Introducing our multi-part series discussing the various options available to homeowners looking to sell their homes
Over the course of history, things change. Sometimes for good, sometimes for the bad, and most times…well, they fall somewhere in between. One thing that’s as sure as death and taxes is, though, that things always – always change. With the continuing evolution of the internet, smartphones, easy-to-use apps, and such – Real Estate has changed much over the last 10-15 years. If you wish to sell your home, the choice is no longer simply whether to hire a traditional Realtor (who uses traditional selling techniques for a traditional fee) or go it on your own as a For Sale by Owner (FSBO). Now there are options. A plethora of them.
Currently, there exists a subsection of the real estate industry that I like to think of as “discount brokerages.” These companies offer a variety of services to help consumers purchase or sell their property while offering some sort of less expensive option for doing so. How does a traditional-minded agent compete with these newer forms of business? First, one must understand what they’re up against. Once that new business model is fully understood, successful agents can develop practical and proven methods to overcome a potential client’s objectives when that client is deciding whom to use.
For practicality sake, in this Series we will discuss three well-known examples of “discount brokerage types.” One subset operates in the traditional sense, but chooses to do so at a reduced fee. The second subset acts like more of an “a la carte” real estate company. The third subset is probably the biggest threat to our traditional way of doing business. This group is trying to revolutionize the entire industry by eliminating many of the “pinch points” in the entire transactional process by offering a one-stop-shop to the consumer. How they buy, sell, and finance properties is very different than how our industry has done so in the past.
This week, we will discuss the first group. The other two will be expanded upon in future weeks’ posts.
Redfin’s Business Model
The best example of a discount brokerage is probably Redfin, an online licensed real estate brokerage based out of Seattle. I’m betting that most of you have heard of Redfin before, but not all of you may be acutely aware of what their original business model is. The company was founded in 2004. Since then, they have employed licensed agents in the States where they operate. Those agents have agreed to take a lower percentage in commission with the intent of being referred a greater number of deals generated from Redfin’s well-known website or smartphone app. Think of it as quantity over quality.
The company’s business model is based on sellers paying Redfin a reduced commission in the 1-2% range, rather than 3-3.5% on the selling side of the transaction. In other words, they take less money than a typical listing brokerage would, but they are supposed to represent you in the same fashion. Should Redfin represent you on the buying-side of a transaction, they actually give their buyers a portion of the sales commission back to you. (This is determined by a sliding scale based on the final sales price.) This, in turn, generates interest from buyers and more referrals to their employees/agents.
Redfin is not only still surviving several years since it launched, it has continued to grow and enter new metropolitan markets as time passes. Here in our part of Ohio, Redfin has yet to take hold. Much of this has to do with our area’s average sales prices. The numbers here don’t make as much financial sense for Redfin as other areas where average prices are $400k or higher. That does not, however, mean that we don’t have similar, (though somewhat smaller), companies operating in a similar fashion as Redfin.
For good or for bad, brokerages using “discount techniques” to attract more business to them are here to stay. So, what do you do if you work for a traditional brokerage? Well, my personal observation is that these agents often do one of two things. They either:
- Stick their heads in the sand like ostriches and “hope” that this evolution in our field goes away; or,
- They acknowledge that these changes are here and they begin planning on how to overcome this latest obstacle on their road to success.
In all honesty, I can understand that first group. I really can. For many, it’s human nature to want to ignore something that can be viewed as scary or a threat to you in some way – especially if you don’t immediately know how to combat that threat. It’s much easier ignoring competition rather than looking it in the face and, then, formulating a plan of action to deal with it. Now that’s hard. And, sometimes the answer isn’t easy to come up with, even if you are willing to tackle a problem.
Traditional Agents Vs. Discount Brokerages
So how do you overcome this particular issue? What can one do if a client asks why they should use you, (a professional acting as an agent in the traditional sense), rather than a discount brokerage??
Well, I posed this exact hypothetical to several successful agents located throughout our area. The responses that I received were all helpful and followed a similar theme. Essentially, it can be boiled down to: “You get what you pay for.” In other words, one cannot expect the same level of service, time invested, or attention to detail if they are paying considerably less.
Now, let’s go into detail. Brokerages that charge less, yet supposedly offer the same service as their traditional competitors often share similar traits with their other discount brethren. In practice, many fall into at least one of two following categories and often are in both:
- They lack customer service because they are built around the concept of handling more quantity at the cost of quality; and/or,
- Though they may claim that they do… they cannot truly offer the same number of services versus a brokerage that charges more.
