Discount brokers are growing in popularity, pitting them against traditional realtors in the race for listings. But are discount brokers too good to be true? Does hiring one save sellers money or leave them frustrated, without offers, and trying to sell their home on Craigslist?
Here’s what you need to know before you sign that dotted line.
What is a Discount Broker?
A discount broker is exactly what it sounds like; it’s an agent who offers a discount on their services. In other words, these agents don’t charge a full commission; they charge fees lower than the going rate.
It may sound like a match made in house heaven, but there’s a catch.
The Fine Print
One potential problem with discount brokers is their fee structure; it can be confusing and deceptive. For example, Redfin, a well-known discount broker, offers a 1.5% listing fee, which is several percentage points lower than average. But this doesn’t include the agent fee for the buyer, a fee that typically hovers around 3%. Thus, the 1.5% becomes 4.5% when all is said and done, taking off some of the shine. On top of this, there are often significant hidden “administrative” or “processing” fees added on to the back-end of a transaction with these discount Brokers, leaving the consumer often feeling like they’ve been the victim of a bait and switch financially.
While this may still be lower than traditional fees, it comes with a caveat: discount brokers don’t just discount their costs; they discount their services, as well.
The Limitations of Discount Brokers
Different discount brokers have different limitations. Some offer pre-packaged services that might look good on paper but can be quite limiting in practice. Some offer a pick-and-choose menu where sellers can select specific services based on needs and desires. Some offer home staging services and marketing materials, but most do not and it’s up to the seller to do much of the selling, and to foot the bill for even the basics like photography.
Importantly, discount firms don’t offer customized attention or home-specific advice. They don’t invest much time in selling your home which translates into lower motivation to seal the deal. Their business model is built on volume – so out of necessity they try to take on more clients than a Full Service Broker to break even, leaving them with less time (and often very little financial incentive for the actual broker) to devote to individual client needs or communications. Many are often content to put a sign in the yard and hope for the best, leaving clients with little to no transparency around what is actually happening with their listing, or the market at large. Because many Brokers working for these discount brokerages are capped on a minimal salary, what the client pays largely does not even go to the agent who supported them – but rather to an overarching corporate entity. This means many of these discount Brokers are asked to serve a huge number of clients simultaneously with zero financial incentive to do so at a high level. Discount Brokers typically recruit very new or inexperienced agents and experience high staff turnover – which can also mean that you may end a transaction with an entirely different broker (or two) than you began with, many of whom are in their first year in the profession. The result of all of this is that whether or not the agent you work with from a discount broker wants to help you on a personal level, they don’t typically have the bandwidth to go above and beyond for clients due to constraints on their time, skill and ability. This can be particularly impactful during negotiations, and as a result many Sellers wind up settling for an offer that is below what they could have netted with a more skilled and dedicated agent. While a skilled Listing Agent with the time and negotiation expertise can create multiple offer scenarios and position their sellers to triumph, an unskilled or unfocused Agent is likely to limit their Seller’s options and potentially leave a lot of money on the table.
The Benefits of a Full-Service Broker
There are plenty of reasons to hire a full-service broker, with the most obvious being that they do the opposite of the aforementioned: they offer personalized attention, one-on-one service, advice and analysis specific to your residence and local market, along with all the bells and whistles to get you the highest offer with the least amount of stress. Full-Service Brokers serve as your fiduciary, committed to your financial best interests and to protecting you through education, information, and advice as you navigate an increasingly dynamic housing market.
In a slow market, this focused attention is vital, as selling your home without it can result in chirping crickets rather than enticing bids. In a hot market, this attention is just as important – if not more so.While it can feel like all that’s needed to sell a home these days is a sign in the yard – the reality is that the amount a property is sold for, how quickly it is sold, and how streamlined the process is for the client are all a direct reflection on the caliber and skill of the agent. With so many sellers fielding offers that go above the asking price, sellers need a full-service broker in order to make the most profit and get the most advantageous terms.
Put another way, it is the difference between having a need for open-heart surgery and going to see a newly graduated Doctor working at a walk-in clinic versus going to see an experienced top Cardiothoracic Surgeon. Both Doctors in that scenario would want to help you, and both have gone through specialized training to be able to do so – but one of these is clearly the expert in practice based on your emergent need, and they are worth the additional cost to access their curated expertise. The reality is that just like when you are protecting your health, when you are considering the welfare of your financial investment in your property, you need the focused expert, not the generalist.
Full-service brokers tend to maintain smaller client loads than discount brokers, which increases the odds that they’ll sell your home instead of focusing on handfuls of others. They’re more likely to know the area, as well, since many discount brokers (especially those in nationally-based firms) may be new to the region or new to the housing industry altogether. Full-Service Brokers often have created a systematic and intentional process around their listings, from the foundational aspects (like photography and open houses) of selling a home to the more advanced and involved components (such as staging, marketing, and negotiations) – with the result of a better client experience overall.
Perhaps the biggest reason to hire a full-service broker while avoiding discount firms lies in the old tried-and-true adage: You get what you pay for.