Discount Brokers: Is Saving Worth the Increased Hassle?

Like most homeowners, when Mark and Lisa Alves decided to sell their Canoga Park home, one of the first things they did was call a full-service real estate agent.

Like most agents, he offered to sell their house for the standard 6% commission.

Mark Alves did some calculating. He wanted to sell his three-bedroom house for $176,000, but he would have to raise his asking price to about $187,000 to pay the broker’s commission of nearly $11,000. Or he could stick to his $176,000 price and take a smaller profit.

“Neither of those sounded appealing,” Alves said.

So, after trying unsuccessfully to sell the home himself, he turned to Help-U-Sell, one of a growing number of companies that market a seller’s property for a flat fee that is far below the costs involved in hiring a realtor and paying the usual 6% commission.

“The sign went up at the end of January, and four days later my home was sold,” he said. Alves got $181,000 for the house--$5,000 more than he originally expected and more than enough to pay Help-U-Sell’s $3,450 fee.

“I saved more than $7,000, and all I had to do was spend a few hours showing my home to people,” he said. “Why should you pay an agent a 6% commission, when you can just pay a few thousand bucks and get the same result?”

It’s a question that a growing number of homeowners are asking, and it has some full-service realtors worried.

Across the nation, real estate companies willing to slash their commissions to home sellers who will help with the marketing are sprouting like mushrooms after a spring rain.

Although exact figures are not available, it is estimated that about one-third of all residential sales today involve a seller who pays less than the standard 6% commission, up from perhaps 10% or less five years ago.

The competition between discounters and full-service realtors is particularly fierce in Southern California, where the strong housing market has made it easier for people to sell without a conventional broker and where skyrocketing values have made the potential savings that flat-fee agents provide look unusually attractive.

“In this kind of hot housing market, it doesn’t take a lot to sell a house: The house sells itself,” said Jay Hunter, partner in the Newport Beach discount firm of Hunter Lane. “So a lot of people figure they don’t need to pay a realtor a $10,000 or $20,000 commission, and they’re right.”

The number of discounters doing Please see DISCOUNT, Page 3

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business today is not known, primarily because real estate companies do not have to report the commissions they charge to state regulators. But nearly everyone--from realtors to housing analysts--agree that the number is growing.

The companies range from one-shop independents, such as Hunter’s firm, to Help-U-Sell, a franchise operation that now has more than 200 outlets in California and expects to open dozens more by the end of the year. Other discounters doing business in the Southland include Realty 3 of America, Real Estate Marketeers and Homeowners Concept.

Flat-Fee Commission

Most of these firms offer to sell a homeowner’s property for a flat fee, typically ranging from $3,400 to $3,950. For the median-priced California home of $172,000, that works out to a commission of about 2 1/2%--compared to the 6%, or $10,320, that most full-service real estate firms would charge.

The discounters usually provide their sellers with “for-sale” signs, advertisements in newspapers or brochures and ongoing advice throughout the sale process. They also handle most or all of the necessary paper work.

However, the seller must show the home to potential buyers, an often bothersome and time-consuming task. Some discounters will perform that chore, too, although it usually costs an extra $500.

“I don’t mind spending some time showing my own house if it means saving thousands of dollars,” said Gary Bonchek, a studio key grip who recently listed his San Fernando Valley home with a broker who is charging a flat $3,950 fee.

If Bonchek gets his $239,500 asking price, he figures he’ll pay about $10,000 less in commissions than he would had he used a traditional broker who charged 6%.

Service vs. Savings

But conventional realtors say it is a mistake for homeowners to put too much emphasis on commissions.

“The bottom line is that you get what you pay for,” said Bob Licatta, manager in the Irvine office of Grubb & Ellis, a full-service firm. “These discounters might charge you less, but they won’t market your property the way a full-service company will and they won’t negotiate on your behalf the way a full-service realtor will.

“It won’t do you any good if you save a few thousand dollars in commissions, but you wind up selling your house for a lot less than you would have got if you had an agent who was working fulltime for you.”

Many full-service realtors say discount brokers often underestimate a home’s value, which reduces the seller’s profit. They also say discounters do not bargain hard enough on behalf of their clients, in part because there is no added financial incentive to push for a higher price.

“If you’re paying an agent a 6% commission, he’s going to work as hard as he can to get you top dollar because he’ll make more money for himself,” Licatta said. “But if you’re using a flat-fee broker, what’s he care if you sell your house for $200,000 or $205,000? Either way, he’s going to make the same amount of money.”

‘Just as Professional’

Discount brokers say they estimate the value of a client’s home the same way that full-service firms do--by examining recent sale prices of comparable houses in the neighborhood. And, discounters say, they are as good at negotiating for the seller as full-service brokers.

“We’re just as professional as anybody else, and we’ll work just as hard at negotiating the best deal,” said discounter Hunter. And, he maintains, using a broker who’ll make more money if the home sells for a higher price does not always work to the seller’s advantage: “If an agent holds out for an extra $5,000 just so he could make an extra couple of hundred bucks in commissions, he might risk busting the deal.”

But perhaps the biggest bone of contention between discounters and full-service firms involves the multiple listing service, or MLS.

