“Full-Service” Discount Brokerages – You get what you pay for!
Updated: Aug 16, 2021
by Karen Flaherty - Real Estate Agent since 2004 - Kinnane Group, Inc.
You may have seen ads for discount brokerages that offer full-service agency at a reduced price. You have probably also seen ads offering to pay cash for your home. While it may sound wonderful to save money on listing fees, it is important to understand what you are getting into when you enter a contract with one of these agencies.
For reference, the average national commission is 5-6%. This commission is split between the listing broker (who the Seller's agent works for) and the selling broker (who the Buyer's agent works for). From there, the agents are paid their commissions based on the agreement they have with their broker. On average, agents receive ¼ to ½ of their agency’s commission. Some agents receive the entire commission but are required to pay office fees, etc..
Full-Service Discount Brokerages
These agencies offer either a reduced commission structure or a flat fee to list your home. Keep in mind that these reduced fees usually pertain to only the listing agency side of the deal and the ads generally do not mention what you will also be required to pay a Buyer’s agency fee (usually 2.5% - 3.5%). Their business models rely on selling a large volume of homes. What this means is that they take on a large number of listings which, regardless of how “full service” they promise to be, takes attention and time away from your home.
One brokerage, for example, advertises a 1% listing fee. That fee is actually only realized if you sell and buy with them. Otherwise, their listing fee is 1.5%. Again, that does not include the Buyer's agency commission, which is also the Seller's responsibility. In the MLS system, where agencies advertise their commission rates to other agencies, these agencies advertise a 4-5% total commission, just like every other brokerage in the area. That commission is paid by the Seller. So,in actuality, the Seller is paying the same as they would with a traditional agency. Some of these agencies pay their agents a salary plus small bonus when a property sells. This model can overwhelm agents and limit incentive to go above and beyond - they just don't have the time. Traditional, full-service agents have increased incentive to go above and beyond because we are only paid if we sell your home.
My Buyers often notice this when we make appointments to view homes that are listed by these discount brokerages. The home is usually on a lockbox, or a “team member” is sent to meet us for the showing (not the listing agent). Getting answers from the listing agent can be quite frustrating because they are often overwhelmed. I’ve had multiple Buyers lose interest or find another home while waiting for the listing agent to get back to us with requested information. Many times, we see these Sellers change to traditional agencies once their contract with the discount brokerage expires.
Some agencies also offer limited service which inevitably causes the Sellers to have the need for an attorney for all phases of the transaction, which means more money spent.
Zillow & Other iBuyer Models
I like Zillow – it is quick and convenient for looking up properties. One concern I've had is with the “Zestimates” that they provide. Although they are one of the better algorithms, they work best in uniform areas. In a town such as Westport, where you have very diverse neighborhoods, the numbers are less reliable. The algorithm cannot account for condition issues, which can be substantial on an appraisal.
Recently, Zillow has gone from being a portal to a brokerage and they advertise that they will make a cash offer for your home. If you accept the offer, you’re charged a fee which ranges from 6-13%.* which includes them paying for any repairs. Sounds great right? Once you accept their offer, someone is sent to inspect your home in-person and that's where things can change. Consumer reviews complain that initial offers were great but then after in-person inspection, the offers dropped by tens of thousands of dollars - usually based on condition or Estimate errors. Also, if you need too many repairs, they the offer is retracted – not all properties qualify.
These companies are in the business of making money and the deal needs to make sense to their bottom-line. Once they purchase your home, these agencies complete any updates/repairs and put it back on the market immediately for resale. They're flippers! So, you’re receiving a below market rate price for your home AND paying higher fees. Forbes Magazine noted that Sellers lose around 10-15% of what they would have made on the home selling it through a traditional agency.
While getting it done quickly and receiving instant money is attractive to some, in our current market, where homes are flying off the market at record prices, it’s difficult to understand what would motivate someone to take that approach.