The True Cost of Using Discount Real Estate Services
$500,000 x 6% = $30,000
$30,000 equal the sum of the combined commissions that your listing agent and the buyers agent will receive at close.
That is a lot of money.
Do agents deserve that much in commission in 2015? Hasn’t technology made that antiquated commission structure obsolete?
What Are Discount Real Estate Brokerages
Sometimes also referred to as “rebate” or “internet” real estate services, discount brokerages are not new.
Discount brokerages offer a more streamlined service that carries fewer bells and whistles with a smaller commission cut. Some rebate brokerages charge the full commission but provide the client with a credit at closing for 1-2%.
Some discount brokerages simply charge a flat fee to get on the MLS and a small fee upon close to cover the legal and admin costs they incurred.
They are, however, growing in numbers popping up with a fury since the Great Recession released us from her grip.
How Do Discount Real Estate Services Work?
While I generically label the discount providers as “real estate services” the cast of characters can be your agent or your mortgage lender. Since they operate a little differently let’s start with discount real estate agents.
Rebate real estate brokerages is where the real estate company or agent lists your home and, at closing, the buyer or seller receives money back in the form of a rebate.
The rebate in many instances comes from the real estate agent’s commission. The going rate for a real estate agent’s commission on the buyer and seller side is 3 percent apiece (6 percent total).
This means that for every $100,000 of real estate sold, a total of $6,000 is paid in commissions.
Real estate brokerages with a rebate, or discount, model present the selling proposition that traditional agents are overpaid.
For the most part, they have a valid argument. A lot, easily a majority, of real estate agents are not worth a 3% commission. However, a portion of real estate agents who are true experts, do return more than enough value to justify 3%.
Their guidance can literally save you thousands just as the wrong choice can cost you thousands.
Your job as the homebuyer is to make sure you choose your agent based on merit and not some six degrees of Kevin Bacon chain that leads you to the neighbor of your best friends mother.
To be frank, if you choose your agent that way then I have little to no sympathy for the results. These people are guiding you through the biggest purchase of your life and you can’t be bother to conduct a proper interview, ask some pertinent questions and select the professional most suited to your needs?
Let’s break down the differences between hiring a rebate real estate brokerage and a traditional real estate agent who works for a full commission.
Must close transactions to get paid
Generates their own leads.
Must learn multiple strategies to gain clients.
Markets home out of own pocket.
Available 24/7 for clients in most cases.
Works seven days a week and has real estate as their full-time job/career. (Some agents are “part time,” but successful agents are full time)
Extensive training in marketing, negotiating contracts, prospect management, and branding
Generates very few leads. Instead, works the leads generated by the brokerage’s marketing department.
Sometimes paid a monthly “salary” by the brokerage, making them employees.
Commissions are smaller than those of a traditional Realtor’s and can be affected by customer surveys on their experience. Less money is paid in commissions for lower survey numbers.
Listing “packages” are sometimes presented for purchase. In these packages, the more the client pays, the more they get back. If a client wants to put in a small amount of money or wants more money back at closing, then they might not be speaking much to your agent except at the beginning and when an offer comes in. Very little time and attention is invested in clients or their properties.
Some agents work part time. Real estate is their second job, not a full-time calling.
When the transaction is over, you might not hear from your agent again because the consumer is a client of the real estate brokerage, not the agent.
Working with a real estate agent who works around the clock in the business and has extensive experience marketing properties, accurately pricing homes and negotiating contracts is imperative.
The Story with Discount Mortgage Lenders
If you have shopped for a mortgage online you will inevitably be bombarded with ads and popups for fantastic mortgage rates offered by lenders that operate several states away in large national call centers.
The discount guys are able to offer the discount because of their national call center style set-up. One operations center is significantly cheaper than five.
Is a national operations center a bad thing? Usually, yes.
It’s difficult to lend in all 50 states because each state and sometimes each county and sometimes each city will have unique laws and property tax calculations. If you choose to operate in all 50 states as a loan officer you are choosing NOT to specialize.
Outside of the bundled operations centers the discount mortgage lenders pull their lower rates from the one place that should concern you as a borrower - loan officer compensation.
The discount lenders operate on the bottom of the pay scale which garners the effort one would expect.
If you are a first-time buyer or coming back from a major derogatory credit issue - bankruptcy, foreclosure, short sale, deed in lieu - then you need to ignore the flashing banners and find a local mortgage professional.
I know you are probably wondering why first-time buyers or “buy-after” borrowers shouldn’t chase the discount lender savings too?
If you fall into one of the categories listed above, have a unique employment & income situation or have anything out of the ordinary your mortgage application your loan will take some massaging to get to the closing table.
Can the loan officers at my discount lender present the file the same way a local mortgage pro would?
No. The answer is an unequivocal no.
The reasons why the answer is always no are clear to understand. Discount lenders pay their loan officers at the extreme bottom end of the pay-scale.
In some cases, the person handing your biggest financial transaction ever makes less than $15 / hour and less than $40,000 a year. They don’t own a home themselves and they continue to work at a company that pays them fast food wages.
The lender has to pay those pitiful wages to get you that extra 1/8th on the interest rate you have been chasing for a month or two.
Honestly, what kind of result do you think you will get under this scenario?
Saving that 1/8th of a point could very well cost you the home, your earnest money deposit and a significant amount of stress & consternation.
On a $300,000 loan amount, the savings from a 1/8th reduction in rate is $22 per month. You tell me, is the risk commensurate to the reward?