Protecting You: Errors & Omissions Insurance

[dropcap character=”L” color=”yellow”]Less than half of the brokerages in America have Errors and Omissions Insurance. For some people, the strategy is that as long as you don’t have deep pockets, then you won’t be sued. While I understand the strategy, we would rather be prepared for a real fault which would cause a lawsuit – regardless of deep pockets or none. Of course carrying this specialized coverage, be it via business insurance from BST Insurance or another firm or something more specific, costs more money up front, money we spend hoping to never benefit from. But it could very well save much more money in the long run for the brokerage and for our brokers.

We live in a litigious society, where many people are quick to call a Bad Faith Insurance Attorney if something goes awry, and when it comes to real estate, people who do not normally have a litigious mind-set give serious thought to suing. One lawsuit can wipe out a Realtor’s business and, without the legal aid that insurance supplies, could also destroy a Realtor® personally. Additionally, someone can sue you without merit and you still need to defend yourself. This is expensive. We hope never to have a claim, but if we do, we hope to show that the claim is not justified, win it, and not lose any money.

[pullquote align=”right”]There is no way around it, mistakes in real estate are expensive![/pullquote]

A brokerage is insured as a group. Therefore when someone is careless or negligent, we all pay for the failure through increased rates. I am aware of a situation where one claim in over 20 years in business caused rates to go up by 500% and remain that high for five years. When the broker shopped for better rates, no one else would touch him! Remember, that was one claim in 20 years! Additionally when there is a settled or paid claim, a deductible will have to be paid, and that can be thousands of dollars. The time to combat a lawsuit is also an extensive cost.

To mitigate this vulnerability we practice the following:

  • We offer extensive training, hold agents accountable for legal and ethical practice, and remind often about risky practices.
  • We are careful about what kind of brokers we welcome to Bella Casa.
  • We watch out for each other and help each other get it right the first time.
  • We help to problem solve early and properly when a challenging circumstance is fresh and smaller. We work diligently to prevent issues from rising to the level of a claim, and from there to a bigger issue.
  • We invest in specific risk management products and services designed to protect the brokerage and agents from claims, like this grc software platform that can be modeled around any requirements and industry, making it highly adaptable to the needs of most businesses requiring risk management services.

[pullquote align=”left”]There are many options in choosing coverage. We have chosen to cover all agents with very good and comprehensive coverage. [/pullquote]

The chief benefit of insurance is that someone else pays to fight the claim with expert legal representation. We have what is called ‘First Dollar Defense’ which essentially means that we do not pay any money or even our deductible unless the claim is settled or paid. Our policy also covers you ‘outside the limits’ for issues beyond the immediate claim. We have Fair Housing Protection, and you are also covered when you sell your own home. [space5]

Here are the relevant issues to inquire about:

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  • Do you have Errors and Omissions insurance which covers all the brokers?
  • What is the dollar limit per claim?
  • What is the cumulative limit per year? (per agent?, per brokerage?)
  • How much is the deductible you will have to pay if a claim is paid?
  • Does your insurance cover legal fees even beyond claim (“outside the limits”)?
  • Do you have ‘First Dollar Defense’; I pay a deductible only if claim is ‘settled’ or paid?
  • Is Fair Housing Protection included?
  • Am I covered when selling my own home?
  • Who is your agent, your carrier, and your underwriter?
  • What is your experience with the claims process? How many claims have been brought against your brokerage?
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I am fortunate to have personal knowledge, experience, and information related to 4 claims. I am even more fortunate that none of them were against me. One was a complete fraud on the part of the ladies bringing the claim, but the insurance company settled with them for a large amount of money. Another was alluded to above, another while I was on the board of another brokerage, and another in small claims court where our broker won decisively and was completely exonerated by the judge. The process of small claims, mediation, and binding arbitration is fascinating, but it is also chilling. I am glad to know how things work to be able to help others, but I hope I never have to be there again. This is definitely an area of our business where preventative medicine is better, and insurance protection from companies like habermaninsurance.com is worth the cost.

No company covers fraud, so if you are going to be intentionally dishonest, understand that you are on your own and will die (figuratively) if you get caught. We also do not want you in our brokerage! Errors & Omissions coverage also does not cover mold related claims. Our protection is to make sure sellers and buyers disclose and investigate, and that we take this issue very seriously.

