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.

74 thoughts on “What will a market slow down do to discount brokers?

  1. Your logic makes sense for low cost houses, but I am not sure it does for the higher priced areas. We are looking at a $3 million house, and have done all the background work on our own so far. We are deciding which buyers broker to bring in. A full service agent at 3% gets $90,000 of my hard-earned cash, even though that person will not need to line up financing or do any other complex tasks. A discount broker who kicks back 2/3 of their commission gets $30,000 of my cash.

    That $60,000 difference sure sounds like more than a “little bit” and it’s not clear how the super-smiley full service broker is delivering an additional $60k in value.

    The agent logic seems to be “for such a big purchase, why would you trust this to a discount broker?” But in reality, it’s just not clear what that broker actually does, and I can’t find one who can describe in concrete terms how they deliver $60k worth of additional services.

  2. Randy-

    Two things, one you read my post in the wrong way. Two, you explained my point EXACTLY! I DO NOT feel A: the % commission model is correct and B: an agent should receive 90k for what could be using their license to buy a home.

    With so much information available over the Internet, a full service agent does not have the same proprietary resources they had say 10 years ago. I believe agents earn their money by ONE: negotiating the sale and TWO(and this is a big two): processing the paperwork for the transaction. If you are buying a home, a great mortgage broker will have a great handle on this too.

    So to answer your question, 60k in value is very difficult to quantify and/or qualify in value. That is why I am saying the shift will come where FULL SERVICE agents will get rid of the non quantifiable commission structure and implement more of a fee for service.


  3. This whole question just illustrates that the biggest weakness all real estate models have is articulating their value to the public. At an individual level, each real estate agent should be able to articulate to their client exactly what they will do for that money. And if they’ve been hired then hopefully that’s an indicator that client believes in the value they bring to the table.

    But at an industry wide level, I think we have some work to do on this. Unfortunately, I do feel that the traditional brokerage model exacerbates this by not taking enough care with their hiring. That makes it hard to point to the industry as a whole as being professionals that provide good value for money.

  4. The more the market softens, the more effort and time it takes to sell a house. That means much less incentive to offer a lower commission.

    And for some Buyer’s agents, the more expensive the house, the more exposure, liability and risk if something goes sidesways and there’s a lawsuit.

    Higher sales price + higher risk/loss if there’s a lawsuit = higher commissions.

  5. Sandy-

    Supply ALWAYS equals demand. There will always be buyers who shop at Wal-Mart and Nordstrom. It is now up to the agent to show their worth. FOR ME, I would much rather pay a bit extra to have more work done for me.

    I am not saying agents are not worth every bit they can charge… I am saying it will be more difficult to charge the fees without answering Randy’s question above. “…it’s just not clear what that broker actually does, and I can’t find one who can describe in concrete terms how they deliver $60k worth of additional services.”

  6. Marlow-

    I agree with your arguement too, I just don’t feel it is that much more difficult to sell a house today as it was 10 years ago (MINUS NEW LEGAL PROBLEMS). With that being said, although realtors have proven their value in many cases (remember I am a broker so I am not trying to shoot myself in the foot), but on average real estate agents are the highest paid non graduate level req profession out there.

    It is just like the the FULL service gas stations. I can barely remember those, but at a time one of the most profitable businesses to be in was stations. The need for gas and for auto repair is and always will be there, but the bells and whistles of full service just are not as appealing.

  7. Randy,

    In a slowing market, why should you pay any commission, even 1%, when you’ve found the house you want? Why not hire an attorney to prepare purchase offers, negotiate with the seller’s agent, advise you on handling the inspection process, the escrow process, and review your closing documents for contractual and legal errors for a flat fee measured in the hundreds of dollars rather than the thousands.

    There are numerous flat fee attorneys in the Seattle area who could help you accomplish this. I’m an attorney and I work with with a contributor to this blog (Craig Blackmon) and we rountinely represent buyers making offers on MLS-listed houses where the offer calls for the entire buyer’s agent’s portion of the sales commission to be credited to the buyer. Despite what many realtors think, the commission can be freely negotiated by a willing seller and a willing seller’s agent. Get ready for the agents on this blog to blow a gasket at this notion, but that won’t change the fact that we do it all the time.

