Should you let a discount real estate broker sell your house?
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Sharon Mather wanted to sell her house in Long Beach, California, but she was reluctant to pay the standard listing agent’s commission. After shopping around, Mather found a discount real estate 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 paid the buyer’s agent 2.5 percent, and her home sold quickly. Her total selling costs were just 3.5 percent, well below the typical total of 5 percent.
Based on her sale price of $400,000, Mather spent $14,000 on broker fees. If the going rate of 5 percent had applied, 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.
What is a discount real estate broker?
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 — working at a discounted rate, in effect. Other discount brokers, as this breed is called, work similarly, often offering commissions as low as 1 percent or being compensated by a flat fee — commonly a few thousand dollars.
But discounting their compensation doesn’t necessarily mean these agents discount their services, too. While business models vary, many discount brokers will help with listing and marketing your home, and negotiate with buyers on your behalf, just as a traditional real estate agent would.
Ben Mizes, Clever Real Estate’s founder and CEO, says discount brokers have a renewed appeal in a seller’s market — in which bidding wars are common, marketing times are short and desirable houses often seem to sell themselves — and for above-list prices, too.
“Sellers are left thinking, ‘Why did I spend so much money when my home sold in a day?’” says Mizes.
How low are discount broker commissions?
Clever Real Estate markets its services nationally, although it doesn’t employ agents directly. Instead, it funnels leads to listing agents looking for clients and offers listing fees as low as 1 percent or a flat $3,000.
The nation’s most prominent discounter, Seattle-based Redfin, also markets listing fees of 1 percent (if you both sell and buy a home through them) to 1.5 percent (if you just sell). By contrast, average commissions with the largest brokerage in the U.S., Anywhere Real Estate (formerly Realogy Corp.), are significantly higher.
Anywhere Real Estate — which owns the Coldwell Banker, The Corcoran Group and Sotheby’s International Realty brands — reported that the average transaction-side commission rate at its company-owned operations was 2.41 percent in the first six months of 2022, a slight decrease from 2.43 percent during the first six months of 2021. If the listing agent and the buyer’s agent split the take equally, that would suggest an average commission of about 4.82 percent.
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, while it increased two basis points from a year ago, Redfin says its market share was a modest 1.18 percent as of April 2022. Most 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.
How real estate commissions have changed
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 2021. REAL Trends, a Colorado-based research firm, says the average commission slid to 4.94 percent in late 2021, down from 5.40 percent in 2012.
“It looks like the downward trend on the gross commission rate continues,” says REAL Trends senior advisor 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. Realtor.com data shows that active listing counts have yet to recover to pre-pandemic levels, though they did climb by 26.6 percent from August 2021 to August 2022.
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 Redfin, the biggest discounter in the U.S., holds just 1.18 percent market share as of April 2022.
How discount brokers work
Despite its modest market share, 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 act as independent contractors. Another commission-cutting concept, UpNest, lets sellers seek discounted fees online.
Clever Real Estate takes a different approach. 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.”
Drawbacks of discount brokers
Since theirs is such a service- and individual-oriented profession, generalizing about discount brokers is difficult. Some may work as hard as any regular broker, as Mather’s did; others may be more cut-rate in their approach. Of course, that can apply to traditional brokers, too: “Full-service” doesn’t necessarily guarantee white-glove treatment.
Many of the best discounters, like Clever and Redfin, promise the same level of service you would get with a traditional agent. But the range of service offerings can vary across companies. Some discount brokerages do not offer services like multiple open houses or assistance with home staging that a full-service agent routinely provides. So it’s important to ask exactly what duties your agent will and won’t perform before you sign a contract.
Understanding the discount
It’s also important to understand how the discounted rates apply. Usually, it’s the listing (seller’s) agent alone who is taking a cut — not the buyer’s agent with whom they split their commission. The buyer’s agent often still gets a full half of the traditional commission, calculated as if it were 5 or 6 percent of the final home price.
For example, Redfin notes that if you both sell and buy a home through them, the Redfin listing agent receives 1 percent commission, while the buyer’s agent (representing the purchaser of your old home) gets 3 percent — bringing the total commission paid by you, the Redfin client, to 4 percent.
That’s still a savings, of course. But it can be a bit of a shock to see, say, $20,000 instead of $5,000 in commissions on the list of closing costs. Moral of the story: Be clear on what the discount covers, and what the total commission bill will be.