More compensation should bring better service as well as a more professional experience with a hands-on sales approach. If a seller has a question or concern, they should be able to reach their agent quickly and easily. That agent should be intimately familiar with the seller’s property because they’ve consciously chosen to be so. A professional agent being paid accordingly should also be using their sphere of influence and network to promote the listing, negotiate its sale, and walk the client each step of the way through the entire sales process to post-closing. Often, sellers who have chosen to be represented by discount brokerages wish they had chosen a “full-service brokerage” instead.
For example, with more compensation should come a larger marketing budget. That, in turn, reaches a larger audience or is more effective in the same-sized audience due to better developed marketing collateral or more “touches” with their marketing pieces. This may not be the case with a discount broker who reaps a smaller profit; thus, has a smaller budget for marketing.
Seller #1 – Goes the discount route and gets a sign in her yard and listed on the MLS with “Discounts R Us” broker Betty. . . Broker Betty is assigned leads from her corporate manager and has 12 other homes to list just this week. She wished she had a team to help her, but because the money paid by the sellers is much lower than what others in her market usually pay, there isn’t much margin for additional staff. This is a typical week for Betty. She hustles and hustles and does earnestly try her best, but with 75 active listings – it’s hard to return phone calls, set showing appointments, or spend much time or effort on one particular property or seller after the initial listing phase.
For some sellers, Betty’s busy world works and is what they’re looking for. If the home is in above average condition and truly move-in-ready, it will most likely sell for a fair price and do so quickly… (assuming that the buying public can find it on the internet initially and proper photos are taken). In these instances, Betty’s discount brokerage can serve a purpose to the public. That’s why so many of these companies exist and already thrive in many areas. If you’re a traditional-styled agent, it makes sense to have examples of why your services would still be better than Betty’s.
What Realtors® Are Saying
The traditional agents that were interviewed said that they come prepared to a new listing appointment to deal with broker Betty and her possible appeal to sellers. James M. of Burgan Real Estate, located in the Youngstown area, said that he is always ready to point out how he and his team make each client of theirs a priority. By doing so, they offer a full suite of services that many discount brokerages would not. “I’m available any hour of the day,” James explained.
“We also are intimately familiar with each listing or with each buyer that we represent. This allows us to actively evaluate each during the entire time of representation. Should a listing need a price adjustment, another open house, or directly promoted to other buyer’s agents that we personally know – we will effectively do so. Anything that we can identify that would benefit our clients, we do. It’s not just ‘list it and forget it.’ We’re with them through the entire process.”
While representing buyers looking for money back at closing from a discount brokerage, Kate O. from Keller Williams in Salem, OH uses a similar train of thought to overcome any possible objections from a buyer interviewing representation.
“It’s our goal to become truly acquainted with the wants and needs of our buyers, we build trust and understanding with them. We know exactly what they’re looking for. That allows my team and I to identify homes that will be likely candidates for purchase. This results in two big benefits to our buying clients… First, we save them a ton of time because we aren’t taking them to homes that we are already familiar with which we know wouldn’t be legitimate properties to consider purchasing. Not only do we save our clients considerable time, though, we also provide agility in the marketplace. What’s that mean? We can react quickly to new developments.”
“For example, due to our close relationship and understanding with our buyers we can immediately identify a brand-new listing to tour before most of the buyers you’re competing with know it even exists. Being the first to tour a new listing is a distinct and competitive advantage. That alone could possibly save you thousands of dollars. Often, we know of these listings well before they actually are placed onto the MLS. That is from our relationships built with our industry peers over years of time. So…unless you have the time to scour the internet all day-every day AND, unless you have worked in real estate as your full-time job for years… one would not have the same advantages that we do.”
In conclusion, it’s better to acknowledge that discount brokerages are here for the time being. In many areas, their presence is predicted to only increase. As they grab hold of more of the market share, those agents working in traditional brokerages should have a plan in place to counter this new segment of our industry when discussing it with possible new clientele. Step one is to acknowledge that these competitors are here and understand how their business model works. Step two is being honest with oneself while identifying what YOU do better than that competition. Then, practice how and what you plan to say if ever faced with an objection from a buyer or seller discussing this. Be a Boy Scout… Always be prepared! If you are – one can expect much better success when facing this adversity. Good luck!
*Not intended as accounting or investment advice. Contact your tax preparer for more information. Not all borrowers will qualify.