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
copyright Jennifer Allan 2007