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Discount Real Estate Brokerages: Worthwhile or a Scam?

“What about the buyer’s side? Do they get no money for all their efforts? This can’t be the whole story.”

Flickr.Houseforsale.images_of_money“Sell your home for only 1.5% commission!” read a billboard that caught my eye recently as I drove down the freeway.

As a Real Estate Broker with a family to support, my first thought was that if I made that little on every transaction, I wouldn’t be able to put food on the table. My second thought was: “What about the buyer’s side? Do they get no money for all their efforts? This can’t be the whole story.” So I decided to investigate.

Discount real estate brokerages promise lower commissions than full-service realtors. And when the real estate market begins to tip in favor of sellers (as it is currently doing), these discount brokerages sprout up like weeds.

Whether you choose a discount real estate brokerage or a traditional brokerage, you should understand what each provides and how they are compensated.

Understanding commission splits

In the traditional real estate brokerage model, the seller pays the listing broker a percentage of the house’s selling price (usually 6 percent, though it is negotiable). That listing broker usually has a split with the listing agent and also offers out a cooperating broker compensation of up to half the total commission to the buyer’s broker, who then splits that with the buyer’s agent.

In other words, that 6 percent of the purchase price can go to paying the commission for as many as four people, plus any service people like transaction coordinators should the agents use them. Still, to any seller,  6 percent is a lot and — in many cases — may make the the difference between breaking even on your home or being able to pay off the mortgage at closing. In these cases, discount brokerages can be awfully tempting.

Discount brokerages with flat fee listings

Discount brokerages have several different options for those who want to sell their homes. The first is a flat fee listing. With this method, the broker lists your home on the Multiple Listing Service (MLS) for a set fee (such as $2,000). Keep in mind you still have to pay the buyer’s broker’s fee, which is generally between around 2.5 and 3 percent.

The discount brokerage will then spend all of a few hours taking pictures and inputting details on to the MLS. From there on, you’re on your own. Step one is marketing the property. Agents at traditional brokerages don’t simply end their marketing efforts when they put a property on the MLS. For example, when I take a new listing, I also syndicate it to Zillow, Trulia, Craigslist, Pinterest, Twitter, Facebook and more.

In addition, I put my sign up on the property and print flyers for buyers to take as they go by. I also call or email my past clients, current clients and sphere of influence. Sometimes these contacts make a huge difference in getting the home sold quickly. These efforts take time and money — and you’ll have to manage it all if you pay for a flat fee listing. In addition, you’ll have to handle showing times, buyer questions, offers, counter offers, disclosures, home inspections, termite inspections, escrow paperwork, HOA documentation and transfer fees, Natural Hazard Disclosure packets and more. But wait, you don’t know which 100+ pages of mandatory disclosures your state requires or where to get them? You aren’t a member of the association of Realtors which provides them? Looks like you need to move on to option two, discount commission percentages.

Discount brokerages with commission percentages

With a discount commission percentage listing, just as the ad that I saw hanging above the freeway stated, you can literally list your home for as low as 1.5 or 2 percent commission. The fine print: That’s to the LISTING BROKERAGE ONLY. You still have to pay the buyer’s brokerage. So a more truthful ad would state something like “Sell your home for 4 percent instead of 6.” Not so much of a difference. But I understand that every dollar counts. So let’s investigate further.

If a listing broker is listing your house for 1.5 percent, consider the fact that they may not be willing to put as much effort into finding the buyer with the highest and best offer as an agent who is making 3 percent of the purchase price. If the discount brokerage is only making half as much, they have to sell twice as many houses to keep up with the traditional model brokerage.

They operate like a fast food restaurant, not making a ton of money off of any one particular sale, but pumping out escrows like hot dogs at a ball park. Therefore, the amount of effort and hand-holding through the process may be decreased. In my opinion, you often get what you pay for. However, you may be comfortable with that if you have a background in the industry, are happy to market your own property and feel like you generally know what you’re doing selling your own house, but you just don’t have access to the MLS.

Toeing the ‘short sale’ line

As the market heats up, many people who were previously upside down on their mortgages are finding themselves with just barely enough equity to sell. This makes the idea of a reduced commission brokerage so attractive, since real estate commissions typically make up the largest percentage of selling expenses. Ask an agent for recently sold comparables and a seller’s net sheet based on what you owe on the property. That way you can determine your break-even point.

If you’re still underwater and in short sale territory, then going to a discount brokerage isn’t worth it, because it’s the lenders, not the sellers, who pay the broker’s commission in a short sale.

Is there another option?

Before you list your property for sale, I recommend interviewing multiple agents (not just those who work at a discount brokerage). If you really like an agent who works at a traditional brokerage but aren’t sure you have enough equity to afford the standard commission, try negotiating. Remember that real estate commissions are always negotiable. If you plan on selling and then buying a new home, find out if the agent will reduce the commission on the sale of the first house if you buy the new house with her as well. Though they are very different, there is no one right answer or one type of brokerage that fits everyone.

What are your experiences with discount brokerages? Do you have rave reviews or horror stories? Or were you able to get a good deal with your neighborhood agent?

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.