Discount Real Estate Commissions: What Most Brokers Won’t Tell You

You’re probably familiar with the old adage “You get what you pay for.” To be sure, there are good deals to be found here and there. But if something sounds too good to be true, it often is.

When it comes to “discount” anything, some skepticism is in order. That’s especially true when it comes to professional services, and real estate is no exception.

In at least some cases, a “discount real estate broker” is someone who is either inexperienced or else willing to compromise on the level of service they give their clients. “Discount” has therefore kind of become a dirty word in real estate.

I get it. There are plenty of discount real estate brokers out there who give the industry a bad name. But at the same time, I’d argue that there’s a place in real estate for discounted commissions.

Many Realtors will argue tooth and nail that only the traditional 6% commission will serve the needs of their clients. But I think they’re mistaken.

I’ll go into the arguments many brokers use to justify a one-size-fits-all 6%-or-bust approach. I’ll also touch upon the online-only discount real estate services currently gaining exposure in the media.

My aim isn’t to say that sellers should never pay a 6% commission. Rather, I think that sellers in Oregon and elsewhere should be able to understand exactly what they’re paying for.

Further, sellers should be able to determine for themselves whether the service they’re receiving warrants that price tag. The info I’ll provide here should help you do just that.

Why Realtor Fees Are What They Are

First of all, let’s start by pointing out what may not be immediately obvious in the age of widespread online home shopping. Being an effective real estate agent requires a highly specialized set of knowledge and skills.

It’s true that real estate transactions can be relatively straightforward. A home can go on the market at an appropriate price, and a full-price offer can come in relatively quickly from a well-qualified buyer. An inspection report can come up clean, without any issues that require further negotiation between the buyer and seller.

From there, a transaction can coast to closing, with the lender doing everything they need to do to get the buyer financing under the terms specified in the sale agreement. The seller can get paid, and everyone can live happily ever after. Pretty simple, right?

Unfortunately, things aren’t always that simple. There’s a whole spectrum of things that can go awry, from the relatively minor issues that even inexperienced agents are well-equipped to deal with to the truly catastrophic.

The latter requires a steady, experienced pair of hands to keep the car from going off the cliff. A transaction can fall apart for all manner of reasons at any stage of the process, but as a sale inches toward closing, the stakes become higher for all parties involved.

To put it as simply as possible, that extra security is a lot of what you’re paying your listing agent for. Of course, most transactions don’t end up skidding toward the edge of the cliff that we’re talking about. Why not?

Well, for one thing, an experienced agent is able to nip the little things in the bud before they become bigger. Most real estate transactions look simple because of the work that goes on behind that scenes to keep them from getting complicated.

Make no mistake, marketing and related expenses are a significant part of what goes into your broker’s commission. I just feel it’s important to clarify that marketing isn’t the only or even the most important consideration that goes into a real estate commission.

No Realtor can magically add value to your home. What a skilled broker can do is manage the process in such a way that the value that’s present in your home doesn’t get lost.

So, Why Do Most Brokers Insist Upon a 6% Commission?

The simplest answer would be “because that’s just the way things are.” I don’t think that’s a very satisfactory answer, but it’s actually the gist of what many brokers will tell you.

In actuality, while the average real estate commission was 6.1% in 1991, by 2016, that number had declined to 5.1%. Much of that drop comes from the luxury home market, but 4-5% Realtor fees have become more common throughout the entire market.

Brokers who don’t want to negotiate commission–and there are plenty of them–will argue that listing agents who accept lower rates are hurting their own clients. Buyer’s agents, they argue, will be less inclined to show listings which offer a lower commission.

This argument held a lot more water when buyers had less access to information about listings, and agents could more effectively steer them away from certain properties.

This kind of practice has never been ethical or even legal. It violates a broker’s most basic fiduciary responsibility to put the needs of one’s client above one’s own financial interests. Agents used to be able to get away with that more easily, though.

Nowadays, buyers can view extensive information about properties online, including detailed photographs and virtual tours. More and more, buyers are taking the initiative in telling their brokers what properties they want to tour.

My biggest problem with the argument that discounted commissions deter buyer’s agents is actually that it depends upon–and perpetuates–a misconception about the real estate industry. That misconception is that we’re all just in it to make a quick buck, and that agents aren’t really looking out for their clients’ best interests.

In reality, the only way to make it as a real estate agent is to actually look out for the best interest of one’s clients. Real estate is a referral-based business, and the slash-and-burn approach just doesn’t work out in the long or even medium-term.

Those agents who do refuse to show their clients particular listings actually shoot themselves in the foot. Over the years, a handful of people have called to ask me to show them my listings because their own Realtor wouldn’t. Those people ended up becoming my clients, whether they decided to purchase my listing or not.

In short, giving buyers easier access to information about properties has disincentivized unethical behavior by agents. In the process, it’s changed the real estate industry for the better. Those who still insist upon the old rules simply aren’t keeping up with the times.

Okay, So When I’m Negotiating Realtor Fees, What am I Negotiating?

Again, the argument I’m making here isn’t that Realtors should never charge a 6% commission. It’s that commissions should be negotiable and should depend upon the needs of the client.

