Are discount brokers a sustainable trend?

Discount brokers racing to the bottom!

Take a chance and take the discount? After all, aren’t all real estate brokers the same and do the same thing? Are discount brokers a sustainable trend?

The television ads are coming fast and furious. Brokers are competing with each other to see who can get to the bottom fastest. One brokerage is saying “I’ll list your house for 1%” another stating they will do it for $3,200 regardless of listing price.

So what is going on here? What is the catch? Good questions.

I decided that I needed to research these brokers since they are my competition. The brokerages I examined are large, national or international firms. I looked at financials, their websites, reviews, and sites like Glassdoor to see what current and past employees had to say. I also called upon past experiences I have had as an agent across the table.

Magnifying the financials and Salesperson.

Looking at the financials, it appears that these firms have yet to report a bottom-line profit. I do not see projections as to when or if they will. For full disclosure, sales and market share are increasing year-over-year.

The salespersons at the discount brokerages may be employees paid a weekly or monthly stipend. With each deal, they are paid additional sums either based on client surveys or some other matrix including a commission split. One company I examined pays a stipend for both the selling and buy side. Another pays an allowance on the listing side, and a commission split on the buy side that favors the company. Volume is essential to the salesperson as the stipend is not a livable wage.

A comparison would be the grocery industry, an industry I worked in for 15 years. Gross margins would hover around 1% or less, so profits rely on sales volume and lots of it to cover selling expenses. When brokerages offer discounts for their service, they too will require the same results transactions and lots of them. Unfortunately, dedicated service usually takes a back seat.

With the need for that volume, particularly for those listing agents, and the desire to get to the next deal the opposing salesperson will likely shepherd the deal to completion. The exceptions are those rare “clean” transactions.

My most recent experience with a discount broker occurred with the discount broker’s agent representing the sellers and me representing the buyers. Towards the end of the transaction, the sellers decided they needed additional time to vacate the property which was agreeable to the buyers. Looking back, I was the agent that negotiated directly with the sellers and buyers and generated all the required rental documents; the listing agent did not involve himself.

What current and past employees write.

Current and past employees state that these discount brokers are good for new agents allowing them to get experience without having to market themselves.  Agent marketing is the lifeblood of the industry. When you search the agent list of the various brokers, a close examination will show many of the agents are newly licensed.

I have to ask the question, are these companies real estate brokerages or merely technology companies performing real estate activities? I conclude it is the latter, since these companies are allowing online offers with the ultimate purpose, I believe, of eliminating an opposing buyer’s representative and claiming the buyer’s agent compensation.

Receiving co-op compensation (buyer’s agent commission) is subsidizing the listing discount. When the discount broker represents buyers, they will generally provide a small credit to the buyer. They are expecting receipt of the full co-opting broker amount from the seller, usually 2.5-3% of sales price. Logic tells me that the buy side of the transaction is vital for them to continue as a brokerage.

Discounting listings will not be sustainable if that is your only business. The possible exception would be a single-person brokerage as they would receive the entire negotiated commission amount without any splits.

If technology evolves to performing 90% of the activities required for successful completion then this all becomes moot.

My own experience.

When ZipRealty was its’ own brokerage, it was considered a discount brokerage by the “traditional” shops. At one time a sizable rebate was offered to buyers using ZipRealty for their representation. Listings were not a substantial part of our business when I started, and listing discounts did not apply. The weight of the dollars used to pay out the rebates and support agents as employees eventually resulted in the elimination of the rebate and reclassifying the agents to independent contractors. ZipRealty became a “traditional” brokerage, however, to the industry the discount moniker remained to our detriment.

Service or price.

When reading customer reviews, I noticed a majority of client’s complaints centered on lack of service and revolving agents. Some reviews stated that the discount was worth the aggravation. You will need to decide what’s most important when selling your home; service or price? As a buyer, the decision is not so cut-and-dry. Money does not play much of a role; trust does, however.

To answer the question in the title, I just don’t know. If you believe technology, like blockchain, will change the real estate transaction then maybe discount brokerages will become the future. But only if the technology drives down the selling expenses. At that point brokerages will become technology companies that happen to facilitate the real estate transaction; then “discount” brokerages become “traditional”.

 

Photo by Sharon McCutcheon on Unsplash