Steve – I’ve seen all the SD markets since ’69 and one thing (among many) remains easily predictable – discount brokerages go away when cherry picking season passes. A difficult or normal real estate market will always prove to be like a knife in the heart for discounters.

And every time they rise up like a mud-filled tsunami, they’re praised as the next revolution in the industry. Blah blah blah

Jeff: Thanks for the comment. I completely agree. That’s the exploitation part of the equation. The fact that these models cannot and have not endured over time suggests (confirms) to me that it’s a one time shot. Very few, if any, clients use them twice, likley for good reason. For Kris and me (and most full-time professional service providers in any industry), building a strong repeat/referral business is an integral part of our business plan. The discount model most commonly appears to be a “slash and burn and move on” mentality that does just that.

I do not think that it is a “knife in the heart of discounters” but rather people are much more aware (due to the availability of information) of the process of buying and selling homes. Perhaps 6% should be more of a moving figure and utlimately the market will decide the right fee for a housing transaction. With the high run up in housing values, most people realized that leaving 36K on the table is worth taking a serious look. My rental house I sold for 510K (bought for 370) probably would not have happened without the 3% offered to the buyers agent. But is this really supply and demand based on exceptional service or is it more of the cost of doing business on the MLS?

“Discount” is only in the eyes of the beholder, with housing values so high it is only a matter of time before a better model is put in motion that will meet the needs of buyers and sellers.

KC – With respect, I’ve heard that exact argument for nearly 40 years. When SD median price hit 100k in ’81 they said word for word what you just wrote. All the discounters turned to dust and blew away. When prices hit 300k, 400k, then 500k the same script was trotted out, though it was so old it was difficult to read.

The MLS has nothing to do with this- period. Never has. The reason less than 6% has never worked as a business model is because in normal to buyer markets it takes real expertise to sell the property, not just the ability to breathe and deposit a commission check. The profit margin of a skilled real estate firm isn’t what the public thinks, and never has been. It simply cannot be done. Ask I Pay One how they’re doing these days. They can’t afford to pay attention.

That’s because in the current market it takes talent to perform. And hard work.

I don’t sell homes, as I’m an investment broker, so I’ll only speak for myself here. When, every now and then a prospect attempts to lower my commission, I tell him the following:

“I’m not charging you 6% to sell your income property, or conduct the tax deferred exchange. That charge is in return for making you wealthy, allowing you to retire years sooner than you’d ever imagined, and keeping more of your job income while on the way to retirement. So no Mr. Prospect, I’m not going to lower my commission for you. Is that a problem, or can we get on with it?”

But then that’s me.

KC – The fact is that supply and demand does, in fact work. But one must also add the perceived “value” by a buyer or seller to the decision-making formula. Not all agents are created equal. Jeff is correct in that he explains his commission structure in this context and his potential client may make the value judgement as to whether or not to proceed on this basis. Another thing to consider; Most discount models try to compare their cost/value against the so-called traditional agent assuming a commission of 6%. In some advertising I have actually seen comparisions to 7% commissions. The fact remains that commissions are negotiable. While 6% has been a common and traditional commission, we also see many full service agents negotiating commissions at 5%, some even lower. It may depend on a particular situation. Generally, you get what you pay for.

But in more challenging markets with the protracted market times we now have in San Diego, it is extremely difficult for a listing agent to deploy and sustain all of the assets in marketing and advertising that are needed to maintain the high profile that a home for sale deserves. After all, we are not just in this to sell a home, but to give it the best chance of obtaining the highest possible price that the market will support.

Similarly, and as Jeff points out, an agent’s success with a buyer is measured, in large part, by not only researching, exposing and finding the perfect home for your client, but by how well you negotiate the sales price and more. My prediction is that the Redfin model and, by association, their agents will put their clients at a disadvantage. I have yet to see a discount model that does not compromise something.

Assume the average cost of a home here at about $500,000. Also assume that the sales commission to the buyer’s agent at 2.5% (fairly common). That 1.5% rebate equates to $7,500. Now, in the Redfin model, YOU had to find the home. So the following questions become relevant:

1.) How many have homes have you found and seen on your own?
2.) How long has it taken?
3.) How many previous offers have failed?
4.) What is your time worth?

Maybe most important – You have an agent who, because of the Redfin model, has likely not seen the recent comp’s, soooo -

5.) How do you establish an offer price and negotiate a sales price not having seen the differences between the comparable homes? I know from experience that MLS pictures and descriptions don’t necessarily paint an accurate picture.

Then there is the escrow and due diligence period, where your ability as a buyer to assess and determine liability issues of the home just begins.

The question, then, becomes (in the words of the great Clint Eastwood), “Just how lucky do you feel?”.

It seems to me (and, again back to Jeff’s comment), that it would be a whole lot easier and safer for the buyer to rely upon their experienced, full time agent, who actually knows the neighborhood, to negotiate a better sales price. My belief is that the buyer will more than offset the “rebate” by getting a better sale price. Add to that the value of an experienced agent guiding you through your due diligence period and escrow – priceless…

The quote was “Do you feel lucky?”. Otherwise, right on target.

I always screw up those Clint Eastwood quotes.

BuySideRealty does it nationwide right now and redfin has been doing it regionally for a while. Both of them give back 75% of the buyer’s agent’s commission to the buyer if you purchase through them.

Basically it works like this:

1. You use their tools to search the MLS for a house. Most of them require you get pre-approved for a mortgage before you can see any places. This is generally a good idea for anyone looking to buy a house.

