Every few years a new company or individual pops up in the real estate market and thinks they are going to be the low-price leader and gobble up a big chunk of the market share. And oddly enough, they all seem to disappear after just a short while. Remember these brokerages… “I Pay 1” or “Assist-to-Sell” or “Help-U-Sell“? They came and went so fast you may not even remember them even though they blitzed the market with advertising and even named the Sports Arena after themselves (“The San Diego I Pay One Center”). These are just a few that popped up just in the last 10 years. Where’d they all go? Out of business because of an unsustainable business model – that’s where.
Don’t fall for the stats.
A common tactic to entice you to sign with a discount broker is to brag about their market stats. I think it was Mark Twain once said, “There’s lies, there’s damn lies, and then there’s statistics”.
- “We’re the fastest growing real estate brokerage in the area…”. Well it’s easy to grow fast when you start from zero. From zero to one is 100% growth. Whoopie!
- “We sell more homes than most…” Ok, but how many of your clients truly did save any money at all and are they happy at the end of the transaction? Show me your client satisfaction rate instead.
Do the math.
The discount broker offer is not always what it really seems. You’re still going to be asked to offer a 2.5-3.0% commission to buyer’s agent. So if the discount broker says he’s willing to sell for a fee of 2%, the total commission you pay will still be about 4.5-5.0%. So the reality is that you’re potential savings is only about .5-1.0%. If your house is worth $750,000 for example, that represents a maximum “savings” of only $7,500. But will you really be “saving” anything?
- Lack of negotiating skills
- Lack of construction knowledge
- Lack of marketing
- Lack of response
Lacking in any of these skills or omitting critical business activities can cost you, the seller, well in excess of that $7500 in a heartbeat! It’s all about the net proceeds at the end of the transaction, not the always the up-front commission.
And of course, don’t forget to factor in the “minimum listing fees” that “vary by market”. Some discount brokers will list your property for less but if you want any additional services, they are all “add-ons” you pick from a menu. The Devil is in the details, right? If you read the fine print and do that math, you’ll find that you will frequently be saving very little if not losing money.
What costs are being cut?
All well-run, sustainable businesses have overhead. Managing expenses is critical of course but making sure you’re compensated in a fashion that is commensurate with the services you offer is just as critical. Providing you, the seller with the best service and best performance possible not only requires a tremendous amount of skill and experience, but support staff, operating expenses and superior marketing… which all cost money. So, if you choose an agent that will work for 1% and he wants to stay in business, guess what? He’s cutting costs somewhere else, and it’s usually somewhere that detrimentally affects you.
Who are these Discount Brokers?
Why is it that the most successful real estate brokers are never the ones offering to cut their commissions? Because they know they provide a service that is in the clients’ best financial interests. They prove themselves time and time again. The best agents pay for themselves. The agents that readily cut their commission usually do so because they lack skills in other areas like negotiations, experience, marketing, etc. and have nothing to offer other than a discounted price. The thought going through their mind is, “Well I don’t have the knowledge, experience or skills in these other areas, but I can still get business by slashing my fees”. This is a very common occurrence with rookie agents too. Is that really the person you want negotiating one of the largest financial transactions in your life on your behalf? If they don’t have extensive experience and understanding of Appraisal, Construction, Negotiations, Taxation… run for the hills.
And of course, every time we go through the thriving times of our cyclical industry, up pops a discount brokerage ready to slash their rates. Again, remember “Help-U-Sell” and “I Pay 1” and “Assist-to-Sell” that popped up in the last up-cycle in Southern California? Where’d they go?
- I Pay 1 – Gone.
- Help-U-Sell – Gone.
- Assist-to-Sell – Gone.
They’re all gone because their unsustainable business model didn’t work.
Are you really saving anything?
- Chopping the marketing budget.
- Not having appraisal experience and knowing how to value a property.
- Not knowing how to negotiate the terms of a purchase/sale agreement.
- Lacking construction experience when working through repair items.
These things all translate into a reduction of your bottom-line net proceeds. Remember the cliché about being careful to not be penny-wise and pound-foolish.
Focus on your net proceeds at the end of the transaction instead of the commission up front. Pay a fair fee for experienced, superior service and in the end, you will come out ahead every time!