In most current real estate models it's the Realtor who takes on the bulk of the risk. For example, when a Realtor represents a seller, they take money out of their pockets to promote and advertise that seller's property in the hope that can secure a buyer during the contract period. But if that home isn't sold during the period covered by the agreement, then the seller is free to move on to find another Realtor or another way to sell that home, leaving the initial Realtor holding the bag for money already spent.

Shifting the risk of a real estate agreement from the Realtor to the home buyer or seller gives Realtors more control of their bottom lines while still allowing them to provide needed services

On the buying side, agents for the buyers usually have less cash outlay but put a lot of sweat equity into working with prospective home buyers in the hopes that they will be able to connect buyers and homes together in exchange for their portion of a closing commission. But they too run the risk of spending countless weekends driving prospects around and spending their valuable time setting up meetings only to have buyers often wander away.

In either scenario, Realtor's take on the vast majority of the risk for the home being bought or sold. As a result, the commission payments that Realtors collect at a closing not only pay for the agreements that close successfully but they also pay for those that don't. (Click on the picture for a fun video look at "The Home Buyer"

The risk-reward ratio is used in other business models as well as real estate. For example, some legal practices use contingency based payment structures when they work with their clients. However, this relationship generally means that attorneys who are willing to work ‘free' on the front end, have the ability to review a case to determine its payout potential before they take it on. In short, most attorneys won't take on a case that they don't believe they can win. Unfortunately, in real estate being able to make that decision on which home or which buyer's to take on is generally not so easy.

If I was to represent a buyer as an agent and agreed to take on all the tasks and responsibility required to get them all the way to a successful closing then I can easily calculate what percentage of the commission. However, I also have very few guarantees that the buyers are going to make it all the way to the closing table. Buyers change their minds. Things happen. People get transferred, lose jobs, add-on to their families, and sometimes simply change their minds about buying. In these cases it doesn't matter one whit how professional I was, how well-planned the closing was or even if it is the greatest deal in the world. If the buyers decide to back out of agreement and there's nothing that I or any Realtor can do to directly recoup those losses.

In this case Realtors take on the majority of the risk but have very little control over the outcome.
At Home Buying Revolution one of our goals is to create new models that minimize or totally eliminate the risk for Realtors by shifting that risk over to the home buyers. In this way, home buyers take on the financial risk of buying a home by paying the agent for the buyer directly for their time and services. This means that the Realtor gets paid regardless of the outcome of the agreement. It also means that because the Realtor is not taking on a huge bulk of the risk that they aren't put in the position where they need to rely upon huge payouts to cover all of their shortfalls and instead can be paid by the job (just like most other professionals) when they do the work.

This shifting of risk from the Realtor to the buyer also means that any huge payout left on the table goes back into the buyers pocket because they did take on the risk themselves.

Understand that this model is not designed to shortchange or diminish what Realtors bring to the table at all. But putting the entire responsibility of success on an agreement the shoulders of someone who has little control over the outcome of that agreement makes very little sense. Instead, shifting the risk to the buyers not only incentive's them (because they are paying the Realtor directly for their services and help) but also gives them further incentive to complete the deal so they can do so by allowing them to get some of their money back at closing.

I should also mention that task-based real estate models are not an alternative to commission based agreements but should be considered a supplemental service. In some cases, it may make a lot more sense for the buyers to pay the full commission to the agent because they don't want to or can't take on the tasks and buying responsibly themselves. However, for home buyers willing to take on more of the risk themselves means that their agent is put in a great position to help their buyer clients by getting paid directly for their time and expertise and while not needing to take on all the risk of an agreement that isn't guaranteed to make it all the way to closing.