2. You ask them to schedule an appointment to see the place. They take care of contacting the seller and all that. You see the place or as many places as you want.

3. You make an offer through them. For this they actually connect you with a licensed agent who will walk you through this process. You can also call an agent at any time to ask questions.

Now 75% of a buy side commission can be pretty sizeable. (on many San Diego homes, you could get a $10,000 rebate for doing this) I think of that like buying stocks. Full service brokerages used to scorn the discount brokerages for not providing the same level of “Service”. In the end, the discount’s won. Some very weathly people still use the full service brokerages, but most people are happy to just place an order on Etrade or Schwab and only pay $10-30 for the transaction. Unless you are completely clueless about an area, you may be better doing the property search yourself. This is a point of contention though. I imagine you might have some input about what you as a buying representative add that they wouldn’t have through a company like this? (keep in mind that you still have an agent you can ask any questions)

Now selling a place, I agree that an agent gives someone a lot of value especially in a tight market. Trying to sell a place yourself in today’s market would be very challenging. In a very fluid market like during 2002-2005, you could probably just do it yourself.

I guess it’s worth reiterating that there is, indeed, a certain portion of the population that this model can and does work for. At this point, it would appear to remain a very small percentage. How much growth, if any, remains to be seen.

I will be commenting on this subject this week in another follow up post since Kris met with Glenn Kelman. I think you will find it interesting. Suffice it to say, they are having a few growing pains. The challenge partially reveals itself in the range of clients Kris and I have. Many/most are very strong in IT; software engineering, electrical engineering, big pharma. They are certainly aware of and capable of using the rebate model, but they don’t. Why? I’m not sure. But I can say from our own experiences that, 1.) while they have the ability, they don’t have a lot of time to do the research, much less try to find and look at homes on their own; 2.) nothwithstanding all of the information on the internet and available by the “local” discount buyer agent, it’s likely that the agent has not actually seen the comp sale homes. So, he/she has to rely upon the pictures on the internet and possibly a drive by. 3.) Since this is such a huge investment, the buyers we work with seem to rely upon our credibility regarding our opinion of value, particularly in the context of the “trend” of the moment, be it up down or drifting sideways. The average $10,000 rebate, and more, can evaporate in a heartbeat if the agent doesn’t have a good handle on the trend of the moment. 4.) Negotiations – when an agent is most familiar with their market, they should have the ability to better negotiate to a target rather than a sellers desired price. And don’t forget, sometimes the best deal is no deal.

Most of our clients need and want a lot of personal service. Many calls to each almost every day is the norm. I’m not certain how Redfin or similar models accomplish this with one (or very few) agents serving a huge market area.

One of the problems that I acknowledge is that there are too many so-called full service agents who are just not very good, professional or dedicated. The old saying, “15% of the agents do 85% of the business is true. The barrier to get a license and begin practicing real estate sales is way too low in my opinion and too many people have had bad experiences in the past. These may be candidates who may now consider the rebate alternative.

Then there is a guy I will call Joe (not his real name). He showed up my open house a while back waving a “Zillow” print-out in my face showing a Zestimate of $675,000 and practically screaming at me that he wouldn’t even pay that! The home was listed with a value range of $685,000-$725,000, which is in the range of recent comp’s. It sold for north of $700k. That WAS the market for that particular home. Joe wanted a deal, so he went “listing agent shopping” (not much different from a rebate company, in concept). Bottom line, this home was great for Joe but because he was not aware or willing to accept the market, he lost out on it. He over-empowered himself (Zestimates have already become legendary for their numerous gross price inaccuracies), and lost out on a great home at a reasonable price.

Yes, their is the potential to save money with the rebate. There is also the potential that you don’t get the home that best suits your need, or that you may even pay too much for that home (so what did you really save?), or that you may find issues (or worse, not discover issues) affecting the value of the home that can save or kill the sale depending upon your agents expertise and experience. For example, in one of the neighborhoods Kris and I sell, we are through experience aware of a high likleyhood of cracked trusses. Sometimes the buyers inspector finds them, sometimes not…until we advise them to look more carefully. Another neighborhood has many homes with “notched” trusses because the original design did not properly consider the size of the furnaces that were to be placed in the attic. The “notch” weakened the truss, but it not always apparent. There are many more examples of these little (and not so little) idiosyncracies among the different communities that takes years of experience to be aware of. I know that it sounds like I’m trying to justify my existence, but I’ve got to tell you, our clients really appreciate it and consider it a benefit that protects their interests.

The question, therefore, becomes how comfortable are you with an agent who primarily pushes paper for you in a transaction?

I hope you had a chance to ask Glenn Kelman your question – why did Redfin choose Seattle and San Francisco as their first cities. He has a pretty good answer, and it’s not necessarily the reason you suggested. In fact, if I remember correctly, Redfin has five main reasons why they choose to enter a market.

Two of the reasons I can think of are, 1) a pool of sophisticated and technology-savvy people; and, 2) heavy volume of annual real estate sales.

Smaller towns & cities might not have the number of buyers necessary to make a big marketing push worthwhile. Redfin is a start-up, of course.

John – I did, and you are correct, of course. A podcast of the interview is coming on Thursday. Stay tuned.

Add one more item to your list: Markets with strong appreciation.

[...] they can not survive by capturing only the limited market of card-carrying do-it-yourselfers. As Steve points out, there are simply too few of these to fill the seats and the box receipts would be insufficient to [...]