Sharon Mather wanted to sell her home in Long Beach, California, but she was reluctant to pay the usual broker’s commission. After looking around, Mather found a discount real estate agent willing to sell her home for a fee of just 1 percent, well below the 2.5 percent typically charged by real estate agents.
In addition to the 1 percent promised to her real estate agent, Mather paid the buyer’s agent 2.5 percent, and their home was quickly sold. Their total selling expenses were just 3.5 percent, well below the usual 5 percent.
Based on her $400,000 selling price, Mather spent $14,000 on brokerage fees. If the current interest rate of 5 percent had been applied, Mather would have paid $20,000 to the realtors involved in the sale of her home.
“That’s a lot of money to save,” she says.
What is a discount real estate agent?
Mather hired an agent she found through Clever Real Estate, a nationwide service that matches bargain-hunting sellers with agents who are willing to cut their fees — practically at a discounted rate. Other discount brokers, as this breed is called, operate similarly, often offering commissions as low as 1 percent or being compensated by a flat fee – typically a few thousand dollars.
But lowering their compensation doesn’t necessarily mean that these agents lower their services. While business models vary, many discount retailers will help list and market your home, negotiating with buyers on your behalf, just like a traditional real estate agent.
Ben Mizes, founder and CEO of Clever Real Estate, says that in a seller’s market – where bidding wars are common, marketing times are short and desirable homes often seem to sell themselves – and also at prices above the listings, discount realtors are creating a new one have attractiveness.
“Sellers just think, ‘Why did I spend so much money when my house was sold in one day?'” says Mizes.
How Low Are Discount Broker Commissions?
Clever Real Estate markets its services nationwide but does not employ direct agents. Instead, it leads to listing agents looking for clients and offers listing fees as low as 1 percent, or a flat $3,000.
The nation’s best-known discount retailer, Seattle-based Redfin, also markets listing fees ranging from 1 percent (if you’re both selling and buying a home through them) to 1.5 percent (if you’re just selling). In contrast, the average commissions at the largest brokerage firm in the US, Anywhere Real Estate (formerly Realogy Corp.), are significantly higher.
Anywhere Real Estate — which owns brands Coldwell Banker, The Corcoran Group and Sotheby’s International Realty — reported that the average deal-side commission rate at its captive operations was 2.41 percent for the first six months of 2022, down slightly from 2. 43 percent in the first six months of 2021. If the listing agent and the buyer’s agent split the revenue evenly, that would indicate an average commission of about 4.82 percent.
Both Clever Real Estate and Redfin insist their clients receive the same level of service as sellers listed on full price brokers for thousands of dollars more.
Though it’s up two basis points year over year, Redfin says its market share was a modest 1.18 percent as of April 2022. Most American home sellers seem to stick with full-price agents.
Daryl Fairweather, Redfin’s chief economist, says that’s in large part because home sales are a high-stakes, low-frequency transaction, a reality that’s leading many sellers to embrace the status quo.
“They don’t get a lot of opportunities to learn about commissions,” says Fairweather.
How real estate commissions have changed
In the days before the Internet, real estate commissions averaged 6 percent. While some sellers still pay that amount, the common rate has dropped to 5 percent or less.
As technology enabled new ways of doing business, the conventional wisdom was that real estate fees would go the way of stockbroker commissions and travel agency fees.
The reality is very different. Commissions actually declined during the housing boom of the early 2000s, only to bounce back in the housing bust days when houses were harder to sell.
Then commissions started falling again, hitting record lows in 2021. REAL Trends, a Colorado-based research firm, says the average commission fell to 4.94 percent at the end of 2021, compared to 5.40 percent in 2012.
“It looks like the downward trend in the gross commission rate will continue,” said Steve Murray, senior advisor at REAL Trends. “We know from our historical data that as the ratio of inventory to agent count decreases, so does the average commission rate.”
In other words, when real estate is scarce, agents compete for listings by lowering their fees. Realtor.com data shows that the number of active listings has not yet recovered to pre-pandemic levels, although it increased 26.6 percent from August 2021 to August 2022.
