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Real Estate News and Advice |
July 24, 2008 |
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How Much of a Threat is Fee-for-service?
by Blanche Evans
Discount brokerage or fee-for-service is presented to the consumer is an alternative, a choice that they didn't have before. The e-discounters offer a reduced fee schedule to place the consumer's home in the MLS and/or perform other limited non-fiduciary services. In return, the consumer derives agreed-upon, limited benefits from working with a licensed broker and his/her company. At the heart of fee reduction is the implied message that full service fees are unearned and undeserved, validating the fears that many consumers secretly have about agents. "I knew they were overpaid," thinks the smug consumer. Validation then opens the consumers mind to the very real advertising message, "You don't have to pay all those fees - Get the same results at lower cost!" More than a few will want to believe it, because they truly don't understand how Realtors are paid and why they can make so much money. Will fee-for-service lower fees across the industry? What has yet to be tested and documented is how many consumers will try the new fee-for-services, what they believe they are getting for the money, and if they think the cost is worth it. In other words, will they like doing most of the work themselves? Let's take a brief look at what has already happened in other industries. When air travelers demanded lower costs, they soon got what they wanted. But when they got it, they didn't want it anymore. Why? To remain operational, the airlines had to slash operating costs to accommodate lower fares. First to go were commissions to travel agents which plummeted from up to hundreds of dollars for a first-class global fare to less than $50 a ticket. Then, travelers were met with sandwich-bag meals and were herded into planes cramped by newly added seating. Overbooking became rampant, bumping hundreds of paying passengers a year. Road rage took to the air as crowded, angry passengers unloaded their frustrations on attendants. The whole mess was laid open with the crash of a jet, whose company had skimped on maintenance in favor of market share expansion. Low cost consumers paid with their lives. Could the same thing happen to real estate customers? As they realize that there is more to the transaction than placing the home in the MLS, consumers may seek advice or additional services from their reduced fee broker, raising the question "Is the fee-for-service broker acting as an agent or not?" But important, the question could be raised, "At what point is the broker liable in the transaction?" With online models discouraging personalized service, the low-cost real estate consumer may find that s/he gets exactly what s/he paid for - less service for lower fees. The incredible risk that this poses to the real estate industry is that fee-for-service reduced liabilities have yet to be tested in court, therefore there also is no common law assuring transactional brokers that they would be any more immune to litigation. Are transactional brokers agents or not? The industry opened the door to this risk by trying to reduce liabilities to the brokers without creating stronger agency or reducing fees for the consumer. Now the fee-for-service broker has the advantage. Just as few consumers would have predicted that they were taking their lives in their hands when they demanded lower airline ticket prices, it is doubtful that the real estate consumer has any better idea of what the choices available to them are in representation and non-representation by brokers and agents. And so far, to the detriment of the industry, few are extending their hands to clarify the issue so the consumer can make what they don't currently have - an informed choice. Do consumers want fee-for-service? What is not available as yet is any research on whether or not buyers and sellers want full service, fee-for-service, or to do it alone (FSBO) and in what percentages. A Realty Times poll posted in January 2000, showed some possible trends however. Out of 300 consumer respondents, the following answers were selected to this question: "What is the most important factor you would use to select a real estate agent?"
Possible Answers - Percentage
With less than 10 percent indicating that access to a menu of services and commission rates as most important, consumers are more likely to choose a Realtor because of his/her knowledge of the local market. Although that is encouraging to traditional agents, the fee-for-service companies are still making headway, and their target niche is the die-hard or fence-sitting potential FSBO who wants access to the MLS. But what about the percent of consumers who don't choose to work with a Realtor? One unpublished N.A.R. estimate puts the number of sellers considering selling their own homes as high as 40 percent. A number of FSBOs capitulate and list their homes with Realtors reducing the number of actual FSBOs closings to between 15 to 20 percent. But there is a lot of room in those numbers for other business models to take root between the extremes of full-service and self-service. These numbers are significant enough to impact the industry should the fee-for-service business model take root. So how will the traditional Realtor hold their market share of 80 percent? Can you beat 'em, join 'em, or both? Part I: How The Real Estate Industry Opened The Door For Fee-for-service Part III - How Can You Compete Against Lower Fees? will run tomorrow. Published: May 8, 2000 Use of this article without permission is a violation of federal copyright laws. 
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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment.