First of all, there simply isn’t a one-size-fits all package for marketing a home. Nowadays, professional photos are basically a given for almost any kind of property. A punchy description certainly won’t hurt.

Apart from that, the waters are murkier in terms of which marketing strategies will actually be effective.

In the context of the current pandemic, 3-D virtual tours can be an essential tool for helping keep physical showings to a minimum. But people will rarely become interested in a property because they’re impressed by the virtual tour.

Basically, the technology is still in its infancy. It’s expensive and difficult to use. Nonetheless, it can make sense for luxury properties that are of potential interest to out-of-state buyers who can’t readily do a viewing.

Drone photos and video are, I’d argue, essential for large rural properties, when still photos simply won’t paint an adequate picture. Drone photos can also highlight the beauty of areas around properties in town, but the technology needs to be used well if it’s to be effective.

Open houses were once considered de rigeur, but the fact of the matter is that agents often benefit more from them than their clients. Sure, it’s possible that someone will come in off the street, fall in love with a house and decide to make an offer. With that said, most people who attend open houses fall into one of two categories.

The first  category is people who are already working with a Realtor and can already get inside one way or another. The second category is people who are not yet in the market to buy.

Lastly, let’s talk a bit about staging. The question of whether to stage or not to stage is completely dependent upon the property in question.

The data seems to indicate that staged homes sell significantly faster and fetch higher prices than non-staged homes. I won’t argue with that basic premise but would caution that correlation doesn’t necessarily imply causation.

Savvy agents recognize that certain homes are likely to sit on the market longer than others, and that staging these properties is unlikely to be cost-effective. In other words, properties that take longer to sell are less likely to be staged, skewing the numbers.

Moreover, some homes and floorplans show vacant better than others. Staging can actually accentuate certain dated or unpleasant features, particularly if it doesn’t gel with the decor of a home. If it’s likely a buyer will want to remodel a property anyway, it can make more sense to offer a blank slate.

All of these considerations of how to market a home should play into the question of Realtor fees and commission amounts. If I as the listing agent am holding one or more open houses and paying for professional staging, professional drone footage, and a 3-D virtual tour, I will certainly make the argument that 6% is a good baseline for my services.

What if we determine, however, that most of those steps aren’t really going to help you sell your home? Going a step further, what if you’ve already identified a solid buyer, rendering any kind of marketing fairly moot? If I still insisted upon a Realtor fee of 6%, something would be off about that picture.

I’m also not going to ask for a 6% commission from someone who plans to use me as their buyer’s agent. I won’t go into all the possible permutations of what might lead to a “discounted” commission fee, but I think you get the idea.

With that said, it’s important that I specify what a discounted commission shouldn’t entail.

These Points Should Be Non-Negotiable When You Hire a Realtor

Basically, an agent’s fiduciary responsibility to his or her client remains exactly the same regardless of the commission involved.

The only exception is “limited service” listings, where a licensed agent publishes a property on the Multiple Listing Service but doesn’t enter into any kind of agency relationship with the client. Some brokers offer this service for a flat fee, and that’s a-ok if you’re expecting to handle the transaction yourself.

If you’re hiring a Realtor to represent your best interests, however, you need to be sure they’re doing just that. Using self-identified discount real estate brokers and services can carry certain risks. For one thing, there can be a tacit understanding that once a transaction is underway, a discount real estate broker won’t offer the same level of service or responsiveness that would otherwise be expected.

This issue is particularly glaring with the flat-fee or 1% commission services that have started to proliferate online. Sure, they’ll list your home for you and deal with the standard paperwork. But what happens when push comes to shove and the other side won’t budge?

Real estate transactions depend upon accountability. That’s why, when I’m on the buyer’s side, I strongly encourage my clients to use a local lender. Having the ability to actually show up at someone’s desk and ask for answers is the best and easiest way to make sure that financing snafus don’t send a home purchase shooting off the rails.

If the agent on the listing side is somebody at a desk in another state, dealing with transactions in a volume that would be impossible for a traditional brokerage, I simply don’t have that option. There isn’t any real accountability, even if that discount broker is performing the letter of what they’d promised to their client.

The simplest way I can express an agent’s duty once their client is in contract is that they have to forget about getting paid. I take that seriously, and the decisions that I make are based upon the best interests of my clients rather than my own immediate financial bottom-line.

It would be easy just to say that, but because of the way I’ve run my business, I’m now in a position where I can trust that if I deal with each person with integrity, I don’t have to worry where the next paycheck is going to come from.

It’s not that I think I’m the only Realtor who operates that way. Again, ethics and integrity are simply the best and easiest way to succeed in this business. But if you’re interviewing agents, it’s important to be attentive to the signs that your agent might be in it solely for the Benjamins.

An agent who won’t negotiate commission may mean perfectly well, and oftentimes they’re bound by the policies of their office. Still, it’s a question you should ask any Realtor who is offering to list your home, and you should pay close attention to their answer.

I always recommend that sellers interview prospective agents, the only possible exception being if you have a rock-solid referral. The best rule of thumb is not to let anyone tell you that “this is simply the way that the real estate industry is.” If you can’t get personal accountability in your very first conversation with an agent, that most likely doesn’t bode well for the future.

 

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