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Sharon Mather aimed to sell her residence in Long Beach, California, yet she hesitated to incur the conventional listing agent’s commission. After exploring her options, Mather discovered a discount real estate broker who agreed to market her property for a mere 1 percent of the sale price, significantly lower than the usual 2.5 to 3 percent charged by listing agents.
In addition to the 1 percent fee for her own agent, Mather compensated the buyer’s agent with 2.5 percent, resulting in a swift sale of her home. As a result, her overall commission expenses were 3.5 percent, which is lower than the typical range of 5 to 6 percent.
With a sale price of $400,000, Mather incurred $14,000 in fees. Had she opted for a 6 percent commission, her costs would have escalated to $24,000. “That’s a substantial amount of money saved,” she remarks.
However, is engaging a discount real estate broker always advantageous? Are there potential drawbacks to consider? Here is what you should be aware of.
What exactly are discount real estate brokers?
Mather engaged an agent she discovered through Clever Real Estate, a nationwide platform that connects cost-conscious sellers with agents willing to lower their fees, effectively operating at a reduced rate. Other discount brokers operate in a similar manner, frequently offering commissions as low as 1 percent or charging a flat fee, typically a few thousand dollars, irrespective of the home’s selling price.
In contrast, traditional listing agents generally charge between 2.5 percent and 3 percent for their services. By utilizing a discount broker, sellers can potentially save thousands of dollars. For instance, if one sells their home for $400,000, as Mather did, a 2.5 percent commission would amount to $10,000, whereas a 1 percent commission would only be $4,000.
It is a common misconception that agents and brokers who reduce their fees also diminish the quality of their services; however, this is not always true. Although business models differ, many discount brokers provide assistance with listing and marketing the property and negotiate with buyers on behalf of the seller, similar to traditional real estate agents.
Ben Mizes, co-founder and CEO of Clever, notes that discount brokers are particularly attractive in a seller’s market, where bidding wars are prevalent, marketing periods are brief, and sought-after homes often sell quickly. He remarks, “Sellers are left thinking, ‘Why did I spend so much money when my home sold in a day?’”
How discount brokers work
A discount broker or agent provides services at a lower commission rate than is commonly seen, or occasionally charges a flat fee instead of a percentage. Each company, however, has its own operational model.
Redfin, arguably the most well-known discount brokerage in the country, has adopted a national strategy that involves hiring agents as full-time employees. This differs from the traditional model of most brokerage firms, where agents function as independent contractors. Conversely, UpNest offers a platform that enables users to compare fees from various agents affiliated with different brokerages.
Clever does not directly employ agents but collaborates with agents from both national brands and independent firms. A key aspect of its business model is to alleviate the customer acquisition costs for its “partner agents” while enhancing their visibility in their respective markets. “By reducing their costs, they are inclined to lower their fees while maintaining the same level of service,” Mizes explains. “If Clever provides you with an additional 20 listings annually, that translates to numerous signs in yards.”
Mather, for her part, expressed satisfaction with the agent she connected with through Clever. Despite the reduced commission, her agent was prompt in responding to her inquiries and effectively guided the transaction to a successful closing. “He turned out to be exceptional, truly a go-getter,” Mather remarks. “You would think I was compensating him significantly more than 1 percent.”
Discount real estate broker commissions
Home sellers who are astute generally pay a listing fee amounting to 1.5 percent of the property’s sale price. Redfin also charges a listing fee of 1.5 percent for sellers who are solely selling their homes; however, if a client engages in both selling and purchasing a home through Redfin, the fee is reduced to 1 percent.
It is important to note that the buyer’s agent must also receive compensation, and the current regulations regarding who is responsible for this payment are undergoing changes. A federal lawsuit settlement involving the National Association of Realtors will alter the commission fee structure starting in August 2024.
Historically, it has been customary for the seller of a home to cover the commission fees for both real estate agents participating in the transaction. However, homebuyers may soon be required to pay their agents directly. The responsibility for payment and the amounts involved will vary based on the specifics of each transaction. Therefore, even if you pay 1.5 percent to your own agent, you may also need to compensate the buyer’s agent, meaning that the total commission could exceed 1.5 percent. It is essential to understand what your discount entails and to clarify the total commission expenses you will incur.
Discount real estate brokers: pros and cons
Pros
- Savings on commissions: Although you may need to compensate your buyer’s agent, you will still benefit from reduced commission costs for your own agent.
- No additional costs: Discount brokers provide essential services, such as a professional MLS listing and assistance with contract negotiations, without the unnecessary extras that may not be required.
- Opportunity for comparison: With a variety of discount brokers to choose from, you have the opportunity to explore and evaluate different rates and services prior to making a decision. This enables you to ensure that you are securing the most advantageous deal available.
Cons
- Possibility of reduced service quality: While Sharon Mather had a positive experience with her discount broker, it is important to recognize that not all agents may provide the same level of attention when operating for a lower fee. The agent with the lowest charge may not necessarily possess the most comprehensive knowledge of your local market.
- Possibility of diminished personal attention: Agents who offer lower rates often compensate by managing a larger number of clients. If your agent is handling numerous clients simultaneously, responding to your inquiries in a timely manner may not be their primary focus.
- Possibility of increased workload: It is essential to clearly understand what services are encompassed within your discount broker’s fee and what services are excluded. You may discover that the additional tasks you are required to undertake may outweigh the benefits of the savings.
Bottom line
A discount broker, defined as a real estate agent who offers services at a reduced fee, may present a cost-effective option for certain sellers. However, it is essential to conduct thorough research beforehand. Ensure that you have a clear understanding of the total expenses involved in the transaction, not limited to the agent’s fee alone, and ascertain the specific services that will be included for that amount. While most agents who take on your representation will strive to advocate for your interests, there is a possibility that some may provide inferior service in return for their lower commission.
