Saving Money via Discount Brokers, and Other Popular Real Estate Myths

Posted on: May 29, 2007

I’m sure you’ve seen the ads. A couple of well meaning sellers are talking about how Realtors are getting rich overnight by charging outrageous fees when they should be listing homes for 2%, 1%, $500, or even nothing at all. They are not engaged in what could be called a level headed debate of the pros and cons of marketing fees. Generally, the proponent of discounting is stopping just short of calling the poor sap who has listed with XYZ Realty downright stupid for flushing tens of thousands of dollars down the drain. By extension, you as a consumer are being chastised for being a drooling imbecile and not seeing what should be obvious to anyone with half a brain. That is, if you pay less for a broker, you get to keep the difference! (A popular variation of this theme is the guy walking around holding a big bag of money he “saved” by doing it by himself. You can tell it’s a big bag of money because it looks like a canvas sack with huge “$$$’s” across the front of it. As a small business owner, I spend more than my share of time in and around banks and have yet to be given one of these cool bags. You’ve probably seen plenty of your friends and neighbors walking around with these things. I guess I should change banks. Anyway, I digress. We’ll talk about this poor deluded soul another day.)

We should get something on the table right now. There is no “standard” commission. The rates charged for marketing homes are not set in stone somewhere. Prominent brokers (middle aged, male, white, well-fed, you know the type) do not get together in the dimly lit, smoke-filled back rooms of private clubs and conspire to artificially raise fees so that they can afford to, well, pay the exorbitant dues to these same private clubs. Fee schedules are flexible. Mostly they are the result of business decisions made by a Principal Broker/Owner and are market driven. In point of fact, the quickest way to clear out a room full of real estate professionals (other than closing down the buffet line) is to bring up the idea of setting fees, or boycotting a firm that doesn’t “see things as we do.” The Federal Trade Commission takes a dim view of this type of activity. By “dim view”, I mean that in the eyes of the Federal Government, catching a real estate professional manipulating the market ranks right up there with finding those pesky WMD’s in Iraq.

Interestingly enough, if there is no standard fee, how do we establish the amount you will “save” by utilizing the services of a discount broker? Where do these guys come up with the numbers to beat you over the head with? I did the math on a recent ad and the misguided seller had agreed to give away 7%. The last time I was paid a 7% commission, I celebrated by buying a polyester leisure suit, white shoes and belt included. Utilizing the same stream of logic, I could quadruple my fee structure, give you a 50% discount, and “save” you a ton of money!

In life, you generally get what you pay for. When I travel, I like to stay in higher end accommodations. I like the service and amenities. What I don’t get at the end of the stay is a bill that appeals to my Scottish heritage, if you get my meaning. Nor would I expect to negotiate with the front desk and contend that I should be allowed to stay in the best suite and pay the same price as those who chose the cinderblock bunker 20 feet off the Interstate. The point being, if you did not have the foresight to explore the level of services you are paying for with a prospective broker, you can’t blame the profession in general for a poor return. Most brokers will provide a written marketing plan and references upon request. If your sole consideration is finding the broker willing to work for the lowest commission, again, you will likely get exactly what you pay for.

As a prospective seller, do you know where the commission is being spent? In the majority of instances, the fee is divided up between the selling and listing agents. Most listing brokers offer a substantial portion of the fee to cooperative brokers in order to attract them to the property, along with their buyers. If your broker agrees to cut the fee, whose pocket does it come out of anyway? He/she may well offer very little to outside brokers who can elect to show other properties first. Effectively, your home becomes almost invisible and could sell for substantially less than it would have if a higher level of compensation were offered. Ironically, it could be much less than the money being “saved’ and after a substantially longer period of time. Again, this is frowned upon by the law and would never show up in a company’s Policy Manual; but human nature being what it is, this sort of thing has been known to happen. If anything, in the declining market we are firmly in right now, commissions go up. Ask any agent on the street what has happened with the production builders in the marketplace. In mid-2006 they were offering a lot less than they are now. Common sense dictates that brokers, like all independent contractors, follow the money. Discounting in a down market could turn out to be a disaster.

Finally, if it works as well as the ads say, why isn’t everyone doing it? There are people in the marketplace who do nothing but sell houses they own. Among these are builders, estate trustees, lending institutions with repossessions, and relocation companies. A typical consumer sells a piece of real estate in America every 7-8 years. As such, the prospect of placing a sign in front of your house has more of an “event” status. When the time comes, you may want to ask yourself, “If the people who do nothing but sell their own inventory day-in and day-out do not utilize discounters, why should I? What is it that they know that I don’t?” I have sold homes continuously for over 30 years and have yet to see a discount brokerage sign in front of a subdivision, bank repo, legal estate or transferee’s home.

Simply put, as a consumer you should concern yourself with protections and net proceeds. Fully explore your options and let logic replace the hype and emotional appeal of the media.
Everyone wants to pay less for more. In a market where simply posting a sign can bring results, by gosh or by golly, discounting can find a modicum of success. We are not in that kind of a market anymore.

Please feel free to send in your questions, comments and criticisms.