Tuesday, November 17, 2009

How much damage can discount brokers do?

Plenty, when all things are considered. Basically you get what you pay for.

Discount brokers include those companies who offer rebates from commissions (e.g. Redfin) or simply discount their commissions to 1.5%. They got a lot of visibility during the boom times in real estate because buying and selling homes didn't appear to take that much effort. You put a house on the market and it sold...fast. Lots of new people entered the business hoping for easy money and most of those are gone or struggling, just like a lot of discount brokers. Companies that have been in and out of bankruptcy include Help-U-Sell, Iggy's House, and others.

Why do they fail or have trouble? Basically it comes down to simple economics. The public doesn't know that to effectively market a property costs thousands of dollars. For example, Redfin says they'll take photos and put the home on the MLS. However, other work such as sprucing up a house (paint, gardening, etc), creating professional flyers, creating and publishing ads in local papers, sending eflyers, sending postcards or letters to the neighborhood, and more all cost hundreds or thousands of dollars that you pay.

Now, assume you sell a $1M home at 3% and the agent sees $30,000. A top producing agent gets 80% of that or $24,000. Take out the cost of advertising the home - say $2000 (flyers, a couple of print ads, photos, etc). You're left with $22K. Most agents spend 20% of their income on personal marketing so that's about another $5K. You're left with $17K. Now, take out taxes, insurance, and other essentials and you're left with half that - about $8000.

The agent is supposed to live on that money for at least as long as the time it takes to advertise and close the deal - about 30 days but probably longer. Let's say 60 days. That means the agent is earning about $4K per month after taxes and costs - not exactly a fortune.

Now, cut that in half and you'll see why discount brokers come and go. You can't live on the money. It all looks great for the consumer but consider what you get. Is the person starving for a deal going to look out for your best interests or get you the best price? Ask a discount broker these questions:

- Do they really know the area? Are they local or 20 miles away?
- Do they know the agents in the area? What's their reputation? Networking sells homes - trust me.
- Do they personally hold open houses or someone else (like the owner)?
- Do they tour the properties in the area and know the inventory?
- Does their company have marketing relationships? Coldwell Banker is aligned with Trulia and others to market your home online better than anyone.
- Can they advise you on how best to present the home with updates and staging?
- Can they recommend contractors to do needed work?
- Will they coordinate all this marketing, prep work, etc?
- How much advise will they give when negotiating an offer? Will they take as much time is as needed?
- What expertise do they have to offer on negotiating strategy? Can they deal with contingencies, multiple counters, financing issues, etc?

I could go on and on but the point is that discount brokers and agents often lack the quality necessary to close a deal, especially in good areas. It is rare to see any of these companies working in Los Altos. There have been a few and usually in the boom times. In general, the most they can offer is to hopefully save you a little money. However, I always like to ask this question:

If an agent can't defend their commission, how can they defend your equity?

The answer is, they can't.

My advice is to stay with a full-service, professional agent who knows the area and has strong connections. Preferably a Realtor - more than just an agent or broker.

1 comment:

discount broker said...

Great post. I totally agree that there are so many advantages of keeping discount broker but on the other hand some disadvantage also there. So according to me carefulness is very essential while choosing discount broker.