Hank Miller

Discount Real Estate Brokers

The appeal of “discount brokers” or “flat fee brokers” to sell homes is an enticing siren song. However, what is advertised and what actually happens are often diametrically opposed. There are variations, but the consistent theme is a “do it yourself” approach after your home is placed into the MLS. Since sellers typically pay 3% to buyer agents (that’s the norm in Atlanta), often the “swing” between discounters and full service brokers is 1% to 1.5%; and that’s not considering the traps or buyer advantages inserted into the contract by the buyer’s agent.

Consider:

• Most discount real estate brokers charge $500-$700 PAID UP FRONT to place a home in the MLS. If it sells, an additional MLS fee of .0034% is collected. The up front fees are non refundable whether the home sells or not.
• You may have an “Open Listing”, not “Exclusive Listing”. You have the ability to sell the home yourself and not pay a seller commission, but you also will have reduced assistance from the listing broker as all they are doing is placing your home in the MLS.
• Your $500 upfront provides little beyond the MLS entry. It’s often pay as you go if you want “extras”.
• If and when you do get a contract on your home, you should expect a one page “guidance” sheet that simply tells you which boxes should be checked and terms to use for a counter. If you pay extra and get an “agent” to assist you, the strong odds are it will be an inexperienced rookie. For the inspection resolution, you’re usually on your own.
• If and when you reach the closing table, expect to pay 3% of the sale price to the selling broker.
  

The discount broker business plan is sound, outstanding in fact. Home sellers pay several hundred non refundable dollars to have a firm enter their home into the MLS; clearly that is important. A sign with the company name is put out and that company is noted as the broker in the MLS. Anything “extra” that might be needed is charge on a per item basis; again easy for the broker as there’s no sales pressure. There is however “suggested” marketing that these brokers push, all at additional cost. The discount broker simply puts it on the seller to pick and choose “upgrades” and they pay as they go.

The beauty of this business is obvious, the broker has zero upfront expense, in fact, they’re paid ahead for all expenses. If the home sells, great; if not, great. They also have buyer bait; they are the contact for the home and they will receive buyer leads from the exposure. Those sign calls are converted into buyer clients, buyers also have no upfront costs and most transactions will bring a 3% commission. So while discount brokers attract sellers, it’s the buyers that bring in the revenue – at the expense of the duped sellers. That is a tremendous business model; minimal outlay of cash, a benevolent “we feel your pain” approach with sellers, a great bait system to attract buyers and no outlay even if a home sells as MLS fees are on the seller. The more they sell the “discount” approach, the more opportunity for their signs to attract buyers and the more opportunity to hook a buyer. The listings are simply bait.

The Math

Assume a $200,000 sale and a 5% total commission (3% to the buyer agent, 2% to the listing agent):

• 3% of the sale price goes to the selling broker ($6,000)
• Minimum $500 UP FRONT for basic listing (assume you want a few photos, a tour and web placement so call it $1000)
• MLS fees are .0034 x 200,000 = $680
• basic total at this point is $7,680

Variables during contract negotiation (assuming no additional “help” is ordered):

• Closing costs, warranties, termite bonds, appraisal issues, surveys, cleaning services, personal property…how is that handled?
  
• Inspection and repairs – who is doing it, what’s legitimate, how are you going to negotiate cost of repairs?
• Who is reviewing the offer to ensure that the seller interests are properly represented?
  
• How many buyer loopholes are in the contract that could result in the deal falling apart?

Most brokers will charge between 5%-6% to list your home and handle everything. Assume that it’s 5%; your actual the difference is the listing side of 2% since the 3% is to the buyer agent even with a discount broker. So $4,000 is the full service side and we know the discounter will cost at least $1,680 so the actual difference is $2,320; still a good chunk of change.

A few things not typically considered:

• Your monthly payment on a $200,000 home is about $1,600+-
• Utilities depending on the season; estimate $300 a month
  
• At the very best, expect a 10 minute market analysis – likely completed by a rookie agent, will be accurate?
• With minimal marketing, it’s very reasonable to expect that your home will expire at least once (at $1600 per month)
• If and when you get an offer, will you be able to handle the negotiation and effectively position yourself with the opposing agent?
  
• When the home is relisted, are you going to be able to explain the reason it didn’t sell effectively, or are agents going to see it and leave it alone watching is languish in the ocean of inventory?

Bottom line is that this might be a viable option in a strong seller’s market; not now. This is a great business model for the discounters because their primary business is buyers. Listing homes is just a means to an end for them; nothing more than buyer bait. While many agents can’t stand working with companies like these, we’ve done many deals with them. Of course it is more cumbersome since we’re dealing with the owner directly, but our buyers do much much better since we roll right over these unfortunate unrepresented sellers…and get paid to do it. On every deal we’ve done, there is absolutely no doubt that the sellers would have fared better with a full service broker.