    So, why not save that $30 grand you’re about to pay the 1% guy and blow it on an outstanding Christmas (or Hanukah or Kwanza or Festivus or whatever else floats your boat)?

  8. Hi Jon,
    Your entry is very a very timely, relevant topic. Below is a link to a story that’s running on CNN Money today that deals with the question about agent comissions. The writer’s argument is that full service will become more appealing to sellers in a down market because they’ll do whatever they can to increase the odds of an effecient sale. On a related note, the bigger name discount providers have been pretty darned quiet over the past few months since the blow up of the mortgage market and subsequent home sales decline. Maybe they’re beginning to realize that not just any ole’ donkey can sustain a sucessful real estate business – discount or otherwise. Here’s a link to the CNN Money story: http://money.cnn.com/2007/10/30/real_estate/commissions_rise/index.htm

  9. Jon how DARE you challenge the traditional methods of the REALTOR (R)

    flat fees will never succeed, just like all those crazy internet startups. REALTORS (R) are irreplaceable!

  10. IMO, the net effect on discount agents will be the basically the same for those working at traditional brokerages: if business is slow enough, you move on to other things. Same goes for other real estate service providers too (escrow offices, title, appraisers, small builders, inspectors, loan officers, etc…). Heck, even contractors. Had two leave a message with me this month regarding some projects. Over the last two years, I had to go looking for them.

    Ubersalad, agents as industry service providers are not going away.

    I believe that those who have ample equity will have no issue paying for traditional commission rate services in a buyers market. But, I do think that those in must-sell situations will not look to traditional commission based brokerages first. The innate human psyche of saving money is a very very difficult thing to overcome. And, the r.e. industry has for years struggled with the value proposition for commission paid, particularly as Jon framed it in this post. And I experience the perception of commission value all the time as customers talk about it from time to time when I help them go through their closing paperwork at escrow. Sheesh, my signature is on the check to brokerages for tens of thousands of dollars every month. Some pretty big ones too.

  11. I don’t want to see alternative real estate companies go by the wayside. They offer the consumer a choice, and that’s fine by me. Some people have extensive experience and don’t need as much assistance. Some people are committed DIY’ers and will never pay service providers. Others will pay top dollar for everything in life…because they can.

    Anyone who offers a commission discount focuses the conversation on the saving of commission dollars. Is the conversation so focused on the saving of commission dollars, that Buyers cost themselves far more in the end?

    Yes, anyone can research available properties online. That’s where it starts (but not where it ends).

    There are many moving parts in a typical real estate transaction, AFTER the consumer makes a good value decision on the property.

    Buyers often pick a home on an emotional basis. Last week I had an experience where the buyer became emotional over a house because of a kitchen remodel with new SS appliances. He also had a couple of other houses he was interested in. The house he was emotional over would have been a very bad buy for him in the end. It suffered from 2 forms of obsolescence (functional and economic). I wrote about this on the Seattle PI Real Estate Professionals Blog:

    In the end, a real estate transaction is not a “simple transaction” and never will. There are several ways a property can be valued. Litigation (sometimes long after-the fact) is always a concern.

    And now to Marc:

    Marc, I’ll grant you as an attorney you are (or should be) a contract expert. Can you explain to the readers how you can adequately advise a client from making a bad mistake on an economic or functional obsolescence issue? A mistake that could cost them much more than the savings on the commission? Can you assist your clients in making good value decisions? Do you track market absorption rates?

    Marc, you say,”In a slowing market, why should you pay any commission, even 1%, when you’ve found the house you want?” You write this in the sense that EVERY consumer would benefit by that saving. Is this a responsible stance?

    Marc, are you holding yourself up as a real estate market expert, able negotiate a deal as good as or better than an experienced, practicing Realtor? How many homes do you go into a week, anyway?

  12. Randy, you’re an exception to the rule. Most people with higher priced houses go with full service agents. I think that says something. Such people are generally more educated, more successful, but beyond they they realize the importance of specialization. They know they got where they are because of how well they do what they do, and how few people can do what they do. They realize that’s true in other areas too.

