BARGAIN BROKERS
In hot seller’s market, discount real estate brokers gain appeal
Sharon Mather wanted to sell her house in Long Beach, California, but she was reluctant to pay the standard listing commission. During the intense seller’s market of 2020, she’s one of many homeowners rethinking the wisdom of paying full freight to listing agents.
After shopping around, Mather found a discount broker willing to market her house for a fee of just 1%, well below the 2.5% typically charged by listing agents.
In addition to the 1% promised to her listing agent, Mather agreed to pay the buyer’s agent 2.5%, and the house quickly sold this fall. Mather’s total selling costs were 3.5%, well below the typical total of 5%.
Home seller: ‘ That’s a lot of money to save’
Based on her sale price of $400,000, Mather spent $14,000 on broker fees. If she had accepted the going rate of 5%, Mather would have paid $20,000 to the agents involved in the sale of her home.
“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 bargain-hunting sellers with agents willing to reduce their fees. The company’s founder says discount brokers have a renewed appeal in the post-coronavirus housing market — where bidding wars are common, marketing times are short and desirable houses often sell for above list price.
“Sellers are left thinking, ‘Why did I spend so much money when my home sold in a day?’ ” says Ben Mizes, Clever Real Estate’s chief executive officer and founder.
Clever Real Estate markets its services nationally, although it doesn’t
employ agents directly. Instead, it funnels leads to listing agents looking for clients.
The nation’s most prominent discounter, Seattle-based Redfin, also markets listing fees of 1 % to 1.5 %. By 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 — reported that the average commission rate at its company-owned operations rose to 2.43% per “transaction side” in the first nine months of 2020, up from 2019’s record low of 2.41%. If the listing agent and the buyer’s agent split the take 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 list with full-priced
agents for thousands of dollars more.
Even so, Redfin says its market share was a modest 1% as of Sept. 30. American home sellers, it seems, are sticking with full-price brokers.
Daryl Fairweather, Redfin’s chief economist, says that’s in large part because home sales are a high-stakes, low-frequency transaction, a reality that leaves many sellers to embrace the status quo.
“They don’t have 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 still pay that sum, the going rate has dwindled to 5% or less.
As technology enabled new ways of doing business, the conventional wisdom held that real estate fees would go the way of stock brokerage
commissions and travel agent fees.
The reality has been much different. Commissions indeed fell during the housing boom of the early 2000s, only to bounce back in the days of the housing bust, when homes were harder to sell.
Then, commissions began falling again, hitting record lows in 2019. REAL Trends, a Colorado-based research firm, says the average commission slid to 4.96% in 2019, from 5.03% in 2018. The company has not yet compiled 2020 numbers.
“It looks like the downward trend on the gross commission rate continues and will continue ... into (this year),” says REAL Trends head Steve Murray. “We know from our historical data that when the ratio of listing inventory to the number of Realtors declines, so too does the average commission rate.”
In other words, when homes are in short supply, real estate agents compete for listings by cutting their fees. Inventories of homes for sale fell sharply during the coronavirus pandemic.
Still, while real estate commissions have been squeezed, they have proved remarkably resistant to the price pressures that have hit other industries. Meanwhile, the decline in real estate commissions as a percentage of sale price has been offset by rising home prices.
How home sale commissions are set
A quick rundown on how commissions are determined: The seller negotiates a fee with the listing agent, typically 2% to 3% of the sale price of the home.
Most sales involve not just the listing agent but also a buyer’s agent, and the seller determines how much to pay that agent, who often plays a crucial role by bringing a purchaser to the property.
The amount the seller is offering to the buyer’s agent appears in the multiple listing service data about the property. Even when sellers pay just 1% to their own agents, they often offer 2.5% or even 3% to buyers agents.
The National Association of Realtors, long fearful of allegations of antitrust violations, stresses that rates are set by individual agents and their clients. Realtors also point out that they get paid only when a deal is consummated.
Commissions have fallen in recent years in part because consumers have been conditioned to push for better deals on everything.
A fast-paced market like today’s also can pressure listing commissions by making consumers question the value of listing agents. Even so, the traditional real estate model has proven remarkably resilient.
Varying business models
Redfin has expanded nationally with an approach that includes hiring agents as fulltime employees. That’s a contrast to most brokerage firms, where agents are independent contractors. Another commission-cutting concept, UpNest, lets sellers seek discounted fees online.
Clever Real Estate takes a different strategy. It partners with agents who are already operating with national brands or independent companies. Clever Real Estate promises to relieve agents of the cost of acquiring customers, and to boost their profiles in the areas where they do business.
“Because we save them on the cost, they’re willing to discount their fee and keep the service the same,” Mizes says. “If Clever is sending you an extra 20 listings a year, that’s a lot of signs in yards.”