Discount Brokerages – Do They Really Save You Money?

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Discount brokerages, flat fee brokerages and even FSBO’s (for sale by owner) try very hard to convince you, the buying public, that they will in fact save you money. Is this really true, or is this in itself, just another sales ploy to get you to part with your hard earned cash.

I know what you’re thinking. “Well, it must save me money because of the lower commission rate”. That could be true if all things were actually equal. You see, we are conditioned to look for sale prices where ever we go. The new flyers arrive in the mail or in the paper and we can’t wait to see what’s on sale or how much items have been reduced. We then compare prices with other stores and purchase the best perceived buy. Sometimes, if we actually need it or not.

Let’s take it a step further. You have seen flyers from two stores, store “A” and store”B”. Store “A” is well staffed, climate controlled, open until 10:00 p.m. and is selling the “widget” for $109.99. Store “B” has a skeleton staff, it’s hotter than all “get out” because they wont turn the air conditioning on and it’s only open until 5:00 p.m., the same time that you get off work. Store “B” is selling the “widget” for $89.99.

This amounts to a total difference in price of $20.00. You decide to buy at store “B” because it’s cheaper. You finally locate someone to help you find where they are keeping the “widgets”. The sales clerk is so over worked that they are grumpy and don’t really care if you get a “widget” or not. Their flyer said they had lots of “widgets”, but you find out there are only two left and they both look like they have been tossed around a little. You pick one out, stand in a long line to pay and finally make it out of the store to return to work because you had to go during your lunch break.

Once you get home you decide to try out the “widget”. It has a problem so you go back to store “B” the next day on your lunch break and return it. The store “returns” clerk gives you a hard time, but you finally get your money back. You return to work and decide to go to store “A” this evening after dinner and buy a “widget” there.

Store “A” still has a lot of “widgets” and they are easy to find because the night crew properly stocked them. You pick one out and while you are waiting only a few minutes in line to pay you realize you are no longer sweating because of the climate control system. You leave store “A” feeling good about your purchase, even though you spent $20.00 more. Or did you. Upon reflection you realize that if you had gone to store “A” first, you would have saved time (money), fuel (money), and stress and frustration (worth every penny).

Listing your home can be a similar experience. I know, I know, your home is different than a “widget” and there are some decent agents working for discount brokerages. That being said, there is a reason they are working for discount brokerages. They are lazy. Yes, I said lazy. The primary reason agents decide to work at a discount brokerage is because there is no shortage of clients. People are always calling them because of their low rates. These agents don’t have to spend time developing their data base of clients, service them properly or develop lasting relationships like top real estate sales professionals that work with a full service brokerage do. They don’t have to because there are always more people calling to ask about the low, low, prices.

Some discount brokerages advertise that they offer full service. Their “full” service includes a sign, listing it on the MLS system, and some bulk advertising in the local paper. Any “extra” services are primarily web-based and cost them very little or nothing at all.

Let’s examine the fee structure, shall we. In my trading area the standard listing commission rate is 5%. Let’s call this brokerage “A”. A local discount brokerage charges 3.5%. Let’s call this brokerage “B”. You have decided to list your home for $220,000.00. Using statistics that have been compiled by our local real estate board, the list to sale price average for brokerage “A” is 97.2%. The list to sale price average for brokerage “B” is 95.5%. Brokerage “A” then, was able to sell your home for $213,840.00. Brokerage “B” could only get you $210,100.00. The 5% commission brokerage “A” charges amounts to $10,692.00, which nets you $203,148.00 ($213,840.00 – $10,692.00). The 3.5% brokerage “B” charges amounts to $7,353.00, which nets you $202,747.00 ($210,100.00 – $7,353.00). You actually end up with $401.00 more in your pocket using the full fee, full service brokerage vs the discount brokerage. Is every case slightly different? Absolutely, but this is quite indicative of what really happens.

Not convinced yet? Consider the intangibles. People that want to list their homes with the discount brokerages do so because they are price driven. For them, the bottom line is everything. They want to stand around the water cooler with their other price driven friends and tell them what a great deal they got. However, because they are so price oriented, they also want to list their home for more than market value. This often results in more days on the market and ultimately expired listings. These people are often the most difficult to work with because they have a “take” mentality and never want to “give”.

They are so wrapped up in every last dime, they shoot themselves in the foot when it comes time for negotiations. Again resulting in more days on the market and expired listings. When I go on a listing presentation and encounter this type of person, I often walk away from the relationship. I can do this because I can choose with whom I work in my business. Most discount agents I know, can’t afford to do this because they only receive 1.5% of the 3.5% their brokerage charges. They need to do volume business. They can’t afford to build a truly satisfying business or take the time to really understand their clients. Therefore, they take listings that they probably shouldn’t, leading to high inventory and not enough time to service them all properly. When was the last time you saw a discount brokerage agent who employed a client care co-ordinator and a buyer’s agent?

I know of one agent that works for a full service brokerage that gives the leads he doesn’t want to work with (the price driven type) to an agent he knows at a discount brokerage in return for the other agents expired listings (as long as they agree to be contacted). One thing that is almost a certainty is the discount agent will have plenty of expired listings. It’s a match made in heaven!

To top it all off, the discount brokerage only offers 2% to the selling agent. That means if I had a buyer that wanted to buy a discount listing, I would only receive 2.0% commission for my part of the transaction. Normally, with a full service brokerage, the 5% commission would be evenly split and I would receive 2.5% of the total commission. This may not sound like much, but on a $220,000.00 home it amounts to $1100.00. If I did 20 transactions with a discount brokerage this year, that would amount to $22,000.00. Not exactly chump change. From this example it’s easy to see why most agents prefer to sell the full service listings (especially the discount brokerage agents). So by listing your home with a discount brokerage, you may not get the exposure required to sell your home in a timely manner. This also leads to more days on the market and to the aforementioned expired listings.

Putting this all together, one can easily see that discount brokerages are not all they appear to be. Do the discount brokerages really save you any money? Occasionally, when all the conditions are just right. Do your self a favour. When you list your home, list it with a top real estate sales professional who works for a reputable full service brokerage. It may cost you slightly more up front, but will more than make up for it in the long run.

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