What will a market slow down do to discount brokers?

One of the reasons I became a real estate broker and started a RE company was because I felt 3% across the board was not right. Using capitalism, over the past 100 years as a guide, real estate will move away from the % model to a more competitive flat fee for service model. Speaking of Seattle in general, a 750k house is not worth $7,500 more in commission than a 500k house. Of course there are special circumstances, but on average.

The mood is changing in real estate. Greg Swann talks about some changes in the industry as a whole in his post here. The real change will come as full service agents become more and more aggressive for business. The slow down in the housing market will surely result in a long over due change in the traditional real estate commission structure. Following the typical paradigm shift, prices decrease, while customer services increase. This means ‘No Touch’ discount brokers will have it rough down the road. As more agents offer their services at competitive prices, discount brokers will loose their appeal.

I do not want to pin point any specific discount brokerages, but in the past week I have noticed two well known discount brokers signs taken down and replaced by reputable full service firms. Discount brokers are stuck at a flat fee with zero customer support (AGAIN… on AVERAGE).

The big question is, “Would the average buyer/seller rather pay a bit extra for a live body than an 800 number to call? “ Time will only tell, but in a service industry, price is never the deciding factor!

UPDATE: I have received an unusual amount of personal emails about this post. I would like to reiterate my reason behind this post was to show the real estate paradigm is shifting. My purpose WAS NOT to challenge the value of an agent or was I trying to make agents defend their side of the story (I am a broker so I guess mine too). My purpose was sharing my view of the future and what will happen.

$100,000 + in consumer savings: It pays to shop

[photopress:j0409344.jpg,thumb,alignright]Since Ardell mentioned the rebates her clients enjoyed, it got me thinking about our small business and how we stack up. During 2006, our purchase and sale clients saved over $60,000 in escrow fees alone compared to our competitors, more if you add up all the other industry inventions consumers are charged for. That figure does not even include the refinance business our office closed.

Put this in perspective:

Let’s say the median sales price in the Seattle area for a single family house is about $450,000 and the fee a seller pays to agents is $27,000, or 6% of the sales price. In contrast, the escrow fee each party (buyer,seller) pays at our office is about .0011111 or 1/10th of one percent of that same sales price. This illustration is not to say agents are overpaid.

Evidently, escrow fees are negotiable. Over the last few weeks our office has received a few calls from people asking if we will match certain title companies who are dropping their escrow fees—ironically, to levels that our clients have enjoyed and where we’ve been residing for the last three years running.

It pays for consumers to shop.

$68,745.00 Paid to Rain City Guide Readers

[photopress:dollars.jpg,thumb,alignright]Well I have to admit that it has been a very, very odd year indeed for me. I stumbled into the world of blogging, and I had no idea where it would take me. Well it took me into a totally consumer-centric view of my world.

Transparency turned out to be much more transparent for me, than for my “blogclients”. I started experimenting. I did not change how I worked in any way. But instead of simply charging what I “normally” charged, or what most agents charge, I decided to view the commission as “a retainer fee”. I then changed it at the close of escrow, to what I perceived to be a fair value for the services rendered.

Sometimes I changed it on day one and that worked out OK. But then in some cases, I found that what I thought would be fair on day one, turned out to be too much at the end, and so I “settled up”. Only once did I have to renegotiate what was agreed upon on day one by raising it, and the client and I both agreed on a different and higher amount. We did that about halfway through, as he changed his parameters, and we both agreed the situation was greatly affected because of that. But I addressed it as soon as it was going sideways, so he had plenty of time to change agents if he and I could not come to terms on a new commission. Fortunately that was not necessary, because we both agreed that the original negotiation was based on factors which did not hold true as time went on.

