According to Inman News, Minnesota-based Webdigs, Inc, a discount real estate broker, announced a loss of $2.7 million since it's inception in the spring of 2007. Many businesses lose money in their first year or two, and I know nothing of Webdigs' merits or demerits. What is significant to my mind, and what should matter to the consumer, is that this follows a pattern of non-traditional brokerage models failing. Iggy's House and Foxtons, both discount brokers, are two recent examples.
Why should this matter to the consumer? Because your transaction is not a zero-sum event. If a broker promises you a 3% commission discount, for instance, there is a cost associated with that discount that doesn't show up in their hypothetical net sheet because it doesn't account for one immutable law of real estate brokerage:
The best agents who will do the best job for you will work where they can make the most money.
Foxtons' agents in New York were all on a salary and an extremely modest commission schedule. When I checked them out in 2001 I recall a $35,000 per annum salary and a $400 bonus for closed sales. A Mini Cooper was in the package also. I know top-producing agents who gross $35,00 a month. They don't drive Minis. They wouldn't work at Foxtons. Since the top 10% of agents are responsible for 90% of the transactions, the agents who were attracted to Foxtons weren't enough to keep the company in the black. And they folded.
Here's how it affects the seller: If, as the seller you choose the firm with the lowest commission thinking it will net you the most money, you are employing backwards logic. Not all real estate agents will do the same job for you. Overall and with rare exception, good agents cost more than discount agents because good agents get great results and discount agents get discount results. Good agents sell homes faster. Good agents get more money. Good agents resolve home inspection issues faster. Good agents handle compliance & title issues more effectively. Good agents have better mortgage sources. Good agents can negotiate the pants off a crummy agent. A good agent may quote you a lower price when they first meet you, but they'll net you more money because they won't let your listing go stale because it is overpriced.
It is ironic that people will shop around for the best cell phone, the best laptop, the best plasma TV and the best surgeon for their gall bladder but the biggest financial transaction gets given to the lowest bidder or Aunt Ethel. If people treated choosing a broker like it was their financial life or death, they'd get dramatically better results. If you think a 3% discount is worth forfeiting that, go ahead. Just remember that the 3% may be off a far lower price or after a far longer, more stressful transaction. And don't be surprised when the company goes out of business.
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The issue isn't busines model it's crummy agents. There are many crummy agents at full service companies too. I think rather than focusing on business models, we should be focusing on making entry standards harder.
All good points.
I honestly don't give discount brokers much thought. There is always going to be a segment of the market that will shop for price, nothing I can say will change that and as a result, I don't waste my time on it. :)
Melina, I totally agree. There is a place in this world for all types of business models. Buyers and sellers should have choices it's only fair. We all want choices. The public can figure out what works for them - they live with the consequences.
Just pointing out the news, Miriam & Melina. They lost $2.7 million in less than 2 years. I have no beef with discounters, I own a discount/FSBO assistance firm in addition to my company. I have a front row seat to how it works. I don't see people saving money.
We are free to set our models/pay scales and see if consumers will pay. In this case, his business model must have been flawed if he couldn't pay the overhead.
You get what you pay for. Bottom line. Discount brokerages have never rattled my cage at all. If the consumer wants to save a buck, let him. That's not the type of client I want. I want one that is committed to me as their Realtor for Life.
As far as raising the bar for entry: That's a bunch of bologna, as we say in our family. Entry level, what about all for everybody in the industry! I'm too busy to worry about those who don't understand the level of professionalism, bottom. Those that don't cut it, won't make it. Yes, I get tired of the lack of professionalism but one must also look at how they were raised. I dropped a boyfriend because he asked for ketchup for his cornish hen at a fundraiser for a college that my Dad was involved with. Then there are those who chew with their mouth open. Others don't understand that a napkin is there only to catch crumbs. It's about choice. If we, as Realtors, focused more on our own personal growth and made sure that we were involved in our local real estate organizations, the level would be raised. But you know what? There are those who chew with their mouth open that are some of the most successful real estate agents.
What is a discounter? One that charges everyone 7% but lowers that fee for friends. Is it someone that says x company charges 7 but we charge 5. As long as Wal Mart is the #1 retailer there will be discounters in every business.
If a seller hires an agent based on their discount commission without verifying their competence, that could cost them in the long run. If it takes 2 months to sell a house by a non-discount agent, and 8 months to sell a house by a discount agent, the seller loses 6 months of time AND monthly carrying charge if seller has (a)mortgage or two on the property. Discount is Expensive.
Like everything else..... you get what you pay for. Sellers should hire an agent by experience in this field and showing a track record. For newer agents the agency reputation should be a consideration.
Very good points Philip. I am surprised when people are willing to gamble and cheapen out on their greatest investment - their home. It is hard to believe.. And like Concetta says - you get what you pay for....
I think you cannot worry about what others are doing. You'll drive yourself nuts. Set your price, stick to it, and do business the way YOU believe it should be done.
If you're good, and the clients see that, you'll succeed.
The point for me about this news is not to decry one way of doing business or to spit on any company's grave. It is more for the consumer to educate themselves. Consumers just assume that if a company is in business that they are doing healthy business, and that is not always the case.
"You get what you pay for" doesn't fly in real estate, because far too many sub standard agents operated in the market providing far less than the value of a transaction- whether they were paid 1% or 10%. Very few in NY are doing a "healthy" business relative to the order taking market that came and went- fortunately, good real estate agents will find a way to remain active.
I wish more "bad" agents would drop out already. Consumers do think we're all alike, just order takers and door openers. We need to prove our value.
I believe the core problem has been that our industry has too often given away our services, advise and expertise. I believe that the public to a large extent has learned to expect something for nothing especailly when it comes to the real estate industry. You go and talk to an attorney about any legal advise or a doctor and you'll get a bill in the mail. Yes, I am aware that these fields have a lot more schooling and education behind them but just like anyone in any field, we in the real estate business still should be compensated when we are providing ANY service or giving out real estate advise, heck that's why they call us isn't it? Because THEY NEED OUR HELP. Agents have become the source for all things free. Maybe we should do like the title industry did when they clamped down on all of the freebees.
Dana Lunceford