Since exposure to risk is directly related to how many transactions one does, we charge $50 per side of every transaction at the close of each sale.

It is not advisable to advertise the details of one’s coverage or contingencies and strategies for handling a claim, but you should find out all you can directly from the Principal Brokers you interview with. For more information let’s talk. There is much more to keeping you financially safe, but it does begin with good coverage. We can help with that!

Randy McCreith, Principal Broker
Bella Casa Real Estate Group
503-310-9147

Profit Sharing a Better Way

[dropcap character=”K” color=”red”]Keller Williams Realty may not have been the first or only real estate firm to offer a profit sharing program, but they have certainly developed it most successfully. It has been one of the key tenets behind their meteoric rise in the last two decades as a new national brand, now one of the largest real estate companies in North America. Many KW agents and owners have made an amazing amount of money through this program and its success is featured at their conferences and in their recruiting presentations.

Understanding the KW System of Profit Sharing

As much as KW passionately rejects the characterization of their system as a multi-level marketing system, it is! Conceptually it is a product of the 1980s when Amway and a host of new sales ventures thrived by becoming that generation’s form of viral sales (person to person – sphere of influence). At KW you qualify to receive profit-sharing money based on how many people have come into KW and identified you as the reason they are there. In other words, profit sharing is a reward for agents who help grow the company by recruiting others. Then in an admittedly random system of 7 levels of connectivity, to those directly recruited by you and those recruited by your recruits (and on and on), you get a piece of their commissions if brokerages realized profit for that year.

As former Keller Williams real estate brokers, we (the founders of Bella Casa) realized that this benefit was far too complex to recreate, but we still liked the idea that if the brokerage was profitable, then the reward would be shared by those who caused the success. In wrestling with this we came to understand some weaknesses of the KW system, identified features we preferred more, and what evolved is what we believe to be a better system for our brokers.

A Critique of KW Profit Sharing

At every conference where profit sharing is promoted, there will also be a revelation which is astounding: in spite of the fact that KW agents can make an enormous amount of money off this system, only about 20% of the KW agents nationwide are participating in profit sharing! How can that be? Why?

Built for Mega Agents:

Because it is the top 20% of the KW agents who are the very successful ones (‘Mega Agents’) and this system primarily benefits them. I will make the larger case that the KW model is all about Mega Agents. In the same way, the business model for traditional brokerages is revolves around the the success of their Principal Brokers (their centerpiece).

Mega Agents Have The Best Recruiting Opportunities:

To whom do agents go to learn about KW? It is to those who are visible and successful in KW and who know the system best. I am not going to go to a novice agent or an agent who produces modestly to find out about KW, I want to interview or learn from the successful icons. Therefore, the top 20% of the KW agents get the 90% of the profit sharing money because they are the ones credited for recruiting the newer agents. The Mega Agents also have the experience and past connections with so many more agents than the rest of us.

They also have developed businesses that allow them the luxury of time to spend time recruiting in order to build another income stream. They also are the only ones who can successfully recruit the already successful agents of other companies. The practical reality of life is that people relate to, and have credibility with, their own peers. Would a successful Re/Max agent go to a ‘lesser’ KW agent to inquire about joining? They would go to their equals who are as successful or more successful. The KW agents get to showcase their success and therefore get more successful people into KW, which increases their incomes.

What About the Rest of Us?

What about the ‘common’ agents? Do they not have opportunities to recruit and make some of this money? They do but their connections are limited and their credibility is suspect. KW wants them to recruit and their model needs them to recruit but it is rarely easy or profitable for the ‘common’ agents. After the idealism of profit sharing wears off, you can talk with many of these agents and they have no excitement about a system which is open to them, but doesn’t work for them, unless they become part of the super-achievers. I have seen many newer agents leave KW without fear of losing profit share money because they realize that it may never come. It is also illusive because the kinds of agents they recruit may not survive (a real problem recently) or may go somewhere else soon. That money is gone. For many others, they just do not want to evangelize for KW in order to get a few dollars each year.

Profit Sharing is one of the KW Hooks and Handcuffs:

For the successful top 20% of their agents, profit sharing is an effective hook to recruit them. It tickles issues like retirement and the desire for ‘passive income’ added to what is earned. For the Mega Agents in particular, it is also serves to handcuff them. The claims are not hollow. However, like all multi-level marketing companies, it is always the people at the top, who have been involved the longest, usually the ones who initiated the system, who make all the money. The people at the bottom of the pyramid are just a vast networked sales force of fresh people who come and go. Yet while they are around, their sphere of influence can be plundered perhaps by the ‘mega-agents’ of their office.

