Home Sellers Beware; Are So-Called Discount Real Estate Brokerages Actually Costing You Money?
On behalf of Cedarglen Realty Services Inc.
Brokerages that offer perceived discounted commission rates are on the rise in the Calgary real estate industry, but they may not be saving you money after all, says Tom Waller of Cedarglen Realty.
It’s against the law to have a fixed or standard commission in the real estate industry. But, every marketplace has a percentage that is considered to be customary, common or typical.
Brokerages that offer perceived discounted commission rates are on the rise in the Calgary real estate industry. It's a phenomenon that industry members are finding difficult to confront, as so-called discount brokerages appear to offer real value and benefit to clients. “Not necessarily,” says veteran real estate broker Tom Waller of Cedarglen Realty (www.cedarglenrealty.com).
"Their approach can actually result in cash losses, not savings," warns Waller.
In addition to lower commission rates, some discount real estate brokerages will offer to list a home on the MLS for a flat rate (a tactic known as "mere listing"). The MLS facilitates most of all successful real estate transactions, but only those with real estate licenses can list a property, so sellers jump at the opportunity. But brokers who arrange a mere listing will waive all liability and provide no further services or support. The seller is then Self Represented and deals with realtors and their buyers directly.
"They essentially get your plane in the air, but it is your job to fly and land it," Tom Waller says. "The seller is responsible from that point on."
Discount brokerage rates are typically much lower than what the industry considers a common or typical commission. The amount varies by region and market, but in Calgary its 7% on the first $100,000 and 3% on the remainder. Under what would be considered these circumstances the agent representing the seller receives 3.5% / 1.5% (half of the total) and the buyer's agent receives the other half. On the surface, commission discounts appear attractive, but it is important to remember that the cost differential usually needs to be -and will be- recouped elsewhere, often to the seller’s detriment.
Discounting commission as a seller (to the Buyer’s Agent) can ultimately be a self-defeating strategy because home buyers sign an "Exclusive/Non-Exclusive Buyer Brokerage Agreement or Service Agreement with their agents (which becomes mandatory July 1, 2014). Section 7.1 of this agreement states the fee paid by the seller to the Buyer’s Brokerage will be what is common within the marketplace, in Calgary 3.5% of the first $100,000.00 & 1.5% of the remainder.
Translated: If a seller lists their home with a 2% commission on the first $100,000 (instead of the customary 3.5%), they are basically asking the buyer to make up the difference, and the typical response is refusal to do so and therefore a lost sale.
The commission paid to both realtors traditionally comes from the seller, so a buyer will usually always use a realtor since it comes at no cost to them. With a Buyer Brokerage/Service Agreement in place, the buyer is not expecting to have to pay any commission on the sale. This causes buyers and their agents to overlook properties listed at discounted commission rates, which prevents the seller from obtaining maximum market exposure for their property. Without maximum market exposure, a seller is not generating the maximum amount of competition amongst potential buyers, and this will typically lead to receiving a lower value for the home. As long as a realtor discloses to their buyer types of listings they will not show the realtor has fulfilled their obligations to their clients.
Colby Sambrotto, founder and CEO of ForSalebyOwner.com listed his home using online classified ads and the strategies he promoted on his website. When the property failed to sell after six months, Sambrotto hired a traditional real estate broker and offered the full customary commission. According to the Wall Street Journal, after he hired a broker Sambrotto received several offers on his home and it closed for $150,000 over his original asking price.
Sellers should not assume that by saving money on commission rates, they will save money overall. By dealing with a traditional real estate professional within the marketplace, they will attract all the buyers and stand a greater chance of realizing the true value of their property.