The stories, which I will try to detail on my blog tonight, will be covered in a somewhat vague manner, as I have to retain the confidentiality of my clients. But I will try to give the stories in a way that we can all learn what a true sliding scale of different fees for different services might look like. A commission schedule that is so fair, that no client felt like they overpaid, and several even felt like they underpaid. And the one man who got the service for free, almost forgot that he wasn’t my client at all 🙂

I never calculated the end result of the total monies returned at the end of the day, until tonight. It is almost three in the morning, and no one is more surprised than I to see that $68,745.00 was paid to my “blogclients”. While most of those clients had read both my writings here on Rain City Guide and my blog, I have to attribute the bulk of the clients to having come to my blog via Rain City Guide.

There were a couple of times when I went a bit overboard, and I admit there were a few times when it hurt like hell, especially in the beginning when I was “training myself” to view the settle up at the end as fairly as I could. But I can honestly say that the couple of times I erred with regard to fairness, I erred on my side of the fence. I did that because those particular clients were injured by someone before me, someone in the industry who “did them wrong”. I felt the need to compensate them for what happened to them, before I entered into their world.

Most importantly, when you treat your clients fairly, when you discuss commission issues openly with your clients, both buyers and sellers, everyone is happy at the end of the day. I treated them all like family. I charged them what I might charge my Mother or my Sister or even my own child, well…maybe some more like my cousin 🙂 I charged a fair value for the work at hand. And while even I am amazed at the total tonight, and frankly it hurts…it really does, I know in my heart that every single time, it was a fair assessment of a valid cost for the services rendered.

It doesn’t break down to a flat fee or a fixed percentage. Some needed a lot more assistance than others. Some found property quickly and some took a very long time. Some sold their property quickly, and some took a very long time.

I’m looking over my list and only $2,175 of the $68,750.00 was paid to someone who “asked for a discount”. Almost all of it, was offered to them by me, without their needing to ask for it. Most of all, my “blogclients” have truly been a joy to work with. They totally trusted me to have their back. They totally trusted me with their most important goal and they totally trusted me not to treat them unfairly in any way shape or form. Not just about the money part, but in all things. Every single one felt I had gone above and beyond the call of duty. And every single one appreciated my efforts on their behalf at the end of the day.

I would very much like to take this opportunity to thank both Dustin and Anna Luther, for this wonderful opportunity. I also thank them on behalf of my “blogclients”, who are all grateful for having Rain City Guide to help them through what might otherwise have been a more difficult process.

The internet is truly a wonderful thing, and we are all learning to use it to everyone’s best advantage. We no longer simply “surf the net” to suck up information. We use it as a vehicle to form relationships, both business and personal.

I need to put the actual stories on my blog because we are really not permitted to discuss commission specifics in a “group” setting, under anti-trust laws. And also because this post is already way too long 🙂

Get Creative


We lost IT. We use to have IT and now we lost IT and now you can get it on ebay! This IT is that huge chunk of our commission that used to come from being the gatekeeper to the multiple. At a listing presentation our competition was only another agent that charged the same fee (there were a few reduced fee offices but it wasn’t a trend).

But they don’t need us anymore for that. They can get it on ebay. And they can get listed for under $400! Of course, taking and uploading the listing in the multiple is just the beginning, but if we’re going to separate out tasks like the actual listing going into the multiple, why not separate out all the tasks and see what they’re really worth. I agree that uploading the listing is a pretty simple task and a lot of agents just fax it in so it probably is only worth $400 (you have to be registered with the mls for this, plus it involves contracts and accuracy of the listing information)….. if that’s all the service a seller wants.

So, last summer I decided to address all of the things that agents do by breaking up the tasks and establishing a monetary value to each. It’s the ala carte menu of listing services and I googled and googled but couldn’t find anyone with anything complete enough online. I even took the coursework to get licensed as a consutant from the National Association of Real Estate Consultants (NAREC) so I could see if someone had already done all that work.

I separated out the tasks ranging from $20/hr for real estate data input, filling flyer boxes, dropping off keys, etc. (a high school kid couldn’t do all of this) to $300/hr for negotiation and problem solving. Wow, I was surprised at how often I worked for $20/hr. I tried to figure out what I’d be charged by different people doing different levels of work and then added a profit margin.