Keller Williams is a Company of the Mega Agents for Mega Agents:

My conclusion after being forced to take a hard look at KW is that it is a company of the successful for the successful. While numbers are crucial and growth is wide, it is the top 20% of the company which is the ‘customer’ of the national entity in the same way that the national traditional brokerages are committed to the principal brokers of their offices as the customer. KW is a newer model which now serves the top tier agents instead of the top broker who owns or manages the brokerage. This is the key structural difference between KW and the traditional brokerages. Gary Keller was ahead of his time for seeing the evolution of our industry from centralized power in the hands of a few towards that power in the hands of many agents. He was also genius in realizing that the Mega Agent is the key player in winning in the new age. Take care of them and they will take care of you. Recruit the successful and they will build the company. Gary Keller’s first and seminal book was, The Millionaire Real Estate Agent and it showed where his focus was. Yes, its intent is to learn all the principles of the most successful agents of North America and how to become one, but it also reveals that for Keller, it is not the principal who is the superstar, it is the Mega Agents. Previously it was to take care of the local principal brokers and build good managers and you will keep the corporate office and brand alive and well. Now it is about building and recruiting Millionaire Real Estate Agents!

More Benefits for the Mega Agents:

These same top 20% agents also are the ones who get the opportunities to own KW Market Centers (brokerages), and the cream of the crop even own KW Regions! New Market Centers are opened by encouraging Mega Agents to buy ownership. My former partner and I owned 10% of the first office in Oregon (Lake Oswego) and 5% of the Tualatin/Bridgeport office. The successful have the money to own offices and they are encouraged to buy into their own office, but also into many other KW offices. In doing so, KW gets people who are motivated to work for the success of the brokerage and help others because they have self-interest in doing so. They are hooked by being able to own some of the office and they also get handcuffed because as owners they receive about 50% of the profits of the Market Centers.

Mega Agents also have most of the decision-making power. The Agent Leadership Council is responsible for all decisions which affect the agents. They have one significant limitation; they have no power to spend the owners’ money. They can form and fashion life for all the brokers and work together to build more successful agents. The council is made up of (you guessed it) the top 20% of the agents in the office. Additionally, if these Mega Agents are also owners then they, with usually less than 12 other owners, make all the rest of the decisions including spending decisions. As owners, they are the recipients of approximately 50% of the profits of the Market Center. The other 50% goes to Profit Sharing, which also goes primarily to the Mega Agents.

Mega Agents often have teams. In KW the team members pay a reduced cap. We were paying only 25% of the cap for our team members. This not only encourages utilization of teams (and a fair amount of abuse) but also lines the pockets of the Mega Agents with more money. I never understood the fairness of this even though we were the beneficiaries.

KW is a company that is big on coaching. As you would expect, it is the Mega Agents who get to become coaches and receive significant money for 30 minute conference calls with hopeful agents. The program is managed by the national office that promotes coaching as a key to success and necessary to break through and become a MA. It is not inexpensive and it is another income stream for the Mega Agents and the national company.

Am I Attacking Keller Williams?

Absolutely not. My intent is not to disparage Keller Williams. I have said elsewhere how much I appreciated my time there and how much I learned. When forced to consider other alternatives, I had to thoroughly understand their model in order to fashion our own. Much of what we have built at Bella Casa is a reflection of the models and values I gained from Keller Williams. I have been to countless conferences of theirs from Seattle to Austin (the KW Mecca) and I have been through the complete training to open a KW Market Center in Yamhill County. The above comments are only my conclusions after seeking to understand the model better to emulate it. That was my personal purpose in 2006 and 2007.

My current purpose is to help Realtors® understand our industry and be able to think critically about it and all it has to offer. I always recommend to new agents to interview all the options, learn everything you can about any brokerage, be suspicious of all, and read all the primary documents of the different companies. But you have the right to know it all, and evaluate it all accurately so that when you make your decision for what is right for you, there will be no regrets. You should be able to go into any company with your eyes wide open.

