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. 

How To Be A Better Seller

When it comes to buying some properties in Toronto right now, you need to put up your mitts and get ready to battle. We hear so much about the bidding wars and the resulting out-of-this world sold prices on Toronto homes.  Neighbours are thrilled. Buyers are depressed. Even if you are the lucky buyer to land a property in a bidding war, you fear that you have paid way more than market value after getting caught up in the spirit of the battle. 

The truth of the matter is, many properties don't sell this way. In fact, there are properties that do sell for what I consider less than their market value. It's very rare in this current market, but it can happen. And it usually has to do with less-than-stellar marketing of a property. So, just how does this happen in Toronto? How can you possibly land a deal as a buyer or avoid becoming the owner of a house that sells for under value as a seller? Well, here are my thoughts on why some properties sell below market value. 

1. The Commission Gap. Many sellers do not understand what is going to attract the most buyers. They focus on saving money by asking the selling agent for a reduced commission. Fair enough, it is your prerogative to negotiate. But be careful. If, as a seller, you only offers 2% to the buyer agent for bringing in the buyer when the overwhelming norm is 2.5%,  then the buyer may be on the hook for the extra .5% if the buyer is in a contract with a real estate sales person where he or she are to be compensated 2.5%. Buyers have enough to pay for while buying a home including land transfer tax and lawyers. The last thing they want is an additional cost .5% to make up for the shortfall the seller isn't offering. So, the seller can lose a lot of potential buyers this way, and receive a lower price on their property,  a price even less than the .5% they are trying to save. 

2. Dreaming too Big. When a seller is ready to sell his or her home, they may interview a few agents to see who would be best suited for them. It's a good practice. I recommend it. When the seller should be focusing on the marketing plan that will yield the best price for their home, they sometimes  fall victim to the real estate agent who promises the highest price. The problem with a home priced higher than everything in the building or the neighbourhood is that it tends to help sell the more reasonable priced homes nearby. So, you are overlooked as a seller. Your property receives few visits and your home may not sell for weeks. Then, after enough time, the property becomes stale, and you either need to reduce your price or accept  a low ball offer. It's not always a poor strategy to list higher with the knowledge that you may accept something less. But if you are expecting a certain number out of wack for your neighbourhood, without anything extraordinary about your home, then you are doing yourself a disservice. 

3. Doing It Alone. First of all, I'm not down on these  For-Sale-By-Owner (FSBO) folks. I think some sellers can sell their home on their own, but this is a very rare breed. Most of the time, sellers do not understand what kind of work is involved, and they often don't know how to market their home, attract buyers or price their home. In Toronto, many For-Sale-By-Owners will fail.  There is a reason why there are agents who focus exclusively on picking up FSBO listings. Many FSBOs cannot sell their home on their own. They often price too high or do not market it properly, even with the MLS.

So, with all those do nots, what should sellers do? Well, you need to make sure you choose a real estate salesperson who presents the best marketing plan and a selling strategy that will yield the best price for your place. When the focus is saving money or dreaming of a big price, the real focus is ignored. 

Let me illustrate this by a recent experience I had with two clients. These buyers were able to obtain a house that I believe was under market value. The sellers offered less commission than the regular amount.  They didn't develop a strategy for selling their home. And they did not put up any photos of the inside of their home. Most of the time when there are not photos on a listing, it's like saying the inside looks like a serial killer and a hoarder exploded from a blender. But this place looked amazing. The sellers kept it tidy and maintained it beautifully, but for whatever reason, there were no photos and you did not get a sense of how great the place was. 

So, sellers, when you're ready to sell your home, look for the salesperson who offers you the best marketing strategy, not the highest price or cheapest commission. 

Buyers, deals are are hard to come by in Toronto but you may want to revisit some of the stale listings that have not sold. Most will have not sold for a good reason, but there may be a few in there that have slipped through the cracks, ripe for the plucking at a lower price.