Discount real estate broker a good idea? Not so fast..

Discount real estate brokers can help you sell your house and perform all (or some) of the functions of a full price real estate broker, but filtering through all the offerings is not so simple.

Some discount real estate brokers actually offer limited service to you, the seller, for a flat fee.  Sometimes this can be as simple as just putting your house in your local MLS system, and you will be responsible for doing the rest.

Others offer a full service to the seller, and simply rely on more deal volume to make up for the lower commission rates they charge.

Below, I’ll break down the business model for discount real estate brokers, the various options you’ll be presented with and what it all means for you, and which avenue might be the best for you based on the level of service you need.

The Discount Real Estate Broker Model–How it Works

The normal rate that you’ll encounter when you go to sell your house is around 6%–which splits out to 3% for the listing broker and 3% for the agent that brings the buyer.

Discounting has become pretty mainstream in the last few years, so the effective commission rate is actually just above 5% when you average out all the various rates across the industry.

Over the last 5-10 years, there has been a rise in alternative real estate brokerages that charge less than the traditional rates–and they all do things a little bit differently, and they all have different coverage areas.  

It can be a ton of work to track down, and compare, all of the various options.  

Here is what you should look out for to start:

Are they charging a commission % or is it a flat rate fee?

Some companies will charge you a flat fee, and make you pay that fee up front, before your house sells.  Some will even keep the fee, even if your house doesn’t sell.

You’ll want to make sure you know up front whether the discounter is going to refund the fee, or charge you the fee after closing (and not before your house sells).

If they charge the fee up front, the discount should be low enough to where it incorporates the risk of your house not actually selling and you being out that money.

I’d apply the following math to analyze whether that was a good deal:  Take the percentage chance that you think your house won’t sell, and add that in as a “discount” from the nearest commission based alternative.

For example, let’s say that we thought there was a 50% chance that the house wasn’t going to sell when you put it up on the market.

I’d want at least a 60% discount on the rate from the nearest commission based alternative.

So let’s say option A is 1% of a 100,000 house ($1,000).  I’d want the up front flat fee charge to not exceed $500 if I thought there was a 50% chance the house wouldn’t actually sell.  I’d consider anything at $400 or less a good value based on my risk.

A Comprehensive Overview of Your Discount Options

Strictly Flat Fee MLS brokers–the lowest cost, lowest service brokers

The most popular of the up front, flat fee charge variety of brokers call themselves “flat fee MLS brokers” (that’s the term you’ll want to enter in on a google search to find them).

The amount they charge varies, but the large majority of them charge around $400.

The base rate for many of these providers only gets your house inputted into the MLS, and maybe a lock box / yard sign.  It normally does not include help with contract, negotiations, or any other aspect of the deal.

If you’re a hardcore home-selling pro (I know some of my readers definitely are) than this is an option you may want to consider.

Some flat fee providers will offer a range of packages, and their highest tiered package could be a higher flat rate (close to $1K) or could be a commission-based payout.  

During my research I’ve seen a large number of the more reputable flat fee providers offer add-on service, which amount to essentially “discount commissions” and a lot of them charge around 1%.  Real estate is already a very fragmented market, but this segment of real estate is even more fragmented than normal as everyone is charging and offering something different.  It takes real work to cut through everything and figure out what the best value for you is.

The benefits of going this route are obvious–you can save a ton of money on selling–but you could basically be selling the house yourself with little to no support.

The best brokers in this category will make it a point to advertise that they forward all calls to the buyer, or answer all calls in a timely manner and clearly direct all buyers to you, the seller.

Some brokers take listings for nearly free for the buyers leads that listings tend to bring in (buyer sees your listing on Zillow, calls the listing agent directly).

If you see a real bargain price (less than $300) make sure you apply extra diligence to make sure you’re getting at least the minimum commitment from the broker that you’ll need to succeed.

Full Service Discount Brokers

This category of brokers is a step up from the bare bones “flat fee MLS” entry options.  These group of brokers typically offer what is considered a full service, just for less of a commission then what is traditionally charged.

If they are a true full service operation, it should include picture taking and answering the phones, as well as seeing the deal from listing through closing representing you.

The full service discounter makes up for the discount with an increase in deal volume.

Redfin is an example of this type of agency, and there are many that have popped up in recent years as home prices have risen.

Some discounters are able to slash their commission rates if you, the seller, agrees to use them as your representation when you go to buy your next house.  This let’s the listing broker to essentially eat the cost for the sell side and make up for it with a full buyer’s agent commission.

A note on the quality of the discounters…

The biggest reservation with using a discount real estate broker is the assumption that the quality must be worse.
The real answer is, it depends, just like it would with any broker.

Ask up front what services they will offer.  The critical components of any full service agreement are:

-Getting the house on the MLS
-Helping set the price with a detailed comparative market analysis
-Being available to answer inquiries from potential buyers and buyer agents
-Helping to complete the deal once an agreement is reached

Those last two points are extremely important–even though some sellers overlook that.

So much in real estate depends on clear and quick communication–make sure your listing agent takes pride in their quick and effective communication (bonus points if they bring that up as a selling point for their services).

Once you’ve come to terms with a potential buyer, there are a ton of potential issues that can arise before closing that can derail your deal.

Every single deal is so unique.  Things can come up that you wouldn’t even expect to be wrong with your house that an inspector might call out that a buyer won’t like.  

The buyer’s financial institution (the bank funding the loan) might require things to be fixed and addressed before closing.  Maybe the bank’s appraiser thinks your home isn’t worth what you and the buyer agreed to.

What now?

When issues arise (and they almost always do) tensions start to run high.  You’ll get nervous. Your buyer will get nervous.

This is where your listing agent really earns that commission check.  Navigating these issue takes experience.  Given enough years, a broker will see just about every issue you can think of.

The important thing here?  Ask them how long they have being in business.  The longer they’ve been doing it–the more deals they’ve seen–and this helps to calm nerves during some tough situations that come up.

An experienced listing agent could be the difference between a blown up deal, and one that holds together.

The bottom line: when you are looking for a discount broker, make sure you they are committed to communication, will handle the major pillars of full service, and have many years of experience under their belt.

Potential Downsides of using a Discount Broker

There’s no escaping the fact that when any good or service is done at a discount, the provider of the service is planning to make up for that by increasing volume.

Increasing volume is fine, as long as the discount broker has a system in place to handle the volume effectively.

This can include assistants, software, or a number of things that can make them more efficient at what they do.

Also just like some flat fee providers, make sure the full service discount broker isn’t using your listing as a lead magnet, and then focusing all their attention on buyers.

There is a real risk in getting subpar service if the broker doesn’t have the proper system in place to handle this type of business model.

Choosing the right broker is paramount here–don’t take the decision lightly!  There is a ton of money, time and stress at stake.

Conclusion

There have never been more options for sellers than are out there in the marketplace right now.

Hardcore, knowledgeable sellers that can do the deal themselves might do well to opt for the bare bones Flat Fee MLS entry option.

For those that need a full service, but still want some savings, using a discount full service brokerage could be a good fit.

When evaluating your choices, make sure the broker has amazing and quick communication, has a decade of experience or more (ideally) and isn’t going to use your listing as a lead magnet for buyers and doesn’t have much of an interesting in servicing you.

It can be a daunting task to filter through all your options as a seller–just take your time and don’t be afraid to ask a ton of questions until you are comfortable.


Best wishes,


Ryan