Don’t Be Fooled By Discount Brokers
If it sounds too good to be true, it is We’ve all heard the saying, “If something is too good to be true, it probably is.” That especially applies to discount real estate brokers. They’ve been around for quite some time. However, since the emergence of the internet, their numbers have grown. These brokers claim they will save both buyers and sellers lots of money. The facts, however, often tell a different story.
Online discount brokers started right here in the tri-state area when a new breed of tech-savvy entrepreneurs marry tech with real estate brokerage.
YHD/Foxtons “2% Commissions”
In 1999, a new online brokerage came on the scene in New Jersey and New York. It was called Your Home Direct, or YHD.com. They offered to sell a home for a 2% commission vs. the standard commission rate of 6%. YHD.com hit the market with a barrage of wall-to-wall TV spots. You couldn’t turn around without seeing a billboard, hot dog stand umbrella or hear a radio spot touting “2% commissions”. One clever billboard ad even featured the headline “Mine’s Smaller Than Yours. 2% Commission.” The response to this ad campaign was so overwhelming that YHD.com’s website and call center crashed during the first week. While the advertising targeted home sellers, buyers were the majority of calls to that call center.
YHD.com was quickly bought out by the largest broker in the U.K., Foxtons. YHD.com soon adopted the Foxtons name. With a piggy bank full of cash, Foxtons soon became the fastest growing real estate brokerage in the U.S. In one month alone they closed 500 homes in New Jersey. Home sellers were tripping over themselves to list their properties with the company. Traditional brokers feared for their existence. Had their model become the Dodo bird of real estate?
All Good Things Must Come To An End
Foxtons was able to charge a 2% commission because they did not pay agents a commission. Instead, they paid them a small salary and loaded them up with lots of listings. Some agents juggled upwards of 70 listings at a time. Such a workload was impossible to manage. Quite often, the last time a home seller would hear from a Foxtons agent was when they listed their property. Then, radio silence. Buyers too were ignored.
Before long, word got out that dealing with Foxtons was an absolute nightmare. Business trailed off, and when the financial crisis hit, Foxtons was no more. When they closed their doors, they were $40 million in the hole.
A New Crop of Discounters and Rebates Emerge
The Foxtons experience did not dissuade others from following the discount and rebate model. Today, there are many brokers who offer low commissions to sellers or rebates to buyers. For example, Redfin, the national “tech-enabled” broker will list a home for a 1% commission.
Others offer buyers a rebate to buyers, giving them a percentage of the buy side commission.
There is an underlying problem with discount brokers. If a broker is going to cut their fees, they have to cut something to pay for that. They cut service. Not having the undevoted attention and full service of an experienced agent can be problematic, particularly for buyers the purchase of a home is likely the largest investment they’ll ever make. It’s not the time to pinch pennies.
Buyers and sellers need only to look at the economics of a home transaction to see that low commissions and rebates don’t add up. What appears to be a great deal, really isn’t.
1 + 1 doesn’t = A Better Deal For Sellers and Buyers
It’s almost impossible for a real estate brokerage to make money charging very low commission rates. A 6% commission isn’t really 6% in the pocket of a single agent, as many think. That 6% is split between the listing broker and the agent, who works for him. The remaining 3% goes to the broker and agent representing the home buyer.
A 6% commission is really a 1.5% commission for four people. That doesn’t leave much for anyone when the commission or rebate is thrown in. Often commissions are also 5% which reduce the net sum further.
Home Buyers Need Someone Good In Their Corner
A buyer entering the home buying arena without professional help is like a gladiator walking into the Coliseum without a weapon. Your opponent – the seller – has with them a savvy agent armed with every trick of the trade, ready to get the best deal for their client, at your expense. Buyers should have someone in their corner whose fiduciary duty is to represent their interests and their interests alone.
To get the best price, home buyers should turn to those who do home buying for a living. Knowing the current market value of a property is hard unless you follow it on day by day basis. Finding the right apartment or townhouse can be difficult hard to given the excess of properties not worth buying in NY, for example. And negotiating the deal requires particular expertise. No country would go into trade negotiations with another country without a professional negotiator by their side. This principle holds for buying a home.
The simple fact is, using a really good buyer broker to represent you will, in almost every case, result in a much better deal.
NYC Requires a Special Expertise
Buying or selling a home in NYC requires a lot of extra work that typically doesn’t occur elsewhere in the country. The logistics of the sale demands specialized knowledge of the city’s laws, co-op and condo building rules – which are different in every building – and a dexterity unnecessary in, let’s say, Omaha.
Agents have to organize condo or co-op board applications and interviews, coordinate showings with listing agents, estimate the fair value and have the insight to guide you to properties worth buying. Agents also have to pull together mountains of financial and supporting documents for buyers so board members can assess and approve without issue. These are just a few of the specialized tasks agents undertake for buyers in New York. Importantly, this is not a job for part-time, underpaid or inexperienced agents who often work for discount brokers or those who hand out rebates.
If you want a happy outcome when you buy or sell a home, you shouldn’t be enticed by the claims of discount brokers or lured in rebates. If you do the math, the numbers don’t add up. As another saying goes, “There’s no such thing as a free lunch.”
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