Jill Chodorov, an associate broker with Long & Foster, writes an occasional column about local market trends and housing issues.
A major industry altering debate has erupted in the Washington real estate community as a result of two articles recently published in The Washington Post Real Estate section.
Both articles discuss the growing rivalry between discount-fee brokers and traditional full-service real estate brokerages.
This is not a new tug-of-war, but it is one that has become more antagonistic and overt.
To summarize, the proliferation of local and national discount brokerages across the country has resulted in a significant drop in commission rates earned in the industry and, in some cases, reduced services provided to consumers.
One of the articles also mentioned the need to disclose to buyers the commission that their agent will earn in the transaction.
It goes without saying that there are vehement defenders on both sides of the ring.
Some believe it is about time — that 6 percent commissions are highway robbery.
Others believe that the lower commissions are diluting the quality of services provided to the public and, thus, puts the public at risk in a real estate transaction — which is the largest transaction of a lifetime for most homeowners.
The discount brokers’ strategy is to gain market share in the industry by offering financial incentives to buyers and sellers. These brokers can afford to offer lower commissions by reducing services offered and/or by paying their agents lower commission splits or wages.
Incumbent companies — the full-service traditional brokers — on the other hand, defend the commissions that they charge, claiming that it allows them to recruit experienced and skilled agents and to provide their agents with the tools and training necessary to provide sound and judicious real estate advice.
The real estate industry is not the first industry to experience an attack on its business model. The hotel, airline, rental car, apparel, furniture and book industries — just to name a few — have seen their distribution and income models get turned upside down by new entrants into the market.
In most cases, the consumer wins when savvy competitors enter into an established industry — new and better distribution channels emerge and products cost less.
The same seat on an airplane can cost significantly less for consumers who take advantage of discount booking Web sites. It is the same seat on the same airline going to the same destination, but for less money.
The same book can cost less from an online bookseller with lower overhead than a bookseller paying rent on retail space. That same book can be even cheaper for a consumer to purchase as a download to a tablet or phone.
But cheaper is not necessarily better in all industries.
The average purchase price of a home in the Washington region was $346,442 last month, according to Rockville-based multiple-listing service MRIS. The average sale price in Falls Church City last month was $806,000. That is big money for most of us.
Not only is it expensive to purchase a home, but the process of purchasing or selling a home is also complicated and stressful, particularly for those who purchase or sell a home just a few times in their lifetime (the majority of homeowners).
It consists of sifting through 60-page contracts full of legalese regarding seller disclosures, fair housing laws, escrow deposits, contingencies, inspections, federal and state lead paint regulations, financing, settlement terms, final walk-through, association document reviews and much more.
Any mistake or oversight when negotiating a real estate sales contract — for both the seller and the buyer — can cost much more than any savings realized from the use of a discount broker.
Some of these discount brokers designed their service model in a way that diminishes the consistency in service that buyers and sellers receive.
For example, some of their agents only show homes, others write the contracts, while others assist with the settlement. The lack of consistency in service results in details that are missed in negotiations and a lack of long-term interest by agents in the satisfaction of a client.
I know this from the many buyers and sellers who leave a discount brokerage frustrated and seek out the assistance of a brokerage with a consistent service model. They realize that the discount is not worth the trouble or risk.
If I were to write a contract on a home that I have never seen, I would not know that the windows are old and need replacing; I would not know that the furnace is not working or that there is a leak in the kitchen sink. I would not be able to guide the buyer in drafting an offer that works in their best interest.
A real estate transaction is cumbersome and jeopardous. Yet it can be a smooth and enjoyable experience when you partner with a qualified and experienced real estate agent.
Not all agents or service models from full-service brokerages are up to par either, however.
Just as you would (or should) review the credentials and ask for referrals to select a doctor or financial adviser, you should do the same when selecting a real estate brokerage. (Read my blogpost on accessing an agent’s credentials).
I believe that there is room for all types of business models in the real estate industry. Discount brokers work for some people, while the traditional model works for other people.
An individual in the business of flipping or building homes for a living could certainly use a discount brokerage firm, as he is very familiar with the sales contracts and process of purchasing and selling a home. And he is able to access if his agent is providing him with the marketing necessary to get the home sold. He could certainly benefit from the use of a discount broker.
While there is pressure in some parts of the country for agents to make their commissions known upfront to the buyer, that is already happening in our region.
When you engage a real estate agent to represent you as a buyer, the agent should present you with a buyer agency agreement, in which the commission rate is stated and explains how much is paid by the seller and how much is paid by the buyer.
In most cases, agents agree that the buyer will not pay any commission on properties listed in the MLS. Rather, the agent agrees to accept what the seller has agreed to pay, as stated in the MLS.
A seller and his agent use the listing agreement as a tool to negotiate and understand the commission paid by the seller and the services that the agent will provide for that fee.
Just like in any service industry, it is the agent’s job to negotiate the best commission for themselves and provide value to their client for that fee.
I would argue that if an agent cannot negotiate a good fee for themselves, how do you think they will stack up when representing you in the negotiations of a home purchase or sale?
I welcome the introduction of new business models in all industries, including my own. The influx of competition into the industry keeps us on our toes, helping us to do better and be better.
But in the end, the old adage still holds true — you get what you pay for.
It seems that consumers agree with me, as is evident by the average commission rates sited in one of The Post articles. In 2005, the average commission was 5.02 percent and in 2013, the average rate increased to 5.38 percent.
Previously from Jill Chodorov:
Jill Chodorov can be reached at email@example.com.