Keller Williams is a brilliant system for competing and beating the traditional brokerages – it worked! It focuses on agents rather than principals. That is good! It seeks and serves the successful, for it is they who will build the company make all the money in the various market places. KW soaks up money from all the agents but gives its perks and bennies to its favored few, the top 20% of agents, the Mega Agents. They will never leave; they are too well taken care of.  New agents will come and go, but if they become successful, KW will insure there are strong enough handcuffs to keep them in place.

Bella Casa’s Model of Profit Sharing

After seeking to understand better, we then realized we could improve on the model if we did it at the local level. We chose to have our local agents, all of them, as our centerpiece. I think this is the natural evolution of our industry as it decentralizes. Since we were not looking to build a massive enterprise, we could adapt it for smaller and local application. Because we were not looking for a model to enrich either the centralized principal broker, or the top tier successful brokers, we could think about what we ALL would like if we could have it our way. The result was a similar model modified to become a Professional Cooperative.

  • What if we could create a model that offered profit sharing for everyone and they would receive back directly in proportion to what they contributed in commissions? Sounds like equality!
  • What if it did not depend on recruiting or any other activity except the very activities we were all committed to, which is selling real estate? Sounds like fairness!
  • What if we actually did not take so much from each agent up front in order to give it back to a select few later, but actually took less from each agent and each sale instead? Instead of profit sharing after the fact, what about profit sharing right up front with lower costs? Sounds like genuineness!
  • What if we then built a system where there was a mechanism to reward each agent directly according to their contribution when we are profitable and in years when we are flush with cash in spite of our low caps? Sounds hopeful and something we can all achieve together!
  • What if we kept things simple and did not focus on finding more income streams to pan for gold? Sounds understandable!

How Does it Work?

Our ideal is to have all our brokers receiving 100% of their commissions and just paying their part of the monthly expenses to cover the brokerage for our cooperative expenses. This money would be like paying any business expense.

In the housing depression which ensued immediately after our genesis, this became intimidating and unworkable in most situations. With few sales our Realtors® could not risk paying when they had no income. So we modified the ideal! We can do that because we are local and nimble. The safe route and the more profitable route…

Our brokers have a choice to be on a no-risk plan which caps at $15k per year. You only pay your split when a closing occurs. There is no obligation for anything else or any back payments for anything. This is a still a kind of profit-sharing for our model, in that the most basic form of profit sharing is to not take so much from these agents in order to give it back later. We have some of the lowest costs in our industry. The value is immense because what we get for those costs is not matched by other companies which offer very low costs but almost no benefits.

Our expectation is that all of our brokers will get to the point where capping is a predictable accomplishment and they can save even more money by paying monthly. When we have recovered from this recession and we are profitable beyond that, there will be even more to share with everyone- equitably, fairly- as together we all are all responsible for our success and its attendant income.

Randy McCreith, Principal Broker
Bella Casa Real Estate Group

Cap & Splits

[pullquote align=”right”]Commissions allow you to be rewarded in direct proportion to your ability to work hard, work smart, and become successful.[/pullquote]

[dropcap character=”W” color=”blue”]While pay is rarely the most important issue in job satisfaction, it is certainly near the top and a decisive issue! The finest sales people in the world get paid by commission and they would have it no other way!  Good sales professionals can surpass their potential of hourly pay, and they get to focus on a single profession’s duties (unlike management) and can earn more than their peers in salaried positions.

There are downsides, of course: you get paid only when you complete a sale, the industry is cyclical (good and bad times), some people can cheat you out of your pay, and the competition can be formidable. Most ‘normal’ people also cannot handle receiving irregular paychecks and unpredictable income. But the ones who can will make more money.

In the real estate industry there are many factors in how much money you take home. To evaluate an opportunity and compare with other brokerages, a Realtor® should consider all of these issues:
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What is Commission Split?[divider]

  • The commission is paid by the seller and is divided between the listing and selling brokerages. A common example might be 6% of sale price with a 50/50% split of the commissions between the listing brokerage and the buyer’s brokerage.
  • Inside each brokerage, there is another split – between the brokerage and the selling or listing agent. This can vary widely from office to office. Some can be 50/50% or worse! Some may be as good as 80% to the agent and 20% to the brokerage. At Bella Casa, our Brokers’ commission is split 70% to the Realtor® and 30% to Bella Casa, every time a commission check comes in from a sale.

