• Tue. Jun 21st, 2022

In the popular seller market, discount real estate brokers are gaining traction

Sharon Mather wanted to sell her house in Long Beach, California, but was reluctant to pay the standard listing commission. During the intense sellers market of 2020, she is one of many owners to rethink the wisdom of paying full freight to listing agents.

After shopping around, Mather found a discount broker willing to market his home for a price of just 1 percent, well below the 2.5 percent typically charged by listing agents.

In addition to the 1% promised to his listing agent, Mather agreed to pay 2.5% to the buyer’s agent, and the house sold quickly this fall. Mather’s total cost of sales was 3.5 percent, well below the typical 5 percent total.

Home seller: “It’s a lot of money to save”

Based on his sale price of $ 400,000, Mather spent $ 14,000 in brokerage fees. If she had accepted the going rate of 5%, Mather would have paid $ 20,000 to the agents involved in the sale of her house.

“It’s a lot of money to save,” she says.

Mather hired an agent she found through Clever Real Estate, a nationwide service that matches salespeople looking for bargains with agents willing to lower their fees. Company founder says discount brokers have a renewed appeal in the post-coronavirus housing market – where bidding wars are common, time to market is short, and desirable homes often sell for a premium at list price.

“Why did I spend so much money when my house sold in one day?” »Explains Ben Mizes, CEO and Founder of Clever Real Estate.

Clever Real Estate markets its services nationwide, although it does not directly employ agents. Instead, it leads to listing agents looking for clients.

The nation’s largest discounter, Seattle-based Redfin, also markets a 1% to 1.5% registration fee. In contrast, the nation’s largest brokerage firm, Realogy Corp., says its average is 2.43%.

Realogy – which owns the Coldwell Banker, Century 21, ERA and Sotheby’s International Realty brands – reported that the average commission rate in its company-owned transactions rose to 2.43% per “trade side” over the past nine first months of 2020, up from a 2019 record of 2.41 percent. If the listing agent and buyer’s agent were to split the hold equally, that would suggest an average commission of around 4.9% this year.

Clever Real Estate and Redfin both insist their customers receive the same level of service as sellers who sign up with agents at full price for thousands of dollars more.

Despite this, Redfin claims its market share was only 1% as of September 30. American home sellers, it seems, are sticking with full-price brokers.

Daryl Fairweather, chief economist at Redfin, explains that this is largely because home sales are a high-stakes, low-frequency transaction, a reality that leaves many sellers to embrace the status quo.

“They don’t have a lot of opportunities to learn about commissions,” says Fairweather.

Pressure on commissions

Before the Internet, real estate commissions were on average 6%. While some sellers still pay that amount, the going rate has dropped to 5% or less.

As technology has enabled new ways of doing business, conventional wisdom has held that real estate charges would go in the direction of stock brokerage commissions and travel agent fees.

The reality was very different. Commissions fell during the real estate boom of the early 2000s, only to rebound during the real estate crisis, when houses were more difficult to sell.

Then the commissions started dropping again, hitting all-time highs in 2019. REAL Trends, a Colorado-based research company, says the average commission fell to 4.96% in 2019, from 5.03% in 2018. The company has yet to compile numbers for 2020.

“It looks like the downward trend in the gross commission rate is continuing and will continue for the remainder of this year and into the next year,” said Steve Murray, director of REAL Trends. “We know from our historical data that when the ratio of ad inventory to the number of realtors goes down, the average commission rate goes down as well. “

In other words, when housing is scarce, realtors compete for listings by lowering their fees. Inventories of homes for sale fell sharply during the coronavirus pandemic.

Yet although real estate commissions have been reduced, they have proven remarkably resilient to the pricing pressures that have plagued other industries. At the same time, the fall in real estate commissions as a percentage of the sale price was offset by the rise in house prices.

How door-to-door sales commissions are set

A quick look at how commissions are determined: The seller negotiates a fee with the listing agent, typically 2-3% of the selling price of the house.

Most sales involve not only the listing agent but also a buyer’s agent, and the seller determines how much to pay that agent, which often plays a crucial role in getting a buyer to the property.

The amount the seller offers to the buyer’s agent appears in the multiple listing service data for the property. Even when sellers only pay 1% to their own agents, they often offer 2.5% or even 3% to buying agents.

Mather, the seller in California, said her agent urged her to pay 2.5% to the agent representing the buyer. Offer less than that, he warned, and agents might not show him the house with enthusiasm.

The National Association of Realtors, which has long feared allegations of antitrust violations, points out that rates are set by individual agents and their clients. Estate agents also point out that they are only paid when a deal is made. All the work they do on property tours, open houses, and home inspections is done for free, in anticipation of a payday at the closing table.

Commissions have fallen in recent years in part because consumers have been conditioned to ask for better deals on everything. A fast-paced market like today’s can also put pressure on listing fees by causing consumers to question the value of listing agents.

Despite this, the traditional real estate model has proven to be remarkably resilient and some discounters have gone bankrupt. In a high-profile illustration of this reality, discounter YHD Foxtons caused a stir during the real estate boom when he heavily marketed cut-rate commissions in New York and New Jersey. This company gained a foothold in the metropolitan area only to go bankrupt in 2007.

More recently, another newcomer, London-based Purplebricks, launched an ambitious attempt to expand into the United States. His pitch: Sellers would pay a lump sum of $ 3,200, plus a commission to buying agents. But Purplebricks never gained ground. The company pulled out of the United States in 2019.

This leaves Redfin as the biggest discount in the US real estate market. Reflecting the appeal of the discount model, Redfin’s market value is higher than that of Realogy and RE / MAX combined.

In many metropolitan areas, local brokers are mimicking Redfin’s business model with their own 1% SEO offers.

Various economic models

Redfin has expanded nationwide with an approach that includes hiring agents as full-time employees. This is in contrast to most brokerage firms, where the agents are independent contractors. Another commission reduction concept, UpNest, allows sellers to search for reduced fees online.

Clever Real Estate takes a different strategy. It partners with agents who already operate with national brands or independent companies. Clever Real Estate is committed to relieving agents of the cost of acquiring clients, and boosting their profiles in the areas in which they operate.

“Because we save them on costs, they are ready to reduce their costs and keep the same service,” explains Mizes. “If Clever sends you 20 more announcements per year, that’s a lot of meter signs.”

While Clever real estate agents take 1% as a listing fee, they typically urge sellers to pay buyers agents 2.5% or more.

Mather says she was impressed with the agent she found through Clever Real Estate. Despite the reduced commission, the agent – Cyrus Mohseni of The Keystone Team – responded to his calls promptly and drove the transaction to a smooth close.

“He turned out to be awesome, just a real go-getter,” says Mather. “You would think I was paying him a lot more than 1%.”

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