Bargain Hunters Cut Realty Costs
It’s an often overlooked statement on documents used by California Realtors: “The amount or rate of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiable between seller and broker.”
Translation: Commissions are not set in stone.
This declaration and its potential to revolutionize the staid real estate industry have gone practically unnoticed for decades. But a growing number of home sellers, encouraged by the Internet and brokers willing to take a risk, are seizing control of the largest cost of selling a home by opting for fee-for-service plans.
Sellers such as Corona resident Richard Stinnett, who saved $5,000 when he sold his 2,500-square-foot home last year through a broker who charged a 4% commission. A typical 6% commission on his $250,000 home would have been $15,000. He paid $10,000. Stinnett said he received a full slate of services from his broker even though he paid less.
“When I figured out how much money I was going to pay out to someone to sell my house for just a couple hours’ work, when I’ve been making payments for many years, it just didn’t seem fair,” said Stinnett, who hired Help-U-Sell’s Corona office to sell his home.
Thrifty buyers and sellers are also hiring e-brokers, some of whom offer rebates as incentives. Long Beach Police Officer Ed Saldana never met his real estate agent. The agent, who was recommended by a friend, works in ZipRealty’s Richmond office.
She worked with agents in Southern California to help Saldana and his wife purchase a three-bedroom, two-bath Lakewood home for $224,000 in January. The company gave the couple a 1% rebate, which they applied to their closing costs.
Stinnett and Saldana are on the forefront of what some real estate professionals say is an inevitable evolution away from commission-based services and toward agents who charge a flat fee for their services, or provide a menu of separately priced items for consumers to choose from.
“Changing consumer wants and needs, plus the profitability issue, is forcing us to rethink the entire way we do business,” said Laurie Moore-Moore, co-editor at Real Trends, a Denver-based consulting firm. “It will change the economics of the business.”
The idea is picking up steam among real estate agents nationwide, many of whom have watched their firm’s profits shrink steadily over the last decade-even though the country was enjoying its best housing market in history.
Today the average profit margin for the top 500 real estate firms is around 4%, down from about 8% of gross revenue 10 years ago, according to Real Trends.
Cutthroat competition and increasing median home prices contributed to this drop. Real Trends said these factors also forced commission rates down around 5% in many major cities last year, further putting the squeeze on profits for both agents and firms.
The real estate business is one of the last industries to make a move-albeit slow and tenuous-toward unbundling or fee-for-services. To better compete, banks, travel agencies and mutual fund companies have all unbundled their services in the last decade.
The new real estate pricing plans are likely to appeal more to sellers, who typically pay the entire commission. But buyers can also benefit, because sellers who pay their agents lower fees may be willing to negotiate a better deal on their home.
Some agents have offered fee-for-service pricing for some time to homeowners who sell their homes themselves but need help with certain tasks. Today the fee-for-service market has broadened to include sellers and buyers from different generations, age groups and income levels.
Consumers interviewed for this story said they aren’t interested in the traditional discount-broker concept-a model that hasn’t fared well in the industry. Rather, they want the same services offered by a traditional broker, only for less money.
“We’re at a crossroads,” said Julie Garton-Good, a licensed Realtor and founder of the National Assn. of Real Estate Consultants.
“The biggest hurdle both real estate professionals and consumers face is understanding the difference between discount and a la carte or unbundled services. Discount is providing an entire menu of services for a lower cost; while a la carte is unbundling various services to consumers and charging them what they’re worth.”
Founded in 1999, NAREC has about 250 members providing fee-for-service options in 35 states. These agents often charge hourly fees, a flat fee for a slate of services, separate fees for unbundled services, or a combination of these pricing plans.
Proponents say fee-for-service models provide benefits for consumers, who can save money by doing some of the legwork themselves, and real estate agents, who save time and money by providing clients only what they need.
For the most part, the fee-for-service model is being embraced today by smaller brokers and relocation experts, attorneys, insurance companies and others who also act as brokers.
Most large, traditional real estate brokers, still adjusting to changes brought about by the Internet, say their customers aren’t squabbling with commission-based services.
Coldwell Banker, Southern California’s largest broker, said the state’s real estate transactions are incredibly complex and do not lend themselves to unbundling.
“We don’t get a lot of demand for that, especially on the higher end,” said Bob LeFever, president of Coldwell Banker Southern California. “In fact, it’s going the other way for us-they want us to do everything for them.”
Even so, on a national scale Coldwell Banker is testing what it calls a “limited service” model in several markets this spring. But the company has a policy of not discussing tests.
There are veteran brokers who agree the industry’s business model must evolve, but offer a different scenario for how this should happen. Some suggest that brokers looking to drive down labor costs should revoke commissions and instead pay agents a salary.
“The traditional, independent contractor model of real estate is so flawed and broken,” said Bob McKinnon, president of Dallas-based Real Estate System. “The industry is going to rapidly go to salaried specialists and get out of the commission business.”