The MLS is copyrighted information circulated only to members of the local board of realtors. It lists homes for sale in the area, including their asking price and the commission a realtor would collect if the realtor produced a buyer.

MLS Listings

Although many discount brokers belong to local boards, they often do not put their listings in the MLS. If they did, they’d have to pay any full-service realtor who produced a buyer a commission ranging from 1 1/2% to 3% of the home’s sales price--an amount that would likely wipe out the discounter’s own fee.

Full-service realtors say a seller whose home is not listed in the Multiple Listing Service does not get the exposure needed to assure that the home will bring top dollar.

“The whole point of the MLS is to provide maximum exposure for the seller’s property,” said Sandy Sandison, a full-service agent with Landes Realty Services in Riverside. “If a bunch of brokers know that a certain home is available, they’ll tell all their clients about it.

“As the number of people who know about a property goes up, so does the property’s chances of being sold at a price that will make the seller happy. If a broker doesn’t put your home in the MLS, you’ve lost your most important marketing tool.”

Commission Rates Down

Many discounters downplay the importance of the MLS, although they will use the service if their client agrees to pay the commission to the realtor who produces a buyer. “But if you agree to that type of arrangement, you’re paying both a sales commission and a flat-fee,” Licatta said. “Where are the savings in that ?”

While full-service firms and discounters disagree about each other’s merits, they are unanimous on one point: The growth in the number of flat-fee firms is putting downward pressure on commission rates throughout the brokerage industry.

Although commissions have always been negotiable, most realtors have historically charged 6%. “Now we’re seeing a lot of 5% listings, and even some in the 4% range,” Licatta said. “No question about it, commissions are coming down.”

The chief culprit behind the falling commissions--at least in the eyes of most full-service firms--is Help-U-Sell, the biggest and fastest-growing discounter in the nation.

The Salt Lake City-based franchisor now has 470 offices across the United States, nearly double the number it had just a year ago and almost four times the number it had in 1986. Company officials like to boast that there’s a new Help-U-Sell office opening somewhere in the nation every 40 hours.

6% ‘Unreasonable’

“I believe that charging a 6% commission is unreasonable for the amount of service that’s typically provided,” said Roger L. Beattie, a Help-U-Sell vice president.

“Let’s say you bought a house for $100,000 four years ago. The seller probably paid a (6%) commission of $6,000. Now you want to sell, and the property is worth $200,000. But this time, 6% is going to be $12,000, not $6,000.

“Why should you have to pay twice as much as the guy who sold you the home four years ago? The realtor’s expenses haven’t gone up 100%, and the realtor certainly doesn’t have to do twice the work. A lot of homeowners are starting to realize that, and that’s why we’ve become so successful.”

Also driving down commissions is RE/MAX International, whose 2,000 salespeople in California and 22,000 nationwide make it the second-largest brokerage outfit in the nation.

Sometimes Disappointed

RE/MAX is a full-service firm, but each of its agents keeps the entire sales commission. Unlike conventional agents, they don’t have to share it with the broker who owns the franchise. As a result, a RE/MAX agent can charge a commission as low as 3%, put the property in the MLS, pay a fee to a broker who produces a buyer and still make a profit.

Still, homeowners who sign up with discount brokers in an effort to slash their commission costs sometimes wind up disappointed.

“I think our home was on the market for two months, and the agent brought by just one person,” said Yola Candela, who listed her Irvine townhouse with a flat-fee broker last year. “Then we listed it with a full-service company, and it sold in two weeks.”

Added Lou Piatt, executive vice president of sales at the 31-outlet Jon Douglas & Co., a full-service firm headquartered in Beverly Hills:

“You’d be surprised at how often people come into one of our offices and sign up with us after first trying to sell with a discount broker, or trying to sell by themselves. It’s not as easy as it sounds.”

Horror Stories

Discounters say such disappointments are the exception, not the rule.

“The fact is, a lot of our clients come to us after having a bad experience with a full-service realtor,” said Barbara Cole, an agent in the Studio City office of discounter Homeowners Concept.

“How many people can you find who don’t have at least one horror story about a broker they dealt with in the past?”

Despite the discounters’ rapid growth, many full-service realtors believe their numbers will dwindle when the Southland’s hot housing market cools down.

“These discount firms seem to pop up whenever the market gets hot, because that’s when anybody can sell a house,” said Jack Forness, a full-service broker and president of the 90-outlet Century 21 San Diego Brokers Council.

“But they can’t make it when the market slows down, because they don’t have all the marketing skills and expertise it takes to cut it in a tough market. So they close up shop, go back home where they belong, and bake cookies all day.”

Here to Stay

But Beattie at Help-U-Sell insists discount firms are here to stay--and that they’ll change the face of the real estate business.

“We’re in this for the long haul,” Beattie said. “Twenty years from now, I think the U.S. real estate industry will look like Canada’s does today: The market will be dominated by a handful of large companies and commissions will be about 3.5% of the sales price.

“The day of the 6% commission is passing,” Beattie said. “Companies that refuse to reduce their commissions are going to go out of business. Sellers are sick and tired of paying too much, and they aren’t going to take it anymore.”