We have all seen the advertisements from discount brokers claiming they only charge a “1% listing fee,” but we want to break down the actual cost of this strategy to the seller.
First, let’s clarify. In the state of California, the seller pays commission to the listing Agent as well as to the Agent representing the buyer, customarily about 2.5%. So when a discount broker says they offer a 1% listing fee, what they mean is the seller will cover their 1% plus the buyer’s Agent’s 2.5%, for a total cost of 3.5%. Full service Agents like Felder Hiken Group, generally charge around 2.5% for their services, which means a total of 5% commission paid by the seller. So we are really only talking about a difference of 1.5% commission between a discount broker and a full service broker.
The two types of brokerages are simply using different competitive strategies in an effort to gain market share – the discount brokers is using a cost leadership strategy, and the full service agent is using differentiation as theirs. To become a cost leader means to become the lowest-cost producer in the industry, while becoming a differentiation leader means leading in areas other than price which are valued by the consumer. In the case of residential real estate listings, what this looks like is the cost leader charging less commission to sell the home (aka 1% listing fees), while the differentiator offers services such as help in preparing the home for sale, an extensive marketing strategy, help with costs such as inspections or staging, and more effective negotiation tactics. For example, clients who are relocating out of the area may choose Felder Hiken Group to represent them because they know they can leave town and the home will be prepared, marketed, negotiated and sold in the their absence, while an investor selling a rental property may choose to sell the property as-is and just want to do a quick deal, paying the least amount of commission possible.
But here’s the real question: is the goal of anyone selling a property to pay the least amount of commission possible, or is the actual goal to net the highest amount of income from the sale? We would argue that all sellers want to make the most money possible, bottom-line, even if that means the commission percentage is not the lowest. So, how does that work?
Let’s look at an actual case study from a Felder Hiken Group transaction in 2017 to see if that 1.5% listing fee differential between the discount broker and FHG actually saved the seller money:
FHG made an offer on a property listed with a discount broker for $840,000. Our clients had the expectation of being counter-offered for at least the amount of the most recent comparable – an identical townhouse which sold 4 months prior for $871,000. However, because a cost leadership strategy requires the brokerage to produce significantly more volume to generate the same income as a full service broker, they do not have the time (or motivation) to negotiate and counter-offer each transaction. In our case, the client would have paid $871,000 (or more) for the property, but they didn’t have to because the discount listing agent convinced their client to take the offer as it was, thus avoiding counter-offer paperwork. The following breakdown of the numbers shows that the seller lost money by paying the “1% listing fee.”
$840,000 @ 3.5% commission = $29,400 paid by seller (actual)
$871,000 @ 5% commission = $43,550 paid by seller to full service broker
$840,000 – $871,000 = – $31,000 loss in selling price
$43,550 – $29,400 = $13,950 in additional commission paid to full service broker
Moral of the story: the seller could have paid a full service agent like Felder Hiken Group an additional $13,950 in commission to EARN an extra $31,000 – ultimately coming out ahead by $17,050 ($31,000 – $13,950).
So before you sign on the dotted line with a discount agent, ask yourself what your end game is – do you want to make more money, or simply pay less commission? If you want to make more money, contact us:
Josh (650) 400-7142 | jfelder@apr.com
Lindsay (650) 224-4130 | Lhiken@apr.com