As startup companies promising to dismantle the traditional real estate brokerage continue to proliferate, more sellers are turning to real estate services which promise to save them a ton of money to help them sell their home.
Sure, it's an option. However, when you pull back the curtain, it's surprising how these discount brokerage services really do a disservice to individuals who want to sell his or her home for the best price possible.
If you've thought about using one of these services, it's best to have the whole story before you commit.
Spoiler Alert: The traditional real estate agent is still the best investment possible in nearly every situation.
What Is a Discount Brokerage?
To be clear, a discount broker or brokerage provides a set services usually for a set price, or a fraction of the commission charged by a traditional real estate brokerage. This flat-fee includes the usual services necessary to get the most out of selling a home.
The difference here is the fee is severely discounted from what a traditional real estate agent's service costs. It sounds like a good thing – yet it there are some serious flaws with the model.
#1: They Take Advantage of Highly Saturated Real Estate Markets
In nearly every situation, discount brokerages thrive in highly saturated and highly competitive real estate markets.
These are markets with high competition among agents who are often forced to cut commissions, offer more services and perks than other competing agents and ultimately make a few too many sacrifices to win each listing.
This type of competition is good for sellers – however as we'll see later, this type of competitive environment allows for discount models to create a "race to the bottom" in terms of cutting commissions paid to their real estate agents.
#2: They Mislead the Consumer Into Thinking Earning A Commission Is Wrong
The amount of money a real estate agent earns from a transaction is not a simple figure.
Contrary to popular opinion, it's not based on a few hours of work to write up a contract. It takes considerable time, patience, persistence and money to make a living in real estate.
Often, it takes a year or more of work to handle a single transaction – especially when you consider the sheer amount of time it takes to build a client's trust - and that is just the starting point.
Months and sometimes years can go by before the seller is ready to list their home. During this time the agent is nurturing the relationship, perhaps showing the seller other properties, having to defend their value against other competing agents, working up marketing plans, taking the client to lunches/dinners, etc.
In the event that they do secure the listing, they are spending a significant amount to market the property as well as keeping up with association fees, travel fees, photography, staging, painting, moving expenses, etc.
Take, for example, the commission on selling a $1 million dollar home in Los Angeles. If the agent is lucky enough to get 2.5% on the list side, that's $25,000 in gross commission available to the agent.
Now take into consideration the costs we spoke about above; i.e., marketing, brokerage splits, association fees, travel fees, lunches, gas, and so on. In the end, the agent is probably earning closer to $12,000 (before taxes) for over a year's-worth of work.
#3: Discount Brokerage Agents Often Discount Their Attention To Detail
I'm sure we all can agree that simply listing a home on the MLS isn't going to guarantee it will sell. More accurately, it simply means it will get attention. Now, who will ensure that this attention will be disseminated, filtered, vetted to ensure that a high quality of buyers will given the best experience when showing your home?
If an agent is earning what amounts to just a few thousand dollars for months and months worth of work (i.e., the discount model), how diligent do you really think they will be when it comes to showings, marketing, vetting buyers, security during open houses, etc?
Sophisticated sellers understand that their agent must work with them on the same team and be motivated to do an amazing job.
Thus, they are willing to pay for value - not playing the game of saving $10,000 to lose out on $100,000 or more in selling at a premium price.
#4: Misinformation Spread By Reality TV Fuels The Discount Model
If you've ever watched, "Million Dollar Listing" on Bravo, you may think the entire process is so simple that every single agent is grossly overpaid for the amount of work they do.
By flashing high commission amounts on the screen for what appears to be an afternoon's worth of work – is a grossly edited-down version of what really happens.
In fact, most of those agents are spending months if not years or more marketing these high-end luxury homes, investing heavily in marketing, catering, luxury rentals (cars, decor, artwork) often only to lose the listing to another agent and end up with nothing.
Shockingly, these "reality" shows are the farthest thing from actual reality.
