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How much can you save with a Discount broker?

by sfishome on June 6, 2007

I just got an Evite to a charity event from an acquaintance who recently bought a San Francisco condo through a new discount brokerage. One of her co-hosts Sold his Loft using the same discount brokerage. They mention in the Evite that the discount firm will donate $1,000 to the charity for any business they drum up at their event.

So obviously the two hosts are happy – right? After all, the Buyer got a 20% refund on her Buying commission – at a $1,650,000 purchase price that’s an $8,250 rebate. Not too bad – right?

The co-host Seller was able to list his Loft for 1.5% instead of 2.5% and is happy because he got his $589,000 Asking Price so he “saved” almost $6,000.

However, I know better. San Francisco is a complex and difficult real estate market to navigate. You have to be careful in analysing each property, and the market, before figuring out your offer price or your Listing price. So choosing the right agent and brokerage can end up saving or costing you a lot of money. Knowing this, I did some research to see how these two “really” did.

As it turns out, my quick “CMA” (Comparative Market Analysis) which indicates “fair market value” seems to indicate that the $1,650,000 was probably at least $50,000 too high – if not $100,000. So her $8,250 rebate may have cost her at least $40,000…. $40,000 that went directly into the pocket of the Seller of that condo who used a well known and respected Brokerage… the Seller is probably still laughing all the way to the bank since they bought the property for $150,000 less just 9 months earlier. Ouch! That’s 10% in appreciation. According to the DataQuick numbers I’ve used in previous posts appreciation was less than 2% during that time frame. That’s why I say they over paid by “at least” $40,000. It may be as much as $100,000 even after factoring in the so-called “savings” or rebate.

Then I looked at the Loft Seller’s situation. Six weeks before his Loft sold, another Loft in his building on the floor below that was 141 SqFt smaller sold for $599,000. In fact, within a 1/2 mile radius of these 2 Lofts, 19 Lofts sold in the previous 7 months and only two sold for cheaper than the co-host “saver” of commissions. So what does the math work out to be? The 1.5% commission cost him $8,835 to net $580,165 before other costs. The $599,000 seller paid $14,975 netting $584,025 before other costs. So… the Seller with the smaller condo netted about $4,000 more. And that doesn’t take into account the other 15 Lofts that sold for a lot more… his “savings” looks to me to be about negative $15,000 to $30,000.

Another discount broker was the subject of a 60 Minutes piece a few weeks ago. The NAR is up in arms because they felt their voice wasn’t heard. One full service agent was interviewed, and didn’t know how to answer the “savings” question. Unfortunately for the TV segment she’s probably just too busy making her clients “real” money or savings, not phantom ones. This is a pet-peave of mine…. general media pieces written or produced by people who have no expertise and don’t even bother to scratch the surface, let alone sniff out the reality of complex issues.

The truth is that if these were “real” savings, then Discount Brokers would rule the day. Buyers are smart – they determined they didn’t need Travel Agents years ago… but they still rely on experienced professionals when it comes to the largest financial decision in their lives.

And why – with these kinds of “savings” that non-real estate professionals think they are getting – haven’t discount brokers gained much of a foot hold after years and years of trying?

My personal opinion is simple…. why would a Realtor who was an expert, who had a lot of happy customers, decide to earn less and move to a Discount Brokerage? The answer is that they don’t. The only types of real estate agents that these firms can attract are either those who failed elsewhere, or just got their licenses. So they don’t know what they don’t know. They don’t know how to Sell a Loft for over $600,000 and not $589,000. And they don’t look at a $1.65 million property, and realize it’s a simple check of past sales to discover only 9 months earlier it was only worth $1.5 million to a buyer represented by an experience agent.

The analysis I did, and do every day, looking at “fair market” values takes some time and expertise. Then it requires Sales & Negotiation skills to get my Seller’s the highest possible price, and my Buyers the home of their dreams for the lowest possible price. Unfortunately for the two people who are so nobly contributing their time to a charity, ended up contributing a lot more to the people on the other side of their transactions.

If you are considering Buyer or Selling, please call an agent like myself, and interview at least 3 Realtors before making a final decision. Hopefully we can help you see the difference during the interview process… not after you’ve lost thousands and thousands of dollars thanks to un-skilled or inexperienced advisers.

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