Differences in Real Estate Brokerages and What it Means to You, the Seller

You may not be aware that the real estate business structure has changed significantly over the past thirty years, and particularly over the last ten. In the past, brokerages would front the majority of the costs of marketing the properties and concentrated on selling their own listings first and foremost. Real estate agents could only sell the listings that their company offered. If you decided to employ a Re/Max agent you would only be able to purchase Re/Max listed homes, making the selection much smaller. The real estate agent just acted as a bystander and assisted in completing the brokerage’s function with no real input regarding the marketing/advertising of the property. The reputation of the real estate brokerage hinged upon the quantity of its listings, the selling price of its listings, and how quickly that particular brokerage was selling the homes they had listed.

Today’s real estate sales business is simpler, but few people truly understand how it works. Today, nearly all real estate brokers will list a property for sale and offer what’s called a “buyer’s broker co-op fee” to the broker who represents the buyer. Most of the time, this fee is a percentage of the gross sales price. It comes out of the seller’s net proceeds and is paid upon closing. For example, half of a 7% listing fee (3.5%) usually goes to the seller’s agent and the other half typically goes to the broker who produces a buyer who closes on the property. On a 6% listing, the split would be the same. Typically, 3% would go to the seller’s broker and 3% to the buyer’s broker. Both brokers receive a fee out of the proceeds ONLY if your home sale closes. To earn this fee, they will be marketing, advertising, negotiating, completing legal paperwork, ensuring the sale goes smoothly, and also anticipating market trends that will affect your home sale. In addition, keep in mind that not all deals close and frequently after all this work is completed, a deal may fall through. The agent must then absorb the loss and start again at the beginning and resell the home to another buyer. Furthermore, marketing and advertising a home properly (which very few agents/brokerages do) is costly. My costs for advertising and marketing a property usually eat up 25-50% of the revenue a commission brings in.

Now that you understand how a commission is split and what you are paying for in a listing, how do you choose a company to list your home with? In today’s highly competitive and technology-driven environment, the services, knowledge, and marketing you receive depends more upon the individual agent you hire to list the home than the brokerage. As with any other profession, real estate agents have varying abilities as well as marketing budgets. Most agents do very little business and cannot afford to market your property at all. They count on a sign and MLS to do the work and wait for a buyer to surface. Sometimes that happens sometimes it doesn’t. Be careful regarding whom you hire to list your home for sale! Hiring the neighbor or relative who just got his or her license may seem like the “nice” thing to do until your home takes 6 months or more to sell and neighbor/relative leaves 10k on the table they could have negotiated and won for you but didn’t have the negotiating skills to achieve. This could all happen and you would most likely not even have no clue that anything was amiss! Since most agents charge 6% (as already described), you would be best served by hiring the most competent and able agent with experience that you can find. You will be paying the same price as you would for a less talented agent.

What about discounted services? While all real estate fees are negotiable, I find it hard to believe that an agent/brokerage can turn much of a profit at less then 3% for their side of the transaction unless they are shortchanging the clients by providing little to no marketing exposure. Many, many “Discount Model” real estate companies have been started and then gone out of business. Foxton’s is the latest in a string of discount brokerages that have gone out of business, even though they had Wall Street support and millions of dollars in seed money. Their intent was to “revolutionize” the real estate business with super low fees. Also consider this: NO discount brokerage (defined as charging fees below the average of 6%) has a dominating, or even leading market share in any large metropolitan area in the country. In my opinion, they survive because many people think cheaper prices somehow equate to the same level of service provided by non-discount brokerages. They think, “Why pay 6% when I can sell for 4.5% and the end product is the same?” When people ask me this question, I always answer them with two a questions. 1) When you’re looking for a surgeon to perform surgery on you, do you go to the lowest price guy just to save a buck? 2) If this brokerage really does everything that a full-service brokerage does, why are they starting their negotiations off by saying they are very willing to accept much less for their services than most others in the business right out of the gate? Is this who you want to negotiate for you on your home sale with hundreds of thousands if not more on the line?

In this post, I focused on the seller side of things. In a future post, I will highlight the buyer’s side (which is much less brokerage oriented).

This entry was posted on Thursday, December 27th, 2007 at 11:33 am and is filed under Selling. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.