Why Using a Discount Broker Will Waste Your Money and Why Most “Full Service Agents” Won’t Be Worth What You Pay For

I recently commented on another real estate agent’s blog about why discount real estate brokers do not really save clients (sellers) any money 99% of the time. To say the least, it triggered a storm of comments from agents and the general public. This is why I decided to devote an entire blog post to my feelings on the subject and point out the issues for sellers. I honestly think if you’re trying to sell your own home, selecting a real estate brokerage type — discount or full service — and the real estate agent is a lot like playing poker. You’re not sure which combination is going to result in the most money gained at the end of the day. Let’s start from the beginning and I will give you the facts on both forms of service and even some advice about picking the actual listing agent.

Benefits/Downsides of a Discount Broker Model For Sellers

First, it’s very inexpensive! Some brokers will just place your home on the market (the local MLS) and place their sign in your yard for a flat fee. Whether your home sells or not is completely up to you. Some of these very limited brokers will not even help you with contracts and the offers that are received. You will either need to pay a real estate attorney to do the paperwork correctly, or you will need to take the risk of doing it yourself. If you can’t sell your home on this very limited plan, you lose the money you paid for the flat fee.

Most discount brokers (such as Help-U-Sell and Assist-2-Sell) charge the same flat fee, although in this case the fee is usually a few thousand dollars for their side of the transaction rather than a few hundred for a very limited flat fee. You still normally pay the fee upfront and the amount typically can be decided by the client, meaning that if you want more service than the flat fee covers, you can pay extra all the way up to essentially full service. This, in my opinion, is a better plan than the limited flat fee. If you find that you are in over your head, you can just phone your agent and sign up for more service. The down side is that these companies are just “helping” you sell your home. Since the fee is charged upfront, if you decide the “help” isn’t helping much, then you’re out thousands of dollars rather than just a couple hundred. Again, usually the service includes listing with the MLS and installation of a sign. I believe Help-U-Sell will even lend you some open house signs so that you can hold your own open houses if you choose.

There are some important facts to consider about discount brokers. In no metropolitan area of the U.S. does a discount brokerage have a leading market share. In fact, it would be difficult to find one that even had a true foothold in any metro market. The reason is pretty simple: they do not offer ALL the services needed! Real estate transactions involve high dollar amounts and high emotions from both sellers and buyers. Once you get an accepted offer, there are the additional complications of appraisers, inspectors, title companies, mortgage companies, and local municipalities. There are obviously many parties involved, and a listing agent must be able to handle all of those parties correctly and make sure their client is getting the best possible outcome.

You also should consider marketing expenses and the value of your time. With the discount model, the brokers will generally only give you access to MLS and a For Sale sign. With the flat-fee brokers, most of the time you will have to do your own showings and negotiations. But prior to even getting that far, you will need to spend money advertising your home. In Tucson, a small 4 to 6-line ad in the Arizona Daily Star will cost over $200 per weekend. On a discount plan, you will be paying this cost yourself. If, say, you need to place 10 ads to procure a buyer, that’s $2000.00 out of your pocket and you don’t even know if your home sale will close. In addition, you should offer flyers on the sign. Those will cost you about fifty cents to a dollar for each 2-sided color flyer. If a mere 250 of those are used, that’s another $125-$250 out of pocket. This type of advertising is the minimum that I would do if I wasn’t a real estate agent and wanted to use a discount brokerage to sell my home. Furthermore, don’t forget to factor in all the time that you will spend doing open houses, creating flyers, ordering advertising, and showing the house. Don’t forget the time you will need to spend learning all about the market and what other homes are selling for and how yours stacks up in an unbiased line by line study (which is almost impossible for sellers to do because everyone thinks their house is the best and that people would be foolish not to purchase it).

Another thing I want to touch on about the discount brokerage is that their goals do not entirely line up with yours. The reason they almost all charge upfront is because they know you are 99% likely NOT TO BE ABLE TO SELL your home, even with MLS inclusion, a professional For Sale sign, and borrowed open house signs. Once they receive your payment, they don’t really need or even want to get your home sold! Their sign at your house attracts buyers whom they can represent in the purchase of some other home, usually netting them at least a 3% commission. Why would they want to halt their essentially free advertising (which you subsidized when you paid upfront) that picks up buyer clients?