#5: The Allure of "Unlimited" Leads Provided To The Discount Agent
Take a moment to consider the average real estate agent and their daily priorities.
As with any business, one of the most important activities every owner MUST do is always bring in new business. In real estate, they call this "prospecting"; or the act of doing activities which bring in new clients to the business.
Discount brokerages have taking advantage of this pain point and have added to their services "unlimited" leads provided to the real estate agent
Here's the kicker: If these agents sit down and do the math, they would actually be better off by keeping most of their hard-earned commission (though the traditional commission model) and re-investing that money into a team which could help them prospect more efficiently and thus allowing for more one-on-one time with their existing clients.
#6: Discount Agents Cannot Afford to Spend A Year or More with Clients
The traditional real estate agent is tasked with a daily juggling act to remain on top of managing all their client's expectations and concerns. They are considered the go-to individual for all their client's real estate needs.
If you've ever observed a high-producing real estate agent in their environment, you quickly realize that they have an intimate knowledge of their client's personal situations, their family, their financial details and are basically considered their personal representative to all things real estate.
Relationships like this are not formed over a weekend, rather they are years in the making.
Traditional high-producing agents can afford to spend quality time with their clients without feeling financial pressure to "cut-it-short" and move on to the next client.
They are able to afford the extra time and attention due to every client because the traditional commission model rewards them for the value they provide.
#7: Discount Brokerages Thrive On Quantity, Not Quality
Discount brokerage models lend themselves to agents pushing for volume over individual client attention.
And who could blame them? The discount brokerage model forces them to chose quantity over quality if they want to survive in the business.
If an agent wants to earn that $12,000 in commission mentioned earlier, they must close far more transactions in the same amount of time than in the traditional commission-based model.
Let's not forget about the time that agents ALSO have to spend prospecting, or finding leads to sustain their business in the future. Where will this extra time come from? It will come at the expense of quality time spent with their existing client base.
That's an expensive situation, not just for the agent but also for their sellers.
#8: The Seller/Agent Relationship Suffers
As mentioned, quality relationships take time. Real estate agents who are caught in the discount model simply don't have the time it takes to form quality relationships with their clients when compared the traditional commission model.
When commissions are reduced, volume MUST take its place. As stated previously, volume and quantity can only exist at the expense of quality.
It's all about churning clients in and out faster, to allow enough time for prospecting for new ones.
#9: Homes Simply Sell for Less Under The Discount Model
It goes without saying that most highly experienced, high producing agents are still on the traditional commission model - and for good reason.
Experience translates into profits much easier when adequate time and value is given to every seller. Agents with experience know how to reduce the costs, negotiate for higher sales prices, and improve the seller's overall bottom line.
In most markets, a traditional, experienced real estate agent will get more for a home than an agent who works for a discount brokerage – even when factoring in their commission.
#10: Discount Brokerages Fuel A Race To The Bottom
The technology boom which has happened within the last decade is staggering.
Technology has made us more efficient, more demanding and undoubtedly has made our minds open to the possibility of breaking down antiquated methods and industries to replace them with systematic efficiency.
Where technology seems to get it wrong though, is in its lack of ability to systematize the radical nature of human emotion.
To date, the only proven method to deal with a human in a fragile, sometimes unstable emotional state is another human being who has the ability (through experience) to empathize with the individual and move toward finding a solution which addresses their concerns.
How emotional is buying or selling a home? For most people, it's the most emotional transaction of their lives.
Real estate agents with experience understand these emotions. Why? Because they've dealt with them again and again (sometimes daily) over a period of many years in many different scenarios.
So I ask you: What value does experience bring? Should experience in an industry be ignored in favor of a reduction in the amount the individual is compensated?
Discount brokerages seems to bet their entire business on answering "Yes" to the above question.
Due to competition in the market place, they continue to cut agent's commissions to compete with even newer discount models - thus continuing "the race to the bottom".
So the question becomes: Who really wins in the end?