Discount Broker Math - Not The Great Savings You Think...(If it Sells)

Discount Broker Math - Not The Great Savings You Think...(If it Sells)

Written by Hank Miller, SRA Posted On Tuesday, 01 October 2013 14:14

The appeal of "discount brokers" or "flat fee brokers" to sell homes is an enticing siren song. There are variations, but the consistent theme is a "do it yourself" approach after your home is placed into the MLS. Since sellers typically pay 3% to buyer agents (that's the norm in Atlanta), often the "swing" between discounters and full service brokers is 1% to 1.5%; and that's not considering the traps or buyer advantages inserted into the contract by the buyer's agent. It's also not considering the numerous issues than can arise during the listing, negotiation and contract period.

Consider:

Most discount real estate brokers charge $500-$700 PAID UP FRONT to place a home in the MLS. If it sells, an additional MLS fee of .0034% is collected. The up front fees are non refundable whether the home sells or not.
It may be an "Open Listing", not "Exclusive Listing".
The $500 upfront provides little beyond the MLS entry. It's often pay as you go if you want "extras".
If an offer is presented, typically a "guidance" sheet is provided for a counter. An agent to assist you may be option at extra cost.
If and when the closing table is reached, expect to pay 3% of the sale price to the selling broker.

The discount broker business plan is sound, outstanding in fact - for the broker. Home sellers pay several hundred non refundable dollars to have a firm enter their home into the MLS; clearly that is important. A sign with the company name is put out and that company is noted as the broker in the MLS. Anything "extra" that might be needed is charge on a per item basis. There is however "suggested" marketing that these brokers push, all at additional cost. The discount broker simply puts it on the seller to pick and choose "upgrades" and they pay as they go. The beauty of this business is obvious, the broker has zero upfront expense, in fact, they're paid ahead for all expenses. If the home sells, great; if not, great.

They also have buyer bait; they are the contact for the home and they will receive buyer leads from the exposure. So while discount brokers appeal to sellers, it's the buyers that bring in the revenue - at the expense of the sellers. That is a tremendous business model; minimal outlay of cash, a benevolent "we feel your pain" approach with sellers, a great bait system to attract buyers and minimal expense. The more they sell the "discount" approach, the more opportunity for their signs to attract buyers and the more opportunity to hook a buyer. The listings are simply bait.

The Math

Assume a $200,000 sale and a 5% total commission (3% to the buyer agent, 2% to the listing agent):

3% of the sale price goes to the selling broker ($6,000)
Minimum $500 UP FRONT for basic listing (assume you want a few photos, a tour and web placement so call it $1000)
MLS fees are .0034 x 200,000 = $680
basic total at this point is $7,680

Variables during contract negotiation (assuming no additional "help" is ordered):

Closing costs, warranties, termite bonds, appraisal issues, surveys...how is that handled?
Inspection and repairs - who is doing it, what's legitimate, how are they negotiated?
Who is reviewing the offer to ensure that the seller interests are properly represented?
How many loopholes are in the contract that could result in the deal falling apart?

Most brokers will charge between 5%-6% to list your home and handle everything. Assume that it's 5%; your actual the difference is the listing side of 2% since the 3% is to the buyer agent even with a discount broker. So $4,000 is the full service side and we know the discounter will cost at least $1,680 so the actual difference is $2,320; still a reasonable amount. A few things not typically considered that might bite into that:

The monthly payment on a $200,000 home is about $1,600+-
Utilities depending on the season; estimate $300 a month
With minimal marketing, it's reasonable to expect the home to expire at least once (at $1600 per month)
Who handles the negotiation and effectively positions the seller with the opposing agent?
When the home is relisted are agents and buyers going to consider it?

If the idea of using a flat fee or discount broker is obviously appealing, but like anything, this is business and every aspect of the operation should be fully investigated. When sellers properly interview agents and only work with the best they will see many advantages of letting a pro handle this very important event.

Hank Miller,SRA
Associate Broker & Certified Appraiser
Atlanta Communities Real Estate6
78-428-8276 direct
This email address is being protected from spambots. You need JavaScript enabled to view it.
www.hmtatlanta.com

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Hank Miller, SRA

Hank Miller is an Associate Broker & Certified Appraiser in the north metro Atlanta area. Since 1989, real estate has been his full time profession. Hank´s clients benefit from his appraisal and sales experience; they act upon data, not baseless opinions. He is an outspoken critic of the lax standards in the agent community.

Hank remains an active certified appraiser and completes specialty work for FNMA, lenders and attorneys. He is a well-known blogger and continues to guest write for multiple industry publications as well as national outlets like the WSJ, NYT, RE Magazine, USA Today and others. He is a regular on public Q&A sites on Zillow, Trulia and many others.

Hank consistently ranks in the top 1% of all agents in the metro Atlanta area. He runs the Hank Miller Team and is known as much for his ability as he is for his opinions. He is especially outspoken about the lack of professional standards and expectations in the real estate industry.

www.hmtatlanta.com

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