If you plan to embrace and excel using any of the new business models emerging in the real estate industry, it's imperative that you understand and differentiate between unbundled fee-for-services versus discounted fees. Absent this knowledge, it could end up costing you consumers as well as hefty dollars in lost income.

One Working Example: A Trip to the Bakery.

You manage a local bakery that specializes in pies. Each day you price fresh pies to sell in two ways: 1.As an entire pie (bundled) at $8.95; and 2. By the slice (unbundled) charging $2.25 for each of the six individual pieces.

If you sell the pie by the piece you can make $13 a pie, to cover your risk for breaking up the pie into pieces. But is that really the greater risk? If a whole pie doesn't sell by the second day, it's considered stale; and since it's now in competition with fresh pies, a marketing edge is required.

So you discount the previous day's price to $6.95 even though it took the same amount of time, cost, and effort to make as did the full-price, fresh pie. In fact, the day-old pie might even cost you more since it had to be wrapped and refrigerated over night. Obviously, if your bakery finds that it's selling more day-old pies than it is fresh, you are slowly going out of business. You can't cover your hard costs of making/baking/marketing pies let alone generate a profit.

Applying Unbundling and Fee Discounting to the brokerage business

When you apply the bakery example to real estate, fresh pie by the piece is an example of unbundled, fee-for-services real estate. You allow various tasks and services (based on your business philosophy, policies, and liability) to be accessed by the consumer and charge for the cost of the service including your profit. Discounting, on the other hand, is polar to fee-for-services since you offer the entire bundle of tasks or services (i.e. listing, sale) but charge less often without covering the hard costs involved let alone addressing profit.

Commission price wars between full-service brokerages have infiltrated real estate markets across the country. In an effort to garner a larger swath of a market, attract attention, and annihilate the competition, many brokerages are slashing fees by twenty-five percent or more.

In fact, at the mid-year meeting of the National Association of Realtors® in May, 2001, the Strategic Planning Committee’s nationwide survey found that double-sided percentage commissions have dropped to an average of approximately 4.2% across the country. Additionally frightening, the survey found that the median broker profit per transaction side had slipped to $150 per transaction side!

While touting that they provide full-service to consumers, formal discount brokers often have little idea the affect reducing commissions will have on their ability to stay in business and deliver results-oriented service to consumers. Subsequently, they may trim the quantity or quality of services the consumer' receives, causing the consumer to fall short of meeting his objective and end result. Unfortunately, these shortfalls may not be apparent to the consumer since the brokerage keeps singing the "full-service" refrain; however, the discount broker who is not staying on top of what it costs to stay in business could take a listing today and be out of business tomorrow! A sage, professional broker, responding to an agent who queried when they'd be slashing commissions like discount brokers in their marketplace, responded, "Never. It makes no sense to compete with someone who's trying to go out of business!"

Another potential downfall of the discount brokerage model is the failure to understand exactly what price-point-plus-profit is for discounted services provided. Absent this information, the discount brokerage is likely to erroneously strive for volume, not quality. It's assumed that the more consumers a discount broker can attract, the lower her pricing structure can move and still allow her to stay (hopefully) in business. Discount brokerage is a little like taking your car to an auto mechanic solely because he quotes the shortest timeframe and cheapest costs. How does he believe he can accomplish it? With volume. But doing so, he often sacrifices quality and best results. Should he find another component of the car that needs repairing, he may choose to overlook it due to his tight time schedule and the need to repair more cars. Or he might approach you to pay additional money to solve the problem. Either way you've lost confidence in the mechanic and his business. Over time, he will realize that his focus on volume instead of quality and best results has destroyed the hope of repeat customers as well as the prospect of many new ones. Defending legal actions against the company erodes what little is left of his bottom line and he's forced to close his doors.

In addition to discount brokerages, price wars between real estate brokerages are also precipitated by the onslaught of dot.com companies providing a wide array of both discounted and unbundled services, many at bargain-basement prices. Online companies like eRealty.com, YHD.com and zipRealty.com are drawing consumers online by providing cost-effective alternatives in cyberspace, available 24/7 with unique online and telephone response systems to make the consumer feel connected, informed and important.

The Bottom Line: There's a Difference

In the final differentiation between discount brokerages and unbundled fee-for-services companies, it's important to understand how each varies in application. The discount brokerage assumes that the consumer needs the whole menu of services and is willing to transfer control to the broker/agent to attain it. More importantly, fee discounters assume that consumers are primarily interested in cost, not flexibility and quality of services/tasks available. In contrast, the fee-for-services company or consultant assumes that one-size-doesn't-necessarily-fit-all real estate consumers and that some are capable of performing and orchestrating various parts of the transaction on their own. Additionally, some consumers want to exercise more control over what transpires and desire tailor-made, needs-based results by working in partnership with the brokerage.

If new business models and services are part of your new horizon, your first step should be a thorough understanding and differentiation between unbundled and discounted services. If you fail to understand the distinction between the two, you may find yourself sacrificing results, consumer satisfaction and business success at the altar of attempting to save the consumer money.

Published: February 14, 2002

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.