The $300 work i assumed would be done by the senior agent taking the listing and running the team but personally doing tasks that take a lot of experience and skill like price opinions, market timing, the totally important negotiations with both buyers and the buyer’s agents and solving all those problems (I had a list of 88 things that can go wrong with a transaction). Personally, this is where I’d prefer to spend my time.

The results are on the LTDre.com website if you want to see how it works. My slick computer tech even built it to automatically compute based on different packages and house price.

What got me thinking about this was today’s Inman article on bloated commissions and how much I agree with it. The article suggests, “consumers would benefit most from fee-for-service real estate companies that base compensation on flat fees, hourly fees and other specific payments for services rather than relying on a commission rate that is based on a percentage of the sale price of a home.

The "Goldilocks" Principle

[photopress:images_1.jpg,full,alignright] I know that applying the “Goldilocks Principle” puts me in the category of “hopeless utopian”, but hey, for one solid year, until December 31, 2006, I am going to stay in this thought mode.

I’ve tried various commissions with various people, and for the most part disregarded anything I’ve ever known, and everything that anyone has to say on the subject. I say “for the most part” because you really can’t erase your brain. But you can test and try varied options, just like Goldilocks rested herself on the three beds before deciding which one was “just right”.

I find that all of the rhetoric available on the topic is pretty much bunk. Reality is, it depends on the sale price/purchase price. I plan to do a “year in review” on 1/1/07, my blogging anniversary, to post my experiences and conclusions. But since this topic keeps coming up in the comments of various articles with everyone spouting out percentages, or flat fees, or hourly fees, etc., I thought I’d at least post that the results of my experiments are absolutely hinged to price of property.

The other reality is that my “awakening” with regard to commission issues started three months BEFORE I started blogging, and being in the Blogosphere really isn’t what turned my head with regard to commission issues. What turned my head was when I, myself, purchased a house for $850,000 with $59,500 of commission issues plus $22,000 of other credit issues thrown into the mix. Trust me. There is no question in my mind that I, the buyer, am the one paying for that whole $81,500 in my mortgage payment. I’m not complaining. I structured everything that way for a reason. But overnight I realized that the buyer pays the commission…no question.

I also realized that it didn’t bother me on the 10-12 properties I purchased before this one. So price of house does matter. The experience revolutionized my whole thought process with regard to real estate commissions. Nothing causes you to “get real” more than putting yourself into the equation, and experiencing it personally, from the inside out. So for now, I’m trusting my own judgment and using “The Goldilocks Principle” when determining the fairness of commissions. A full year of experiments, and then I’ll come out the other side and see where I’ve been and which feel “just right”, which were too high and which were just not enough.

For now…price matters is the key, and almost none of the discussions anywhere, focus on different fees for different home prices. So basically, they are ALL wrong.

Negotiating the Buyer Agent Fee

[photopress:swan.gif,thumb,alignright] Greg Swann over at Bloodhoundblog wrote a lengthy piece on his feelings with regard to changes that are needed in the real estate industry.

I happen to be writing an offer as I write this, actually waiting for a buyer client to come over and sign it, who was the first client with whom I negotiated the fee at first contact over coffee. That is not my normal scenario of negotiating the buyer agent fee, as I generally like to see at least three homes, of my choice, with the buyer before having the discussion regarding commissions.

I like to see how they look at property, what types of things bother them, how many and what kinds of questions they ask, etc… Just as I need to see a house before I know what I would charge the seller, I have to have some idea of the level of difficulty involved with the buyer attaining his objectives, before I can establish a reliable fee base.

So while I do not totally agree with Greg that a buyer should, or even can, negotiate a fee before seeing any homes, his article is well worth reading. I plan to read it again more thoroughly after this contract is signed 🙂

I will mention, that this particular client and I renogotiated the intital fee we came up with over coffee. So breaking my rule of not looking at houses first, was not a good thing. Having some experience with the agent and vice versa, is the best way to establish a fee that will work for all involved.