    As sort of an explanation of this, I’m an ex-attorney. I know that there are all levels of attorneys, good, average, great and horrible. The same is true in other professions too (try not to think about that when you go to the doctor). The thing about attorneys is you can’t tell how good they are by the fees they charge, but that doesn’t mean you want to go out and get the cheapest one. The same is true of real estate agents.

  13. Jon wrote: “With so much information available over the Internet, a full service agent does not have the same proprietary resources they had say 10 years ago. I believe agents earn their money by ONE: negotiating the sale and TWO(and this is a big two): processing the paperwork for the transaction. If you are buying a home, a great mortgage broker will have a great handle on this too.”

    This ignores pricing, which is probably the biggest service an agent can offer. And it’s an area where information alone isn’t sufficient (even assuming consumers had the same information as agents, which they don’t).

    That said, not all agents can price well, but the problem is owners tend to price high.

  14. Kary-

    I agree with everything you said except: “Such people are generally more educated, more successful, but beyond they they realize the importance of specialization.”

    I believe that is way over generalization and I can show you plenty of wealthy people who will pay the fee, just because they don’t care… not because they are better educated, more successful or are given some ability to understand the importance of specialization.

    I am actually taken back by that comment!

    Regarding your second comment. I agree 100% and I am glad you brought that up. Although doing your own CMA can bring you close, but knowing the pros/cons of the marketplace is worth its wait in gold and could be the result in ‘paying for the commissions’ with an increase in sales price… so great comment!


  15. Jon,

    As to your first point,I agree that’s a generalization, but it’s also true. I could have also said the males are probably taller. That’s probably true too. The point was, however, unless they won or otherwise were somehow given the property, they apparently made a lot of right decisions in life. And one of the decisions they tend to make is to hire a full service agent.

    Also, the commission they pay is no higher than others relative to their worth or the importance to them. It’s a percentage–the same for everyone.

    The problem with doing your own CMA’s is most consumers don’t have the tools or the experience. For one thing, they’ll look at active listings, which are not quite irrelevant, but if anything the last thing you look at. But beyond that, except for maybe a condo, it will be difficult for them to find proper comps on actual sold units.

  16. I think there are two factors that may contribute to the higher income sellers choosing full service Realtors(R):

    1. The sale was prompted by a job transfer where the employer reimburses transaction costs;

    2. The property seller has a position that consumes a lot of their time, they don’t have energy to both manage the sale process and their professional responsibilities.

    Note, I said full service. Didn’t mention fees.

  17. “(even assuming consumers had the same information as agents, which they don’t).”

    Well of course that begs the question, why don’t they. Many homeowners begin looking at properties for sale in their area well before the decide to sell. If a homeowner has visited the Open Houses in their community and tracked which sold for what afterward, they could in fact have more of a feel for value than an agent who hasn’t been in the “comps”.

    The hard part is being objective with regard to the evaluation of their home vs. the neighbor’s home. But often the sale price has been more a factor of supply and demand, than actual value based on comps. Clearly that has been the case for the last few years.

    In the Seattle Area, most homes I have had to price had no REAL comps. Many are quite unique. Today the challenge is often getting what the seller needs to the best of our ability. Staging the property and improving the condition and getting the photos just so, to achieve highest price attainable, has for the most part superceded many of the other services we offer as to value of service.

    As to sellers, the “product” itself, and attention to it, is much more important in most cases than paperwork and negotiating. The agent who can get rid of the smell, make the sink white again, have the nerve to get all that crap off the fridge before taking a photo and pretty much be straight up honest about what a seller needs to do to achieve top dollar…lots of value there.

    As to buyers, telling them which houses NOT to buy likely has more value than helping them buy the right one. So services that don’t include pointing out all of the negatives are of less value.

  18. As to buyers, telling them which houses NOT to buy likely has more value than helping them buy the right one. So services that don’t include pointing out all of the negatives are of less value.


    This should not be underestimated.

