Discount Real Estate Brokerage Costs More

Discount brokerages often are just dressed up for-sale-by-owner sales that can cost sellers a lot more money than listing their house with a real estate agent.
Discount brokerages often are just dressed up for-sale-by-owner sales that can cost sellers a lot more money than listing their house with a real estate agent. | Source

Flat Fee and FSBO Services Can Hurt Sellers

FSBO, short for "For Sale by Owner" is an appealing idea to home owners who don't want to pay a hefty commission. When many home sellers are underwater on their mortgages, it sounds very reasonable. The ads say things like "$149 Flat Fee MLS listing" and "full-service, flat fee."

Logical and reasonable aren't synonyms for "correct," though!

A few years ago, I was the only real estate agent in my county willing to do flat fee services. When I fully explained the difference between flat fee brokerage and full-service brokerage, every single seller I spoke to except one opted to pay a full commission. The one who did not want to changed his mind after a few months and converted.

In this article, I'm going to explain why sellers are better off paying a higher commission and how these services cost them more in the long run.

Your Experience

If you've used a discount brokerage, what was your experience?

  • It was great! I sold my home in less than 4 months and got at least 98% of my asking price.
  • It was good, but it took longer than 4 months or I had to cut my price more than 2%.
  • I wish I'd have had more help, but I got it done.
  • I had too many problems or it cost me more than I expected. Next time, I'll hire an agent.
See results without voting

How Flat Fee Brokerage Works

The idea is that you can pay a discounted fee (I've seen rates from $99 up to 2% of the sales price) in order to list your house on the MLS, or "multiple listing service." An MLS is something like a catalog of properties for sale that is shared among the real estate agents in an area. These days, many of the properties in an MLS are also shown online to potential buyers and investors. Realtor.com, for instance, contains all the active listings in the United States except for the ones where sellers have specifically limited advertising of their property. Until IDX came along, this site was really the only website with reliable data on available listings.

That changed over the last decade. An MLS can now be syndicated using an Internet Data Exchange, or IDX. This is a different kind of service that allows sites like Trulia or Zillow to gain access to MLS listings and make them available to consumers who aren't members of a real estate board. However, most of these services limit what the consumer sees to some extent. For instance, when I log on to the MLS for my area, I can often see tax records, pull up a history of sales on a particular property, and find out many other details a consumer won't find without making a trip to the courthouse, local water and sewer districts, and so on.

Flat fee services that place your property on an MLS make your information available to area Realtors and to secondary consumers who are using sites like Zillow, Trulia, and Yahoo. The benefit to you as a seller is that people who wouldn't know you're selling your home can now find it even if you're not listing it with a Realtor.

However, there's a lot more to gettng a house sold than getting it on an MLS.


"What Should I Do to Sell My House?"

Before deciding to list with a broker or to undertake a FSBO sale, consider that there are four things that sell a house:

  • Price
  • Condition
  • Location
  • Marketing

Let's take a look at each of these, and how flat-fee brokerages and traditional broker relationships affect each one.

Real Estate Buyer Factoid

88% of home buyers use the Internet to search for homes.


87% of them use a Realtor.


Conclusion: Most buyers turn to professional representation even if they search online.


Source: 2011 National Association of Realtors

Pricing a House for Sale

The 2011 National Association of RealtorsĀ® Buyer and Seller Profile report reveals that establishing their sales price is the most difficult task for people trying to sell a home.

Most of them take a stab at pricing by looking for similar properties on the Internet and pricing their property similarly. A few take a page from Zillow, using their Zestimate tool. This is a service that records sales prices of many homes around the country, but beware - the data is incomplete and may not be accurate. Zillow reports that its price estimates only have a 70% confidence range. One other thing they encourage sellers to do is to get an analysis from a local Realtor! This is because agents who work in the area day after day are best able to know which adjustments will result in an accurate sales price.

As an agent, I will only do a thorough Competitive Market Analysis (CMA) for people who are going to list their house with me. Think about it - it costs about $400 to get an appraisal. I perform a similar analysis that takes a couple of hours, so I won't do this for someone who says they will not hire me. This is part of what their commission is paying for when they give me an opportunity to sell their property.

However, a CMA or an actual appraisal are vital to pricing a home effectively. Here is the difference between some possible tools for pricing a house for sale:

Method of Establishing Price:
Examines recent sales of similar properties
Examines Current Competition
Makes Specific Adjustments to Comparables
Considers building materials used
Considers rental / replacement value
CMA by a Realtor
YES
YES
YES
MAYBE
MAYBE
Appraisal by a Qualified Appraiser
YES
YES
YES
YES
YES
Online & Flat Fee Resources
MAYBE
MAYBE
MAYBE, ON LIMITED BASIS
NO
NO

FSBO sellers lose about $12,000 on average compared to similar properties that are listed with agents. In other words, the agent's services often pay for themselves and don't actually cost the seller anything at all!

