Sunday, April 29, 2007

Will a Discount Broker save you money?

So I'm out showing houses last week, and we came across a home that was listed by one of those discount brokers. Now, I'm not against discount brokers as an option for sellers. In fact, if a seller can come out ahead without using a traditional broker, more power to him! We even offer help to FSBO sellers at no charge. But when the end result is not going to be what the seller intended, then it bothers me. Here's what I mean…

The "Realtor" section of the MLS listing for this particular house gave me specific instructions to set my appointments, talk to, and negotiate directly with the seller. I was then to fax a copy of the signed contract to this discount broker.

Part of me didn't want my clients to like this home, because I knew I was going to end up doing twice the work for the same amount of money (since I would be the only agent actually working during the transaction.) However, another part of me was hopeful my clients would love the house, because I was going to negotiate the deal of the year for them! You see, since I was legally representing my buyers, but was given specific instructions to negotiate directly with the seller, I was going to use every tool in my arsenal to negotiate the price downward. In effect, the seller would be paying me to negotiate against them! Granted, I don't claim to be the best negotiator in Phoenix, but I am at least proficient; I get lots of practice and do this every week of the year. The seller probably hasn't done this since he bought the home five years ago.

Here's the kicker – the home was in the $300k range. The seller was offering a buyer's broker commission of 3%, which is the same as a full-service listing. The seller probably paid about $500 to put the home in the MLS, compared with 2% or 3% that a full-service broker would have charged. If I split the difference and assume a 2.5% listing, that would be $7,500 to the listing broker; a cost of $7,000 more than the seller paid. However, I'm sure that I could have negotiated the price downward by $15k or $20k. I also would have convinced the seller to take any inspection requests very seriously – maybe another couple thousand dollars. When the smoke cleared, the seller would have come out of the process upwards of $15,000 WORSE than if he had paid a little bit more to have someone represent his best interests during the entire transaction.

I'm all for saving money, but this was a classic case of penny-wise and pound-foolish.

- Chris Butterworth