  19. In a capitalistic economy competition will always bring about change, but that’s not to say it will bring about change to YOU, or the way YOU run your business. There will always be discount Brokers. There will always be agents willing to lower their commission to satisfy anyone looking to save a buck. That’s a good thing. And when those folks out there find themselves in court or in arbitration because some discount service provider did a crappy job representing them, well—-that’s a good thing too. Sometimes the public need to learn the hard way…

  20. I’m not sure how my post to Randy was construed to be directed to “EVERY consumer,” but apparently it was by at least one reader. In any event, I strongly believe that competent people who are willing to do the research in their preferred neighborhood(s) and seek the advice of an experienced real estate attorney are perfectly capable of determining whether a given house satisfactorily meets their wants and needs. This even more true when a qualified home inspector is retained to thoroughly inspect the subject property. Craig and I have been involved in something near, if not just above, $40,000,000 in transactions in the past two years or so to say nothing of negotiations relating to real estate litigation. So, yes, I’m quite confident that I can negotiate as well or better than many “experienced, practicing Realtors.”

  21. Marc,
    Well now, I was willing to give you the benefit of the doubt that you were speaking generically to all readers. It now seems that you were making a blatant attempt to specifically mine a client out of the RCG. Generally the only time we see a contribution for either you or your partner, Craig, it’s a blatant “self promotion” piece.

    If your “client” in their research does not understand the impact of buying the first house in the subdivision (on a busy street) vs. a house 2 blocks in…. or understand the difficulty in selling a home near a high voltage line, this little oops could cost them thousands when it comes time to sell. I strongly believe, that while you may be a contract expert, when it comes to advising clients on a purchase, you may in fact at time be out of your area of expertise and in a postition to do your “client”s harm. How many little “oops” can you live with? Of course, you don’t see the house they’re buying….do you bother to look it up on a map?

    Your actions here on the RCG are like that of an ambulance chaser……

  22. To All:

    I would like to echo what Greg said above. The value an agent brings to the table knowing the price difference of the first house in a subdivision or on a busy street is worth its weight in gold.

    My point in this post was NOT to devalue an agent. There are many agents out there that can MORE than show their value. The unfortunate REAL problem here is how do you quantify that value. As a builder, I am on the phone with Eileen (RCG contributor) daily asking her her generic questions where any one answer could essentially pay for a full commission. For example, a partner of mine was SOLD on using solid interior doors. The cost was STEEP, but he insisted. So I called Eileen and she said you would not see the return with solid at this price level.

    That was one phone call that saved me over $6,000. Thanks Eileen!

    My point in the post was not to say agents are not worth their value. My point was agents are not worth a straight 3%.

    I should have left the post with this question. Any agent who can answer this question is worth EVERY penny you pay them.

    If my house is worth 750k and my neighbors house, built the same time and basically looks the same but doesn’t have the same upgrades and is worth 150k less. ON AVERAGE (assuming it sells in about the same time) is REALLY worth an extra $4,500 in commission?

  23. Marc, with all due respect, how many times have you met an agent late at night to present an offer or counteroffer in order to beat a sensitive time frame on behalf of your client? How many times have you met late at night with clients to sign off a purchase and sale to beat a competing offer to the punch? How many times have you met a client at a hospital or an airport or at a restaurant at all hours of the day and night to get time sensitive initials or signatures? Negotiating is far more complex and labor intensive than merely faxing off paper with fancy letterhead and making a few phone calls. I’ve known and deal with plenty of real estate attorneys and none of them provide near the hands on, time sensitive, ready to go service Realtors do and I cannot imagine that your office is any different. If it is, good on you.

  24. Jon, you’re asking a question nobody can answer for you. You’ve already made up your mind, nobody is worth it. Right. I will say this…If you take that line of thinking to it’s logical conclusion,

    “My point was agents are not worth a straight 3%.”

    Then the guy selling his house for $350,000 should be offering what…about $1500.00. Taxes are calculated on the same principle. Amount of the sale! When you can convince the County or State to lower their tax rate based on your analysis then I’ll agree, agents aren’t worth 3%. Taxes, commissions, closing costs ect are based on the sale price.

  25. Gene-

    First I am not sure why I am replying at 7 pm on a Friday night : )

    Second, you are missing my point. Agents are unlike Uncle Sam and that is the problem. Just like you wouldn’t want to pay a higher price for gas because your car gets a lower MPG so therefore you need more gas… it just doesn’t make sense.

