Discount Brokerage - Can It Work For You?

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Education & Training with Sell with Soul

I just had a long conversation with one of my consulting clients who works at a well-known discount brokerage. We both had several Ah-HA moments during our discussion and I thought I'd share some of them here since the topic of discount brokerage comes up from time to time.

First, let me disclose that I am in full support of the discount brokerage concept. I owned a discount brokerage that offered full service (above and beyond most full-fee companies) and was proud of my ability to provide terrific service for a lower-than-market fee. And, I made great money. Coulda made more, certainly, but I have no complaints. You can read more about my feelings on the topic in my blog "Our Sacred Commissions."

But back to my conversation. My consulting client has always raved about all the leads she gets from her brokerage firm. She has minimal marketing expenses and claims that her entire business has been built from the leads she gets from her office. She feels a strong loyalty to the company and their model and has claimed that she could never leave them. Fair enough.

But today, I asked her to send me her stats for 2006 so I could prepare a letter to send out to her 2006 clients. I was stunned to see how little her net was... after split. I know how hard she works and how smart she is and she made less than $40,000 in a market where the average price of a home is $300,000.

Two observations come to mind. The first is that in a discounted commission model, there simply isn't enough pie to go around. Her company pays for lots of national advertising that brings in leads and they want and deserve to get paid for it. That's fair. But, since her commission is so low, her company needs to take a big chunk of that commission to pay their bills. Her net commission after split is hardly worth getting up in the morning for! In my humble opinion.

My second observation is the only way for a discount model to really work for an agent is if the prices of the agent's listings are in the upper ranges, rather than entry-level. BUT, who do you think all that expensive national marketing generates calls from? The upper crust? Nope. The vast majority of her company-provided leads were in below-median price ranges. Most agents agree that sellers in upper price ranges are not nearly as concerned with a commission percentage as those in lower ranges. And besides, how comfortable is a $600,000 seller going to be with a "Discount-Broker-For-Hire" For Sale sign in his yard? 

My own discount company worked for me because, as the owner, I got 100% of every commission I brought in. I worked primarily from my strong SOI and my overhead was quite low.

So the moral of the story seems to be... if you want to be a discount broker (and there is NOTHING wrong with that) you may need to do it on your own. If you want the full support of an office (and are willing to pay for it), you will need to charge market-rate. I don't think you can have it both ways.

Am I wrong? Argue with me!!

Jennifer Allan, GRI
http://www.sellwithsoul.com/

copyright Jennifer Allan 2007

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Rainer
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Rick Beal
Coldwell Banker Residential Brokerage - Portland, ME

Very interesting Jennifer.  It sounds like your friend has to be twice as productive as a full service agent like me and that can only lead to one thing - burnout.  If the fee for service shops model is based on quantity vs. quality they will continue to burn through agents, and that turnover will not be good for their client base.  I know you offered full service at your company, but the large francise fee for service shops will/can not.  We are in real estate because we like to work with people and like houses, etc.  But we also like to be rewarded for all of our work.

 I suspect you will get a lot of comments on this and I look forward to reading them!

Jan 11, 2007 06:18 AM #1
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Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents
I'm in agreement with your analysis unless your friend wants to work twice as hard to get half of what she deserves. But my question is how much are her business expenses and how much does she pay for lead generation? 40K (profits after or before taxes???) on a 300K average home sale sounds awfully low. For me, I would think that this "franchise" would have provide some name recognition and provide some constant stream of "leads".
Jan 11, 2007 02:17 PM #2
Rainmaker
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M. Suzi Woods (Gravenstuk)
NOW Sharing the life and spice of the GC one day at a time - Grand Canyon, AZ
Suzi Woods, Prior Independent REBroker in MS

Excellent points, Jennifer (I think I know which discount franchise you are referring to). As a matter of fact the son of a discount broker mentioned that he had closed 51 sides in 2006. The $$ are there for the broker as well as the cost of advertising. 

I would rather develop my own leads and pay all expenses and be 100%. (my 2 cents)  .

Jan 12, 2007 03:11 PM #3
Rainmaker
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Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Suzi,

Your last sentence... "I would rather develop my own leads..." is right on target. In fact, that's what my client is going to do. After seven years with the national discount brokerage, she's going out on her own and I'm thrilled for her (I get to help!). I think she will continue to be a full service, discount broker, but when you keep 100% of the commission, it's totally doable. Especially if you have a strong SOI which is something we're working on for her.

Jennifer www.sellwithsoul.com

 

Jan 12, 2007 11:10 PM #4
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Jennifer Allan-Hagedorn

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