In the hot seller market, discount real estate brokers are gaining popularity
Sharon Mather wanted to sell her home in Long Beach, California, but was reluctant to pay the standard listing commission. During the intense 2020 seller’s market, she is one of many owners rethinking the wisdom of paying listing agents full freight.
After shopping around, Mather found a discount broker willing to market his home for just 1%, well below the 2.5% typically charged by listing agents.
In addition to the 1% promised to his listing agent, Mather agreed to pay the buyer’s agent 2.5%, and the house sold quickly that fall. Mather’s total selling costs were 3.5%, well below the typical 5% total.
Door-to-door seller: “That’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 prevailing rate of 5%, Mather would have paid $20,000 to the agents involved in the sale of her house.
“That’s a lot of money to save,” she says.
Mather hired an agent she found through Clever Real Estate, a nationwide service that matches sellers looking for bargains with agents willing to lower their fees. The company’s founder says discount brokerages have renewed appeal in the post-coronavirus housing market – where bidding wars are common, time to market is short and desirable homes often sell above the mark. displayed price.
“Sellers ask themselves, ‘Why did I spend so much money when my house sold in one day?’” says Ben Mizes, CEO and Founder of Clever Real Estate.
Clever Real Estate markets its services nationwide, although it does not employ agents directly. Instead, it leads to the list of agents looking for clients.
The nation’s largest discounter, Seattle-based Redfin, also markets listing fees of 1% to 1.5%. In contrast, the nation’s largest brokerage, Realogy Corp., says its average is 2.43%.
Realogy – which owns the Coldwell Banker, Century 21, ERA and Sotheby’s International Realty brands – said the average commission rate for its business-owned operations had risen to 2.43% per “transaction side” over the past nine first months of 2020, up from 2019. record of 2.41 percent. If the listing agent and buyer’s agent split the prize equally, that would suggest an average commission of about 4.9% this year.
Both Clever Real Estate and Redfin insist that their clients receive the same level of service as sellers who sign up with full-price agents for thousands of dollars more.
Even so, Redfin says its market share was just 1% as of September 30. US home sellers, it seems, are sticking with full-price brokers.
Daryl Fairweather, Redfin’s chief economist, says that’s largely because home sales are a high-stakes, low-frequency transaction, a reality that forces many sellers to embrace the status quo.
“They don’t get a lot of opportunities to learn about commissions,” Fairweather says.
Pressure on commissions
In the days before the Internet, real estate commissions averaged 6%. While some sellers are still paying that amount, the going rate has dropped to 5% or less.
As technology enabled new ways of doing business, conventional wisdom held that real estate fees took precedence over stock brokerage commissions and travel agency fees.
The reality was quite different. Commissions fell during the real estate boom of the early 2000s, only to rebound during the real estate crisis, when homes were harder to sell.
Afterwards, commissions started to fall again, hitting record highs in 2019. REAL Trends, a Colorado-based research firm, says the average commission slipped to 4.96% in 2019 from 5.03% in 2018. The company has yet to compile 2020 numbers.
“It looks like the downward trend in the gross commission rate is continuing and will continue throughout this year and next,” says Steve Murray, head of REAL Trends. “We know from our historical data that when the ratio of listing inventory to the number of real estate agents decreases, the average commission rate also decreases.”
In other words, when housing is scarce, real estate agents compete for listings by cutting their fees. Inventories of homes for sale have fallen 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. Meanwhile, falling real estate commissions as a percentage of sale price have been offset by rising home prices.
How are commissions on home sales determined?
A brief overview of how commissions are determined: The seller negotiates a fee with the listing agent, usually 2% to 3% of the selling price of the home.
Most sales involve not only the listing agent, but also the buyer’s agent, and the seller determines how much to pay to this agent, who often plays a crucial role in bringing a buyer to the property.
The amount the seller offers to the buyer’s agent appears in the 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, says her agent urged her to pay 2.5% to the agent representing the buyer. Offer less than that, he warned, and officers might not show him his house enthusiastically.
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 only get paid when a deal is struck. All the work they do on property viewings, 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 push for better deals on everything. A rapidly changing market like today’s can also put pressure on listing commissions by forcing consumers to question the value of listing agents.
Despite this, the traditional real estate model has proven remarkably resilient and some discounters have failed. In a highly publicized illustration of this reality, discounter YHD Foxtons caused a stir during the real estate boom by heavily marketing 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 upstart, London-based Purplebricks, launched an ambitious attempt to expand into the United States. But Purplebricks never gained popularity. The company withdrew from the United States in 2019.
That leaves Redfin as the biggest discounter in the US real estate market. Reflecting the attractiveness of the discount model, Redfin’s stock market value is greater than that of Realogy and RE/MAX combined.
In many metropolitan areas, local brokers are emulating Redfin’s business model with their own 1% listing offers.
Various business models
Redfin has grown 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 adopts a different strategy. It partners with agents who already operate with national brands or independent companies. Clever Real Estate promises to relieve agents of the cost of acquiring clients and boost their profiles in the areas where they operate.
“Because we’re saving them on the cost, they’re willing to lower their fees and keep the same service,” says Mizes. “If Clever sends you 20 additional ads a year, that’s a lot of billboards in construction sites.”
While Clever Real Estate agents take 1% as a listing fee, they generally 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 quickly to his calls and brought the transaction to a smooth close.
“He turned out to be great, just a real go-getter,” Mather says. “You would think I was paying him a lot more than 1%.”