  26. Jon, one thing you might not be factoring in is there are fewer buyers at higher prices (well typically–that might not be the case at the low end right now). So maybe it’s sort of like a price per square foot. A house with 2200 square feet isn’t worth any less than a house with 2300 square feet just on that factor along, but it is worth less than a house with 3200 square feet, all other things being equal.

    Thus you might be able to argue that a house selling for $425,000 shouldn’t pay a higher commission than one selling for $400,000, because it is mainly the same group of buyers, but that one selling for $750,000 should have a higher commission because there are fewer buyers in that market. But commissions are typically based on percentages, so . . . .

    Also another factor to consider is expenses. We recently spent a considerable amount of money staging a higher priced house for our client (the client could not do it). That’s perhaps an extreme example, but there are other expenses incurred in marketing a higher priced house which don’t happen on your typical starter home.

    All that said, personally I’m more likely to reduce the listing commission on a higher priced home if it’s in good shape to market going in, and very unlikely to reduce the listing commission on a starter home or cheap condo regardless of the condition. One thing I’m very unwilling to do is reduce the commission for the agent on the buyer’s side. On a $500,000 property a half percent is only $2,500.00–which could easily be close to the seller’s mortgage payment. While I show 2.5% properties, not all agents do, or even if they do, they might subconsciously downplay the property. Given that it typically takes 30 days+ to find a buyer in a decent market, you don’t want to do something that will increase that time over $2,500.00.

  27. Jon, wrote: “Second, you are missing my point. Agents are unlike Uncle Sam and that is the problem. Just like you wouldn’t want to pay a higher price for gas because your car gets a lower MPG so therefore you need more gas… it just doesn’t make sense. ”

    Not the best example because there they are paying a higher price to get from point X to point Y. The constant is the price of gas, just as with a commission the constant is the percentage.

    So, wealthier people tend to pay more to get from point X to point Y because their more expensive vehicles tend to get less gas mileage. Wealthy people also pay more to get from point X (ownership) to point Y (sale) because their more expensive houses are more difficult to market (but again, perhaps right now that’s not true compared to the very low end).

  28. Jon, your lower mpg car vs a higher mpg car is based on choice. Similar to your choice to hire an agent who will compromise their principles and income to suite your beliefs. When you make these choices there are inherent risks, ie; less mileage, buy more gas with your car analogy and a potential for litigation from poor representation with a sale. One thing is for certain. You are free to make those choices, and you are free to hire someone who will compromise their principles.

    I’ll tell ya what makes no sense. Anyone who thinks they can sell a $500,000 house for the commission rate comparable to that of a $300,000 house.

  29. Gene,

    I never claimed to be available at “all hours of the day or night.” However, every one of my clients has my cell phone and they can call me on the weekend when circumstances require it. I simply make it clear from the beginning that I’m not getting paid 3%; therefore, I’m not going to drop what I’m doing to meet their schedule. You know what the result is? They plan ahead and make an effort to avoid last minute deadlines. As for those rare golden opportunities that simply cannot wait, well, I haven’t missed one yet.

    As for the gentleman who likened me to an ambulance chaser, I hope that makes you feel better. It just made me laugh.

  30. Marc,
    As for the remark about acting like an ambulance chaser……listen I’ve been wrong in my life before, and I may be wrong here.

    I stand by my remark on THIS post that your motivation to comment was to was to “blatantly self promote”.

    However, I’ll give you the opportunity to set the record straight. If you can point to any posts (since Craig Blackmon’s August 27 self promoting post), that you joined into a conversation here on the RCG helping the readers here in any of the the posts that involved legal issues (without self promoting), I’ll humbly apologize.

  31. Very interesting debate!

    The original question was “What will a market slow down due to discount brokers?” Many companies are sometimes lumped together in the discount brokerage category to describe all non-traditional business models (e.g. flat fee full service, commission-based listings with rebates, low listing commission – high SOC, buyer agency with rebates, menu-of-service options, limited service listings).

    I can only speak for our experience, which is that our business is up 11% so far in the slower market of 2007. We have also seen upward pressure on selling office commissions. Our customers’ most common choice is 3%, and we have seen some SOCs as high as 6%.

    Ken Whitney, General Manager, MLS4owners.com

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