who attempt to base their splits on non-bought-down rates will inevitably lose good agents. For those brokers focused on minimizing overhead, the flat-fee broker organizations—like Meridian Financial, Axiom, VERICO and RMA—may seem like especially appealing alternatives.
With the trend in buydowns, percentage split-based firms are sailing into stormy seas. It may be safer to get lean, charge a la carte for certain agent services and technology, and diversify their revenue, versus making their situation worse by charging splits on income that agents never receive.
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