Cruising around Durham a couple of days ago I heard a radio commercial for “Flat Rate Realty” offering to list and sell any home for a flat fee of $2500. There was a quick and vague disclaimer at the end that seems to imply that that doesn’t include the compensation that is offered to the buyer’s agent, which is traditionally a 2.5% to 3% commission. Whatever.
I found what I believe to be the company’s website through a Google search. It appears that they are just getting cranked up. The two brokers’ Linkedin profiles put them in Charlotte and their 5 active listings are in South Carolina south of Charlotte. I also found another company that will license a broker to use their “Flat Rate” logo and provides some training and collateral material for a little less than $5K upfront and $550 per month, which is peanuts compared to most franchises. They also don’t indicate any standard flat fee. For a number of reasons, I don’t believe the two are related but that’s not the point of this post.
How do discounters get away with this?
Well, this really isn’t that new. Many discount real estate brokers hung out their shingles during the real estate boom. They had a market because it was so easy to sell a home that many consumers wondered what they were getting for the typical 6% commission they were paying. Back in those good old days, the commission was paid to the listing or seller’s agent and through the multiple listing service it was split 50/50 with the buyer’s agent. So on a $300,000 home sale, the two brokers split $18,000.
The discounters stepped in and started reducing the commission and taking business away from the traditional brokerage operations. The traditional companies tried to deny the discounters access to the MLS. The discounters complained to the Feds and The National Association of Realtors settled with the US Justice Department in 2008 and allowed discounters full access to the MLS.
This was a good thing for consumers but bad news for the brokerages with business models heavy with overhead…fancy offices, large staffs, etc. However, the agreement didn’t require them to stop describing this new competition in disparaging ways as “discounters” or “limited service” brokerages.
The Justice Department’s case wasn’t a stretch at all, it turns out. Although many consumers, if not a lot of Realtors, may have assumed that the 6% commission was encoded in law or regulation. In fact, it was not, and Justice argued that it was essentially price fixing.
The so called “discounters” were only discounting from the standard pricing set by policy by the various brokerages, with most remarkably coming up with the same pricing. They also aren’t necessarily “limited service.” It’s long been the American way that if you could run your business with lower overhead and deliver services cheaper or settle for less profit you were free to charge a lower price than your competitors. There is no good reason why real estate brokerage should be approached any differently.
There is no reason that the compensation has to be a commission either. There is often no difference in cost between marketing a $200,000 house than a $500,000 house. The latter may take longer to find the right buyer but that does not necessarily add much additional cost. That’s a difference between $6,000 and $15,000. So the savvy consumer to do? Hmm…
One reason I prefer to work independently is that I can set my own pricing policies and negotiate directly with clients without getting permission from some office broker. It also keeps my overhead down. I don’t have to share my commission with a company that typically would take from 10% (from top producers) to 50% (from new brokers.)
I can also work out of my home at virtually no extra cost. This means I can charge 2% on the listing side and make just as much money as I would in a big firm at 3%. Maybe more. At the pace I prefer to work (I don’t like to work with more than 3 or 4 clients at a time) my split with the broker would probably be 40%. On a $300,000 house that saves the seller $3000 and I would make a few hundred dollars more. There has been a trend recently for large firms to start tacking on other fees on the front end for listing clients to get some cash flow up front.
The higher costs may be worth it for some sellers that are just more comfortable with a larger, well established firm and that’s fine with me.
There’s a lot more to be said about this that is covered in Fun To Sell, Easy to Buy in the chapter on pricing and I recommend it to anyone that really wants to understand how this has evolved and what it means in terms of working with a real estate agent. It’s a Kindle book and it too is sometimes discounted. For less than $6 it could save you a bunch of money.