Although real estate commissions have been depressed, they have proven remarkably resilient to the pricing pressures that have hit other industries. Meanwhile, the decline in real estate commissions as a percentage of the selling price has been offset by rising home prices.
How commissions are set for home sales
A brief overview of how commissions are determined: The seller negotiates a fee with the agent, typically 2 to 3 percent of the selling price of the home.
Most sales involve not only the real estate agent, but also a buyer’s agent, and the seller determines how much to pay to that agent, who often plays a crucial role in bringing a buyer to the property.
The amount offered by the seller to the buyer’s agent appears in the data of the multiple offer service about the property. Even when sellers only pay 1 percent to their own agents, they often offer buyer’s agents 2.5 percent or even 3 percent.
Mather, the seller in California, says her agent asked her to pay 2.5 percent to the agent representing the buyer. Offer less than that, he warned, and agents might not be thrilled to show her home.
The National Association of Realtors, which has long feared allegations of antitrust violations, stresses that rates are set by individual agents and their clients. Brokers also point out that they only get paid when a deal is completed. Any work they do on home visits, open houses, and house tours is done for free in anticipation of a payday at the closing table.
Commissions have fallen in recent years in part because consumers have been conditioned to push for better deals on everything. A fast-paced market like today’s can also pressure listing commissions by leading consumers to question the value of listing agents.
Despite this, the traditional real estate model has proven remarkably resilient, and Redfin, the largest discount retailer in the US, holds just 1.18 percent market share as of April 2022.
This is how discount brokers work
Despite its modest market share, Redfin has expanded nationally with an approach that includes hiring agents as full-time employees. This is in contrast to most brokerage firms, where brokers act as independent contractors. Another commission reduction concept, UpNest, allows sellers to search online for discounted fees.
Clever Real Estate takes a different approach. It works with agents who already work with national brands or independent companies. Clever Real Estate promises to relieve brokers of client acquisition costs and raise their profile in the areas in which they operate.
“Because we save them the cost, they are willing to lower their fee and keep the same service,” says Mizes. “If Clever sends you 20 extra entries every year, that’s a lot of signs in yards.”
While savvy real estate agents charge a 1 percent listing fee, they typically ask sellers to pay 2.5 percent or more to buying agents.
Mather says she’s impressed with the agent she found through Clever Real Estate. Despite the reduced commission, the agent – The Keystone Team’s Cyrus Mohseni – was quick to respond to her calls and guided the transaction to a smooth conclusion.
“He turned out to be fantastic, just a real go-getter,” says Mather. “You’d think I’d pay him a lot more than 1 percent.”
Disadvantages of discount brokers
Since it is such a service- and individual-oriented profession, it is difficult to generalize about discount brokers. Some may work as hard as any regular broker, like Mather did; others may be cheaper in their approach. Of course, this can also apply to traditional brokers: “Full service” does not necessarily guarantee white glove treatment.
Many of the best discounters, like Clever and Redfin, promise the same service you would get from a traditional agent. However, the range of services may differ from company to company. Some discount brokers don’t offer services like multiple open houses or home staging assistance that a full-service agent routinely offers. Therefore, it is important to find out exactly what duties your agent will and will not perform before signing a contract.
It’s also important to understand how the discounted rates apply. Normally, only the agent of the offer (the seller) gets a share – not the agent of the buyer, with whom he shares his commission. The buyer’s agent often still gets full half of the traditional commission, which is calculated as if it were 5 or 6 percent of the final home price.
For example, Redfin notes that if you both sell and buy a home through them, the Redfin listing agent earns 1 percent commission, while the buying agent (representing the buyer of your old home) earns 3 percent — which is the of Total commission paid to you gives , the Redfin customer, to 4 percent.
Of course, that’s still a saving. But it can come as a bit of a shock when, say, $20,000 in commissions instead of $5,000 is on the closing cost list. Moral of the story: Be clear about what the discount will cover and what the total commission bill will be.