One last point: let’s say the MLS does, on its own, get your home sold (this does happen) and the service you have paid for does include negotiation assistance. The discount broker is the same person who essentially said, “List with me because we’re the cheapest.” Now, the “cheapest” is helping you negotiate for hundreds of thousands of dollars. If these real estate agents were strong negotiators and had a multitude of clients, they would not want to charge bottom dollar prices. A real estate agent can only handle so many clients, and the reason they go the discount route is often because could not make enough money charging higher fees. They have to charge less for the poorer service they provide or insufficient knowledge they possess. If I were in any other high pressure situation (which is what selling a home is), such as needing surgery or an attorney to represent me in court because I was accused of a crime I did not commit, I would not for one second even consider the cheapest guy! It wouldn’t be realistic to hope this would get me the result I needed and that I’d come out way ahead by not having to spend a penny more than that guy charged.

Benefits/Downsides of a Full Service Broker Model For Sellers

By now, you’re probably saying, “Michael, I think you’re right. I’m going to use a Full Service Agent.” But hiring a full service agent does not guarantee getting full service. Again, the vast majority of agents do not spend a penny to market your listings. Why? They rely entirely on their company to do that for them, and fewer and fewer companies are providing full marketing for their agents. You need to hire a realtor who not only works for a full service firm but also does his/her own private marketing over and above that which is provided by their company. This type of marketing includes direct mail advertising, home magazines, newspapers, open houses, agent connections, cold calling prospective buyers, and cold calling agents known to work the area in which the listing is located. An individual agent who, on average, sells 1 or 2 homes a year cannot afford to do this type of marketing at all. Additionally, if you’re reading this, you probably understand the importance of the Internet in today’s high-tech real estate world. That is what I personally push because I feel it gets my clients the most for the money and the best audience possible to purchase their home, although I’m not knocking the other methods. I either currently do some forms of what I stated or have tried it with varying results for my personal business. A true full-service Realtor brings so much to the table, you can now see why they need to charge full price for their services.

One of the main benefits of full service is exposure. Your home should get more marketing exposure and push behind it. The real estate brokerage should have their own basic marketing strategies for all of their listings, and if you have chosen a great listing agent, he or she will offer additional personal marketing to push your home. You will, of course, get the MLS and For Sale sign, and in most situations, you will not pay a dime until the real estate brokerage/listing agent produces a willing and able buyer who makes an offer that you have to approve and the sale closes. Sometimes a sale — especially in this market — can take years! Imagine all the work the agent is doing behind the scenes on your behalf without you even having to pay for it!

A full-service listing agent should also be a good to great negotiator. Simply put, if a full service agent has been around a while in this market and has at least several active listings going at a time, he or she is most likely a good negotiator. As an agent myself, I know how much pressure buyers and sellers place on us to reduce commissions or lower the listing fee for the business. If they were not charging for all the services they provide, it is not long at all before they either become a discount agent or go out of business. It’s just that simple. Many sellers do not appreciate how expensive it is for an agent to handle a listing. Furthermore, it requires a MINIMIUM of 40-60 hours of work if the home sells in a few weeks, and in this market, I would be willing to bet I am putting in close to 80-100 hours per listing from first conversation with potential seller to closed sale. It’s just a lot of work to make homes sell.

A full-service brokerage’s interests line up with yours, since most of the time, a commission is not collected until a sale is closed. An offer is not an agreement until the seller and buyer come to terms. It is in a full service agent’s best interest to get you the terms that you need and want so you will allow a deal to go through and they can get paid. Remember, most discount brokerages collect when you list and if you don’t sell, well, that doesn’t matter because they got paid.

So tell me what you think. Is saving that 1%-2% really worth using the discounter? Keep in mind that, as a rule, you’re still going to have to offer 3% to buyers agents even when you go with a discounter. In my opinion, if I can’t gain my client at least 1%-2% through negotiation alone, I know something is wrong! Not to mention all the other services that the full service brokerages provide their clients without even thinking otherwise.

This entry was posted on Monday, March 3rd, 2008 at 4:07 pm and is filed under Buying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.