As a homeowner, you probably want to hire an agent that will help you get an above average result when selling your house. Isn’t that why you are paying them many thousands of dollars?

The problem is, if you ask them, “Can you deliver me above average results?”, every real estate agent is going to give you a resounding “Yes!”. They will talk at length, and quite convincingly, about their amazing marketing reach, their list to sale price ratio, and how they are a top performer. So how then do you separate the agents that really can deliver strong results from the rest? The answer, by using an incentive commission structure.

By way of background, an incentive commission structure involves a low base rate, say 1%, plus an incentive payment that adjusts based on the final sale price. The incentive payment is often something like 15 or 20% of the proceeds above a pre-negotiated price threshold. For example, consider a home worth around $1 million. Under an incentive commission structure, an agent might earn 1% of all proceeds up to $950,000 and then 20% of all proceeds above that. At a sale price of $950,000 the agent would earn a 1% commission, at a sale price of $1 million they would earn roughly 2%, and at a sale price of $1,050,000 they would earn about 2.8%.

While an incentive commission gives the agent a strong financial incentive to work to get you the best price, it also does a lot more. An incentive commission can also be used to understand what the agent really thinks, both about your house and their own abilities.

In the example of the $1 million dollar house, let’s say you meet with two different agents and they both tell you they think you could sell your home for $1 million, maybe a bit more. You like them both, they are both very professional and have sold several nearby homes similar to yours. How do you decide who is the better fit? Looks? Gender? The taller one?

Instead of resorting to hunches or luck, ask them for the terms they would propose for an incentive commission where they earned a base rate of 1% and 20% of the proceeds above some incentive price. Suppose the first agent proposes $950k for the incentive price and the second agent says $920k. Well now it’s obvious that the first agent is much more confident in getting a $1 million sale price. On top of that, if you hire the first agent and they don’t deliver the result they expected, they don’t earn as much. There is a cost to the agent for being wrong. In a normal real estate commission, if an agent overpromises and underdelivers, they still make the same percentage commission. The incentive commission makes it so that the percentage commission you pay your agent adjusts with the quality of the results delivered.

The other advantage of asking agents to propose the terms of an incentive commission is that it promotes competition. It allows agents to differentiate themselves. Originally the agents had similar expected sale prices and qualifications. Now though, the first agent is providing better economic terms. You might think you could have just asked the agents to propose a commission rate, and they could have competed by quoting you 1.5% or 2% or 2.5% for their commission. The problem with that approach is that you agree to how much you pay the agent independently of the results they achieve. As a homeowner, you are taking on all the risk of agent performance, while in an incentive commission the agent bears the risk of their own performance.

If you want to know what agents really think your house is worth and how confident they are in their abilities to deliver a given result, try using an incentive commission contract. Once you do, you’ll wonder why you ever paid real estate agents any other way.