McKinnon says his company’s salary approach increases profit. This system, where agents work in teams that specialize in different tasks, does not lower costs for the consumer, who still pays a commission of 5% to 7%. Many Internet e-brokers also pay their agents a salary.
But a growing number of veteran agents want to make a clean break from the commission-based model.
Many agents who currently offer fee-for-service options are in geographic areas that have traditionally catered to for-sale-by-owner transactions, or FSBOs.
Among them is Joanna Schofield, broker and manager at Triumph Realty Inc., based in a suburb of Raleigh, N.C., who has assisted FSBOs for several years. Schofield provides her customers with a menu of separately priced services.
“We put the home in the multiple listing service and provide consultation services and representation until closing,” Schofield said. “But we don’t guarantee open houses or advertising.”
Schofield charges clients based on how the buyer is procured. If the buyer comes directly to the seller or their listing agent, the fee is lower than it would be if the buyer comes through the multiple listing service, she said. If a buyer wants her to hold an open house, or set up a virtual tour of the home online, that requires an extra fee.
Like Schofield, many on the front lines of the fee-for-service movement find they still have to offer a buyer’s broker the traditional 3% commission, or risk having these brokers ignore their listings.
Several pioneers in the fee-for-services field are seeing unprecedented growth thanks to an expanding number of agents who are interested in opening such franchises.
“First it caught on with consumers and now it’s catching on with agents around the country,” said Mary LaMeres-Pomin, a co-founder of Assist-2-Sell.
Since the Reno-based company started franchising five years ago, it’s grown from one to 150 offices in 33 states and is adding about 10 offices a month, LaMeres-Pomin said. The firm offers two marketing programs for sellers to chose from.
The first markets a home in newspapers, grocery store publications and online-but not in the area’s multiple listing service-in an effort to bring a buyer in to an Assist-2-Sell office on their own. It runs $2,995.
The second program markets a home through the same avenues and the local multiple listing service. It costs from 4% to 4.5% of the home’s sale price.
A similar service, New York-based Help-U-Sell, allows its franchisees to set their own fees based on the markets where they’re located. The 25-year-old company has 200 franchises, and expects to add 100 more this year. The company also received requests from about 2,000 brokers in the last year for information on its franchising process, said Dale Strack, a vice president of Help-U-Sell.
Both Assist-2-Sell and Help-U-Sell pay their agents a salary. These agents work in teams that specialize in listing and pricing services or in catering to buyers.
Some agents are interested in providing fee-for-service models to their customers but are struggling with how to price services individually.
Broker David Ness wants to integrate fee-for-service options into his 50-agent Re/Max office in Columbia, S.C., but he’s unsure how to compensate agents who specialize in different parts of the market.
“Say I have one agent who specializes in low-end homes who is selling 50 homes per year and then I have another agent who is selling 24 homes on the higher end,” Ness said. “The one on the lower end will have a lower hourly value, so how can I set an hourly value for our service that’s fair to both people?”
Other veteran Realtors charge that consumers who buy unbundled services may end up paying more for separate items than they would have if they chose to pay a commission.
Agents interested in fee-for-service options also have to cope with complicated state laws regulating the real estate industry. For example, there’s a California law that says that a licensed agent can’t draft a sales document without any other involvement in the transaction, Garton-Good said. Sacramento broker Curtis Trenor, who has been offered payment for counseling, analysis and his negotiation skills, would like to offer fee-for-services options. But he’s grappling with how to change his business model and meet Department of Real Estate regulations.
“I would love to be able to work as attorneys and accountants do, receiving an upfront, non-refundable fee to cover expenses,” Trenor said. “And then simply charging an hourly rate due and payable as each hour accrues and not contingent upon the closing of any real estate transaction.”
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By the Hour
More consumers are hiring real estate agents who charge a flat fee, or offer a menu of specifically priced services. A look at how real estate agents may break out their services, and the number of hours it typically takes to complete each task:
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FOR HOME SELLERS
*--*
Service Average time, in hours Prepare/stage property for sale 20 Gather property information/ Price the property 20 Market the property 15 Locate/prequalify the buyer 10 Draft contract/negotiate with buyer 8 Troubleshoot the sale/Close the transaction 10
*--*
Total time 83*
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FOR HOME BUYERS
*--*
Service Average time, in hours Strategy/game plan for purchasing 8 Preapproval for mortgage 8 Locate neighborhood/Choose the property 25 Check information/Price property 10 Draft purchase agreement/ Negotiate with seller 8 Troubleshoot the purchase/ Close the transaction 10
*--*
Total time 69**
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*A poll of 100 consumers found they estimated the selling process took 54 hours.
**In this poll, buyers estimated the process took 43 hours.
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Source: According to a poll of 100 real estate consultants cited in Julie Garton-Good’s “Real Estate a la Carte: Selecting the Services You Need, Paying What They’re Worth” (Dearborn Trade, April 2001).