Flat-fee services may provide limited help, much like the limited report I will provide sellers who don't plan to list with me. I'll click a few buttons to send them some comps, but I will not make in-depth adjustments based on square footage, building materials, upgrades, and so on. These kinds of estimates can be off by thousands of dollars, but I'm not willing to work hard on something if I know I won't get paid, and neither do discount brokerages, especially those who aren't using actual hands-on agents familiar with your neighborhood!

The founder of FSBO.com should be the ultimate expert as selling a home without an agent. So why did he turn to a Realtor to get the job done? And why did hiring a Realtor put $21,000 in his pocket? Read his story and check out this video (and the rest of this article) to understand what happened.

The Real Story

How to Prepare a House for Sale - Condition

The condition of a property has a tremendous impact on a buyer's excitement to buy it. However, many sellers make serious mistakes when it comes to preparing their house for a sale. Common problems I see:

  • They overspend on updates.
  • They underspend on maintenance.
  • They fail to package their house as a commodity. Staging a home to sell is like packaging a food item. If the package is unappealing and generic, it won't have "brand name" appeal that produces higher interest.

An experienced Realtor can assist sellers with recognizing where to spend money and where not to. Literally every single house in the world *can* be improved. Recognizing which improvements will have effects on the seller's profit is an important aspect of a successful sale. I recently spoke with a woman who had been advised to spend $1,800 to hire a professional stager even as she was advised to cut her price significantly, when all she really needed was about $200 worth of staging products to get her full asking price. She chose to use the first agent's advice instead of mine because I wouldn't reduce my commission from 3% and they'd offered her 1%. On her $215,000, she believes she will save money by lowering the price to $208,000 and spending over $2k on staging it. This means she's losing almost $9,000 in order to save $4,000.

In order to better serve my sellers, I obtained certification as a home stager in 2006. I realize not all agents have attended coursework to be home stagers, but I can tell you that discount brokerages often take the shortcut way out of helping sellers prepare their home's condition by recommending staging. Staging is vital, I'll admit, but how much is needed in order to make a particular home competitive at a certain price point is debatable. Here's what I've observed:

Ā 
Generic Suggestions
Articles with Advice on Staging
Work with Seller to Stage House
COST
Realtor
YES
YES
SOME
Included in commission
Discount Brokerage
YES
YES
NO
Included in commission
Interior Designer
YES
YES
YES
$$$$ in addition to commission
Home Stager
YES
YES
YES
$$ in addition to commission
Home staging typically runs about 1% of the expected sales price of a home. Interior design can cost much more and tends to appeal to only certain buyers rather than a general buyer.

When Realtors provide staging services, they may or may not have good expertise. They may provide staging materials, but in most cases they will require a seller to pay for them separately because the agent doesn't want to take ownership that will require long term storage or furnishings and decor when they are not being used.

Staging may be the easiest thing for you to do if you're selling yourself or hiring a discount brokerage. Honestly, even though I became certified through Barb Schwartz, the inventor of home staging, the principles are not that difficult to master. A book like this one should have all the necessary information you'd need.

Commission Myth

It's a myth that an agent earns a 6% commission for selling your house. The truth is that an agent's commission is always negotiable, and that half of it is paid to a brokerage that finds a buyer for your home. The agent receives a portion of the half of your commission that is earned by his or her office, the broker receives some, and some of it pays for MLS access, signage, Errors and Omissions insurance, community support programs, and other marketing.

Location, Location, Location

Well, quite frankly there isn't a lot you, a discount brokerage, or an agent can do about location. After all, your house is where it is and you're not likely to move it!

As a seller, you probably already understand that where your property is located has a direct impact on what kinds of buyers will be interested and on your sales price. What you may not have considered is that location plays an important role in determining what a discount brokerage can do for you when compared to a real estate agent's services.

About 12% of all home sales were completed by FSBO sellers in 2011 according to the National Association of Realtors' data. Of those, about 40% were sold to someone the seller already knew before hand. This same principle applies to agents.

An agent who works regularly in your area knows people who are looking for homes that are similar to your house and interested in your location. Discount brokerages may or may not have agents who are working consistently with a network of others. For instance, a seller who lists with FSBO.com can only expect referrals of buyers who come looking for homes like his. His broker is not going to reach out to people who aren't using that particular website. An agent, on the other hand, reaches out personally to someone they may not be working with - someone a coworker mentioned, a stranger at the grocery store who mentioned they're looking for a house, someone who wasn't qualified to buy last year, but who was looking for something just like what you're offering and may be able to qualify now.

Hy-Ko Sign Kit Orange 59" For Sale,Take One
Hy-Ko Sign Kit Orange 59" For Sale,Take One

Plan to purchase a lawn sign that is sturdy and allows you to place fliers if your brokerage won't be providing any.

 
Master Lock 5400D Select Access Key Storage Box with Set-Your-Own Combination Lock, 1-Pack
Master Lock 5400D Select Access Key Storage Box with Set-Your-Own Combination Lock, 1-Pack

Will you make your house available to other brokers to show it? You'll need to make sure they can access your house when you're not home. Be aware that they may be reluctant to show a house if they think the seller's not fully trained to handle the selling side of the transaction.

