Thursday, 5 February 2015

Discount Brokerages: Are They Worth It?

There's a new duck in town. It's called "Fee Duck". And strangely enough, it has something to do with real estate. I'm not sure where the name came from, but I suspect the word "duck" comes from the word "deduction", at least it sounds like it may if you say "deduction" out loud. 

This is how it works: Let's say you want to sell your house and would prefer to pay the lowest commission possible. You would go to Fee Duck, sign up, and sit back as real estate agents bid on who will obtain this listing. The listing does not go to the highest bidder. It's the opposite, a reverse bidding process where real estate salespersons are lowering their commission so that the seller could select the salesperson with the lowest bid, and therefore, save money on paying out commissions. 

Though Fee Duck may be new to Toronto, the idea of a discount brokerage is not new at all. Since I am a real estate salesperson myself, it may surprise some that I fully support discount brokerages. In many ways, discount brokerages make my job much easier at finding my buyer clients better deals. Why? Because discount brokerages often tend to attract salespersons who do less for their listing, market properties poorly, and who cannot compete with the pros. In turn, I find it easier to find better priced homes for my buyers. At least that's been my experience. In my day to day life as salesperson, the seller ends up losing more money in the long run by selling at a lower price and netting less of a profit on their sale, even with significantly reduced commission. 

When a real estate salesperson cuts his or her commission enough, then the focus turns more to obtaining the listing over marketing to obtain the best price. A seller's job should be to find the salesperson who markets the house the best. To be  honest, any one can sell your house or condo unit, but you need someone who will maximize his or her marketing and skills to get you the best price that would justify a higher commission.

Still, in the past year there is boom in companies trying to appeal to a lower commission while taking a piece of the commission for themselves. 

And I have a pretty good idea why this lower commission option has become so appealing. Some agents in the past have charged 5%, and did very little marketing and preparation on a property. It leaves the seller scratching their head wondering what the agent had done to earn a fat commission cheque.

Subsequently, sellers have become so focused on the commissions they pay out that they lose sight of what a real estate agents do, or at least should be doing. 

There are a lot of real estate agents in Toronto. More than half of them do two deals or less per year. They are hungry for a deal and lack experience. So, they will cut commissions. The thing is, these deep-cutting commission agents may lack the skills and the revenue to sell your home. You never know, you may find a discount brokerage that offers you a lower commission option and sells your home at a price with which you would be happy, or you may find a lousy agent who wants 5% and does not have the marketing plan to back it up. 

That's usually not the case though. A good marketing plan costs money. And more and more, the marketing is just not about putting a property on the MLS. You are competing with other homes that are for sale at the same time in your neighbourhood. So, you have to have the most appealing property in your area to attract the most buyers away from your competition. Because buyers are going to gravitate to the house that has the most appeal, and leave the one with the less-than-stellar photos and the agents who do not return phone calls, you want to have the most appealing property that was marketed and staged better than any other in the area. If there are 9 serious buyers in your neighbourhood and 3 houses for sale, it is very unlikely that  each house will receive a fair amount of 3 offers each. One house will take in most of the buyers, the next will get one or two, and one will likely receive no buyers.

On some level, it's basic capitalism. You invest more in commission, and you take a risk that it will lead to 5 to 10% sale price above market value, a better return than if you cut commission for a reduced or non-existent marketing plan that does not lead to an outcome as lucrative.

I think real estate is going to see a lot of new models of selling and buying properties in the years to come, and undergo some big and needed changes. On the downside, many outside companies like Fee Duck or Zoocasa will try to reduce commissions for the consumer and take a piece of the cut on commission as well. Some will last longer than others. Some will have more viable business models than others. I would be very interested, though, in seeing the data on sold properties from discount companies/brokerages compared to brokerages that sell at full or close to full commission. 

On the upside of this changing real estate landscape, there are some good things that I think will benefit the consumer. First, I think there will be more transparency for the consumer on knowing what the sold prices are in a given neighbourhood. So, I believe a consumer can soon look up prices and see comparable homes without a real estate salesperson. The real estate salesperson will no longer be the gatekeeper of information. He or she will be the person who will maximize the selling price of your home by knowing how to price, stage, and market your home for the top price. I think many people don't think highly of agents because they think agents make too much money on commission and have access to all the info. I say give the info to everyone, and make the agent work hard to sell your house and earn their commission. 

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