The crucial issue here is how much of each commission check from your sales will you be able to keep? Obviously the more the better, right? Maybe not…[/one_half] [one_half_last]

What is Commission Cap?[divider]

Not every brokerage will offer a commission cap! The cap is the point at which the brokerage will no longer take a commission split and the Realtor® receives 100% of the commissions. Caps are usually restarted annually, either the calendar year or the contract year (anniversary of joining the brokerage). Obviously a broker will want to ‘cap’ as early in the year as possible in order to make more money during the year. An agent who has capped has seemingly unlimited income potential.

The ‘cap’ is a more important factor than the ‘split’ to a successful professional. Those who do not sell much will make more money with a better split (80% vs. 70%). However, those who are successful in sales will make much more money by enjoying 100% of their sales after fully satisfying their share of the brokerage costs.[/one_half_last]

Royalties and Fees

Brokerages can be creative in finding ways to nickel & dime you to death. Most brokerages are money-making operations and naturally look for as many ‘income streams’ as possible. You must look at every service and product they give you as a profitable center for them.

If your brokerage requires you pay a royalty to the national or regional office/brand, then it costs you a lot more than nickels and dimes. Royalties commonly are 5-6% of the gross commission on each and every transaction (although I have seen 8%!). Only one that I know of will cap the royalty at a certain number, $3,000 per year, for example. The value of the royalty (having a national brand) can be debated and is discussed in other articles.

Investigate and be alert to fees and other charges which will come out of the gross commission for each transaction:

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  • Is there a fee for mentoring or training (or is it taken from your split as a certain percentage)?
  • Do you pay for Errors and Omissions Insurance per side of transaction (or how is it paid)?
  • Do you pay a transaction fee in each sale for its paperwork being processed?
  • Is there a marketing fee for assistance with advertising or marketing, for you individually, or for what the brokerage does generically?
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  • What advertising do you pay for? How much is it and does it promote you or the brokerage?
  • Is there a minimum sales fee? If you do not sell enough it might cost you to ‘hang your license’ there. Sometimes this is called a monthly minimum desk fee.
  • Is there any specialty fee; perhaps a special assessment to help the brokerage when times are tough as it has been since 2007?
  • How much do they charge for desk space?
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  • How much for a private or semi-private office?
  • How much are copies, both black & white and color?
  • Are you required to purchase home warranties or other affiliated business services (some of which have rebates to the brokerage)?
  • Do you pay for your own signs, lock boxes, sign posts, etc?
  • Do you pay for eFax service or other technology services?
  • Is there a technology/website fee?
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Bella Casa Offers Two Compensation Plans:

Plan 1: Most agents get 70% of the commissions until they cap at $15,000. After this they receive 100% of the gross commissions until the end of the contract year.

Plan 2: Realtors® confident of their sales for the coming year can receive 100% of their commissions for every sale. They pay their share of the brokerage expenses by paying $1,000 monthly as a normal bill. For these agents their total commissions paid (cap) is $12,000! Additionally, when the brokerage is profitable, these Realtors® can have their cap lowered based on the profits made for each year.

Because the cap is designed to satisfy the full needs of the brokerage, we are excited when our Realtors® cap very early in the year and enjoy all the fruits of their labor for the rest of the year.

Bella Casa Splits, Cap, Fees and Expenses:

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  • Our split is 70/30%
  • Our cap is $15k or $12K (approximately sales of $2,000,000)
  • We do not have a royalty or payment to another entity (save over 5%)
  • Our only fee is an Errors and Omissions assessment of $50 per transaction side. Because risk exposure is related to the number of transactions, we believe this is the fair way.
  • Our copier charges are free for black and white, and 10 cents per copy for color.
  • Our office usage and desk space is free. If someone wants private space, they pay based on our adjusted lease rate of space costs.
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[pullquote]The issue is not that many of these services come with a price tag, but that you have a right to know what you are paying and to decide for yourself whether this is a good value. [/pullquote][space10]

You also have a right to evaluate the competitive differences accurately. Of course any brokerage’s costs are subject to change but you should be able to assess for yourself whether changes are reasonable and the value is still worth it. It should not come as a surprise once you are already committed to it when it is too much hassle to change back to the better brokerage.

Randy McCreith, Principal Broker
Bella Casa Real Estate Group
503-310-9147