 
Adams Real Estate Forms Library on CD, White (SS502)
Adams Real Estate Forms Library on CD, White (SS502)

If you sell it yourself, you will need to obtain contracts and forms. Be aware that not all forms work for all states. Also, if you are working with a discount brokerage or selling it FSBO, the duty for meeting all state laws falls to you. Your broker typically doesn't work for you in an agency status, which would require him/her to accept a high degree of legal responsibility.

 

Marketing Your House for Sale

Whether you list your home with a full service agent, a flat-fee broker, or you decide to sell it yourself, marketing and showing your property are vital aspects to the process.

When considering a discount brokerage, you should delve deep enough to answer the following questions before you agree to pay anything:

  • Will you receive a lawn sign?
  • Will an agent hold open houses or will you?
  • Will you be loaned a lockbox so Realtors can bring buyers to tour your home?
  • Will you lose showings because you will be required to let people in?
  • Will you lose buyers who feel inhibited by your presence? (Many people don't want to discuss a home's flaws or look inside bathroom cabinets when the owner is present!)
  • What kind of feedback will your brokerage obtain and forward to you after a showing?
  • How much Internet syndication will your property receive?
  • What other costs are associated with the sale that aren't covered by your brokerage fees?

Let's look at a typical discount brokerage marketing package compared to a full-service agency agreement:


Who Does What When You List Your House for Sale?

Who is legally responsible for:
FLAT FEE / DISCOUNT BROKER
FULL SERVICE BROKER
Obtain sq. footage data
You
Broker
Obtaining legal address
You or Broker
Broker
Obtain tax data
You
Broker
Ensure you've met disclosure laws
You, with some broker input
Broker
Get high quality photos that are appealing
You
Broker
Pay for yard sign
You
Broker
Place yard sign
You or Broker
Broker
Prepare fliers
You
Broker
Hold Open Houses
You
Broker
Pre-qualify buyers
You
Broker
Help unqualified buyers get qualified
You
Broker
Find the "right" lender for buyer circumstances
You
Broker
Follow up with buyers
You or Broker*
Broker
Obtain accurate feedback on showings
You or Broker
Broker
Direct buyers interested in other properties to yours
You or Broker*
Broker
Overcome buyer objections
You or Broker*
Broker
Help buyer overcome other obstacles like current leases
You
Broker
Order title work
You or Broker*
Broker
Ensure contract deadlines are met
You or Broker
Broker
Show property
You or Broker*
Broker
Ensure property is in best condition to show
You
Broker
Determine necessary/desirable repairs
You
Broker
Negotiate on your behalf
You
Broker
Address legal problems like boundary issues
You
Broker
Understand relevant laws that apply
You
Broker
Ensuring all funds have been accounted for properly
You and Title Work Company
Broker
Ensuring safety and security at showings
You
Broker
Ensuring sales contracts addresses all necessary legalities
You
Broker
Ensure buyer does not back out
You or Broker*
Broker
Ensure buyer meets lender's requirements
You or Broker*
Broker
Answer buyer's questions
You or Broker*
Broker
Determine if property meets lending standards
You
Broker
Attend closing
You and maybe Broker
You and Broker
* Items marked with an asterisk highlight services that may or may not be provided by a discount brokerage, and that a seller is unlikely to have sufficient information to handle alone.

Real Estate is a Major Legal Transaction

With eight years under my belt as a real estate agent in two different states, I've discovered that the laws governing real estate transactions change monthly. I've known sellers who completed sales themselves only to discover that the sale was invalid or who waited for nearly a year after the original closing date because they did not know how to address problems that arose.

When things like this happen, a seller's costs go up tremendously! First, there's the cost of paying the mortgage until the house sells if poor marketing or a failure to address problems gets in the way. There's also the possibility of expensive lawsuits because a seller did not know the laws as well as they thought they did and don't pay close attention to necessary details.

A builder I knew was forced to sell a house for $87,000 less than his asking price because of an error like this. He stated a price to a buyer, then changed the price. When the buyer came back a couple months later with an agent and wrote an offer with the first price he'd stated, he accepted it without the kind of review an agent would have completed for him. He tried to back out, but the buyer took him to court and he was forced to honor the contract he had accepted.

Before hiring a discount brokerage, make sure you're getting the protection you need. You wouldn't dream of performing a gall bladder operation on yourself if you didn't have medical training, so be careful about being your own legal representative on a matter where there may be many thousands of dollars at stake!

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Comments 2 comments

alocsin profile image

alocsin 3 years ago from Orange County, CA

Real estate transactions are so time-consuming and complex, I think it's worth it to go with a full-service agent. Voting this Up and Interesting.


jellygator profile image

jellygator 3 years ago from USA Author

Thank you, Alocsin. It's true, they can be very easily sidelined by simple mistakes, so it's worth it to have someone on your side!

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