In hot seller’s market, discount real estate brokers gain appeal

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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 percent, well below the 2.5 percent typically charged by listing agents.

In addition to the 1 percent promised to her listing agent, Mather agreed to pay the buyer’s agent 2.5 percent, and the house quickly sold this fall. Mather’s total selling costs were 3.5 percent, well below the typical total of 5 percent.

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 percent, 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 percent to 1.5 percent. By contrast, the nation’s largest brokerage, Realogy Corp., says its average is 2.43 percent.

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 percent per “transaction side” in the first nine months of 2020, up from 2019’s record low of 2.41 percent. If the listing agent and the buyer’s agent split the take equally, that would suggest an average commission of about 4.9 percent 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 percent as of Sept. 30. American homesellers, 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 percent. While some sellers still pay that sum, the going rate has dwindled to 5 percent 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 percent in 2019, from 5.03 percent 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 through the rest of this year and into next,” 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, Realtors 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 proven 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 percent to 3 percent 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 percent to their own agents, they often offer 2.5 percent or even 3 percent to buyers agents.

Mather, the seller in California, says her agent urged her to pay 2.5 percent to the agent representing the buyer. Offer less than that, he warned, and agents might not enthusiastically show her home.

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. All of the work they perform during property tours and open houses and home inspections is done for free, in anticipation of a payday at the closing table.

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, and some discounters have flopped. In one high-profile illustration of that reality, discounter YHD Foxtons made a splash during the housing boom when it heavily marketed cut-rate commissions in New York and New Jersey. That company gained a foothold in the metro area only to go bust in 2007.

More recently, another upstart, London-based Purplebricks, launched an ambitious attempt to expand into the U.S. Its pitch: Sellers would pay a flat fee of $3,200, plus a commission to buyer agents. But Purplebricks never gained traction. The company retreated from the U.S. in 2019.

That leaves Redfin as the biggest discounter in the U.S. housing market. Reflecting the appeal of the discount model, Redfin’s stock market value is more than that of Realogy and RE/MAX combined.

In many metro areas, local brokers are mimicking Redfin’s business model with 1 percent listing offers of their own.

Varying business models

Redfin has expanded nationally with an approach that includes hiring agents as full-time 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.”

While Clever Real Estate agents take 1 percent as a listing fee, they usually urge sellers to pay 2.5 percent or more to buyers’ agents.

Mather says she was impressed by the agent she found through Clever Real Estate. Despite the cut-rate commission, the agent — Cyrus Mohseni of The Keystone Team — responded quickly to her calls and shepherded the transaction to a smooth closing.

“He turned out to be awesome, just a real go-getter,” Mather says. “You would think I was paying him a whole lot more than 1 percent.”

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