Hourly consulting: Great idea whose time has yet to come
Originally appeared in Bay Area News Group publications on January 16 and 18, 2009
Real estate by-the-hour, as I have discussed in previous articles, is a tremendous approach in certain situations. Recently, I received a thank you note from a client saying how well hourly consulting worked for her. I helped with her purchase of a For Sale By Owner, East Bay property. I am pleased that my advice, including how to negotiate with the seller, worked out so well for her.
The email reminded me that this service is so needed, yet exists in a vacuum that is unlikely to soon be filled. Consulting by-the-hour continues to be held back by a number of factors.
Public and agents do not know the concept
I wrote my first article about consulting in 1997. Even then, it was not a new idea. Despite that, few understand what hourly consulting is and how it differs from traditional agency relationships.
In a nutshell, an hourly real estate consultant’s function is to assist buyers and sellers of properties that are not listed. Consultants guide and give advice directly to the buyer or seller and do not interact with third parties. Due to the fact that a consultant does not have the same obligations and duties as an agent, the potential liability may be less. This depends on the experience and qualifications of the consultant and the quality of his or her company.
Consultants get paid only for actual time worked, as authorized by the client. In the transaction I described above, the total fees were under $1000. This amount, of course, is often higher, determined by the client’s requirements.
Consulting is about details
Consulting is about details; surprisingly, many in real estate are not detail oriented. An in depth knowledge of the business necessitates skill and experience. According to information I received as a state Director at my last California Association of Realtors (C.A.R.) meeting in October 2008, approximately 40% of all C.A.R. members have been in the business less than one year; approximately 70% have been Realtors for fewer than five years. This eliminates a sizable number of licensees from doing a meticulous, effective job as a consultant.
Real estate is a “sales” business
The business is commonly perceived by practitioners as the process of selling a product (a house), as opposed to informing buyers and sellers about what is best for them. Those with this approach are not suited for consulting.
Small fee vs. large commission
Even if they are clear on what consulting is, some agents dismiss the possibility of earning a relatively small fee, which usually must be split with their broker, in comparison to the potential of a bigger paycheck from a sales commission when functioning as an agent.
Resistance from big brokers
Big brokers are, understandably, concerned about the risk of lawsuits and, for this reason, generally do not allow their agents to handle hourly consulting. With a large percentage of newer agents, who may not be fully qualified to do consulting, it follows that, if the broker allows this, he may increase his chances of legal problems. If the company tries to set parameters of who can and cannot do hourly consulting, this may lead to upset among the agents.
Given that Errors and Omissions insurance is expensive and can be difficult to obtain, this makes the broker cautious. If the insurance is used too often, rates will skyrocket, coverage may be dropped and a policy with any other insurance carrier may be unobtainable. This is not to mention the fact that these policies can have a hefty deductible that the broker must pay out-of-pocket.
All in all, real estate in California is a litigious business and, for the normally small compensation to the broker, the additional risk is perceived as unacceptable. This is why few licensees from large firms regularly do hourly real estate consulting.
The fact that a substantial number of agents work for large brokerages is, in my opinion, the most significant reason why hourly consulting has not, and will not emerge as a serious alternative to the current system.
Smaller brokers, on the other hand, tend to be the ones doing this type of consulting. In spite of this, there seems to be a much greater need for the service than the availability of those doing it.
All the same, do not confuse hourly consulting with an agent’s agreement to handle “paperwork” for a flat fee or a percentage of the sales price. Those arrangements are almost always agency and not consulting situations. They are not the same as fees based only on time expended and, typically, cost the client more than hourly consulting.
Often, even totally logical concepts are not adopted. With hourly consulting, there simply is not enough incentive for the system to change.
A fee-for-service approach is not appropriate to all real estate situations. Nevertheless, it could work nicely for you. The trick is to locate the rare real estate professional who is doing hourly consulting in your area.
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