The long slump in housing has caused some churning in the nation's interest rate-sensitive real estate market -- particularly among so-called "discount" brokers, who charge lower fees in exchange for offering a reduced range of services.
Complete statistics are not available, but there is evidence to suggest that at least some of these "discount" firms are finding it more difficult to survive than their "full-service" competitors -- even with bargain rates.
Traditional or "full-service" brokers work on a percentage commission typically 6 percent of the home's ultimate selling price, but do everything from showing the house to prospective buyers to actually closing the deal.
The discount brokers take care of financial and legal arrangements, but leave it to the seller to show the house, charging flat dollar fees -- usually $600 to $2,000 -- that inevitably are far below 6 pecent of the sales price or even a flat percentage well under the 6 percent rate.
Washington area real estate agents say business locally is sour -- although not as bad as some might think in view of today's high interest rates. Dollar sales are up, mainly because of higher prices but actual volume is off visibly.
Opinions differ as to how well discount brokers fare in such situations compared with more traditional firms. John Little, spokesman for the new National Association of Real Estate Service Agencies, the discount firms' trade group, says many of the smaller "shoestring" discount operations appear to have gone under in the past year.
"There are some [discount operations] that are proving very successful," Little says, "but they're mainly the ones in which the discount service is run in combination with a full-service firm. The others aren't doing as well."
Little, for one, insists the interest-rate crunch "sort of helps" by making buyers pay more attention to discounts.
But Lance Webb, a discount broker in Northern Virginia, says many discount firms simply aren't well-financed enough to make it in a difficult market. Many have gone out of business, but it's not known how many new ones have come in, he notes.
Statistics on the industry are almost nonexistent. NARESA's John Little estimates that his trade group's informal listings have shrunk nationally to about 200 discounters, down 50 from a year ago. But he says that doesn't count new entrants -- and may not be up to date.
Locally, the situation is similar. The Washingtonian magazine a year ago counted two dozen discount agencies in this area. Today, sources estimate, only about half of them remain.
Among the low-cost brokers that have closed their doors in the past year or so are National Homeowner Services of Arlington, Commonwealth Homeowners of Vienna, CAC Real Estate Exchange of Alexandria, Alternatives, Inc. of Arlington and Vienna, H&C Properties, Inc. of Falls Church, Shire Realty of Crofton, and Web Real Estate of Hyattsville.
Action Properties was bought out by Norris Properties, a full-service broker. Action was a Rockville franchise of Home Sellers Center, an Atlanta-based corporation that went bankrupt last year. According to Alice Maher, a Virginia discounter, Home Sellers went down because it charged clients an up-front, nonrefundable fee of $950, with no guarantee of sale. Few people were willing or financially able to enter into such a deal.
United Services Homeowners Association of Forestville, which also charged a flat fee, was bought out earlier this year by Aim Properties of Clinton.
Bob Kertesz of Aim now charges $777, but also offers multiple listing for an additional 3 percent commission. An up-front charge of $97 is nonrefundable. Aim also offers full-service brokerage at whatever the going rate may be. Last year, Kertesz said, his firm sold 55 or 60 properties on a discount basis and 80 on full commission. Kertesz thinks that the increasing prices of real estate make sale-by-owner -- where the owner finds the buyer and shows the property -- the wave of the future.
United Services Homeowners Association of Virginia, which has offices in Dale City and west Springfield, has consolidated its operations and upped its fees at settlement from $575 at start of 1981 to $900 now. This includes an estimated $300 in closing costs such as title examination and notary fees.
There is a termination fee of $100 if the client withdraws. The firm has also added a 4 percent commission for inclusion on the computerized multiple service listing used by all real estate firms.
Daland Webb, who had been a discount broker in the Washington area for 15 years, retired to New Hampshire last year. Lance Webb, who last fall took over United Services from his brother Daland admits that he has been harder hit than most full-fee brokers and says his business is off at least by half.
"People are not convinced they can sell their houses themselves in hard times," he said. "They seem to believe a 'professional' Realtor is needed to get them a buyer and financing."
Homeowners Realty Center in Springfield, which charges a flat fee of $575, including a $75 non-refundable fee, concedes it has been hard hit. Burt Kerns of Homeowners Realty says that once half of his customers who were trying to sell their houses themselves succeeded, just 15 percent do now because of the complexities of financing. Net income from such assisted-owner sales dropped off from $50,000 to $3,500 last year, he said. Kerns is now affiliated with a full-service broker.
Discount Realty Inc., which suffered a 28 percent drop in business last year, has consolidated into one office in Bethesda. It has also changed its name to Custom Realty Services because, in the words of Craig Metz who recently took over from his mother Evelyn Metz, "People expressed reservations about the name 'Discount.' It doesn't sound as solid as the service we provide." Custom now charges 4 percent for a co-brokered sale, 3 percent if it sells the house. Metz has also added a consulting service for investment properties. The negotiable fee is about $30 an hour.
Virginia Homeowners has consolidated its Vienna and Springfield offices into a central Annandale headquarters. It charges a fee of $995, with $95 up front, nonrefundable for advertising. For a negotiated percentage commission, it will put the customer into multiple listing, a change from past practice.
The company also sends agents to inspect the property, something it did not do before. President John McMahon believes in future the discount broker stands a better chance of survival against the giant franchises if he or she offers such a hybrid service. Full-service brokers, for their part, will begin to offer more discounts or lower commissions on upper bracket houses, he added.
Homes By Owner of Springfield is up for sale. Owner Angel Akin, who runs the business with her husband and child, says she fails to understand why discount realty is not working at a time of rising prices, why people still accept to pay 6 percent commission.She charges 4 percent for multiple listing; one percent for sale by owner, and 2 percent if Homes By Owner finds the buyer. She does not show or advertize for clients.
Suburban Home Advisors of Kensington has doubled its fee from one to 2 percent of sale. Business was off about 30 percent last year, but owner Joe Schwartz insists "I'm here to stay." Like many others, he cites an increase in business during the past month or so.
Alice Maher, owner of 4-3-2-1 Realty in Bailey's Crossroads is also optimistic, even though her business dropped 40 percent last year. Maher's charges vary from 4 percent on a sale where the buyer is supplied by a full-service broker to one percent where the house seller finds the buyer.
"I have walk-in traffic all the time and referrals from satisfied customers," she said, referring to military personnel living nearby. One of the pioneers of discount broking in this area, she was asked about the future of discount brokers. Maher replied, "I personally wouldn't want to start such an operation now. I wouldn't want to compete against big franchises now for name recognition."
Yet, Marie Malinowski of Bay Realty in Passadena, Md., has chosen to do just that. She started a flat fee business just a month ago after six years in real estate. For $1,995 -- a figure she thought was "catchy" -- Bay Realty will do everything including multiple listing except show the house. So far she has six listings and two sales. "I just had to do something to get costs down," she said, referring to the standard 6 percent commission.
Peter G. Miller & Co. a discount broker in the District, has upped its percentage commissions, bringing them closer to those charged by full fee firms. Miller used to charge 4 percent on the first $100,000 and 2 percent thereafter. He now has changed to 3 percent if he sells the house directly and 4 1/2 percent if the sale is co-brokered. He made the change because full fee firms refused to act as cobrokers with him at his previous rates.
However, Miller says increasing numbers of full-fee companies are now willing to negotiate commissions on upper bracket houses.Miller said he knows of several full-service brokers that are willing to work for 4 or 5 percent commission on houses costing over $200,000. He called this willingness to negotiate the most important development in the real estate market and advised sellers to shop around.