Discounting is not a new concept, and low commission real estate agents have been around for as long as there have been real estate brokers. There’s a good reason why everyone isn’t using a low cost real estate agent to buy or sell.
We’ll explain the pros and cons of using a 1% commission Realtor to sell your home as well as the benefits of and considerations to getting a commission rebate on your purchase in New York.
Table of Contents:
A 1% real estate broker will certainly be motivated to sell your property if they are paid on commission and the property is located in a high value locale like New York City. Considering that the average home sale price in NYC is approximately $2 million, 1% commission is still $20,000!
Furthermore, just having an exclusive sales listing in Manhattan, Brooklyn or Westchester brings tangential benefits like enhanced branding and credibility.
However, beware of companies that treat their agents as employees on guaranteed salary versus salespeople on commission.
An agent working on commission is highly motivated to find a buyer since failure to close on a deal means there is zero compensation, whether it’s 1% or something higher. The fact that any and all compensation is paid at closing creates a complete alignment of interest with a home seller.
Conversely, a real estate salesperson who earns a guaranteed salary will care much less about whether or not a specific deal closes. Just think about it. How motivated will a salaried agent be to drop everything she or he is doing and show a listing to a buyer who requested a last minute viewing compared to a pure commission salesperson? In the case of the commission agent, that one additional showing could make the difference between a successful closing or the expiration of a listing agreement.
In other words, an agent on salary will simply not be as motivated to chase down all of the leads that come in on your property. Again, they have no monetary upside in doing so!
Discount brokers may be subject to occasional adverse treatment from traditional (non-discount) agents who naturally feel threatened by the concept of reduced commissions.
After all, lower commission rates are an existential threat to the earnings power and overall livelihood of traditional agents. Therefore, isn’t it simply human nature for agents to behave differently (and perhaps even unknowingly) when interacting with a discount broker who they feel threatened by?
To be clear, we believe that the vast majority of traditional (non-discount agents) operate with a high degree of ethical standards and would never intentionally subject a discount broker to adverse treatment. Aside from being ethically wrong, it’s also illegal for traditional agents to discriminate against discount brokers.
But if an unscrupulous agent decides to break the law and ‘punish’ a broker who discounts commissions, how can anything really be proven? There are a multitude of completely stealth and undetectable ways a traditional agent could attempt to ‘sabotage’ a discount brokerage.
For example, let’s say a traditional buyer’s agent plans on sending 5 listing ideas to a new buyer client. The buyer’s agent feels threatened by upstart firms who are willing to work for less commission, so this agent deliberately excludes a perfectly suitable listing from a discount brokerage firm when finalizing the list of apartments to send to the buyer.
How can the buyer, a discount broker or any 3rd party regulator or investigator ever pin down this unethical behavior and prove it beyond a reasonable doubt?
Here’s another example: let’s say a traditional listing agent who has a hot listing receives an offer from a buyer who is represented by a discount broker. What’s to stop the listing agent from subtly delaying the presentation of the offer to the seller, perhaps tactically for a few hours, to allow other offers to come in first?
Moreover, what’s to stop the listing agent from refusing to speak with this discount buyer’s agent, even though the listing agent calls back every other buyer’s agent to share more insight about the level of competition? This denial of equal information may put the buyer represented by a discount broker at a disadvantage compared to other bidders.
A 1% real estate agent who will only earn a 1% listing commission will have all of their incentives aligned if they will also be able to make a market rate on direct buyers.
This is especially relevant if the direct buyer is an existing client of the brokerage. It wouldn’t make sense for the brokerage to proverbially shoot themselves in the foot on their own listing by only taking 1%. That’s because buyers are worth 2.5% to 3% on the open market on any other listing!
The best way to maximize savings and still keep incentives aligned is to agree to waive the 1% listing fee if the agent finds a direct buyer, and instead let the 1% real estate broker keep the buyer’s agent fee.
Therefore, assuming you decide to offer a reasonable 2.5% commission to buyers’ agents, your total cost would be either 3.5% or 2.5%.
It would be 3.5% if the buyer has a broker (1% listing fee plus 2.5% buyer agent fee) or only 2.5% if the buyer comes direct.
This commission structure maximizes your savings for full service while also keeping incentives perfectly aligned. Your 1% real estate broker will be incentivized to both earn more money and save you money by finding a direct buyer.
Furthermore, your 1% real estate agent won’t be hurt by showing your listing to one of their own buyer clients.
Be careful of low commission real estate agents who do not understand the above commission structure. They are either naive, inexperienced or outright malicious if they claim to not understand the rationale for the above commission structure!
Working with a buyer’s agent who will rebate you a portion of the buyer agent commission is a great idea, but receiving a rebate shouldn’t require you to settle for a low quality or inexperienced agent.
Be sure to vet the deal history of any buyer’s agent you consider working with. After all, what’s the point of possibly receiving a rebate if you end up overpaying or failing to close altogether because an inexperienced buyer’s agent gives you bad advice?
It’s also important to keep in mind that many rebate brokers expect their clients to do more of the legwork in exchange for receiving a rebate.
For example, some smaller rebate brokers might not accompany you to showings. Other more extreme light-touch rebate brokers might ask you to do everything up until the point of a potential offer submission, at which point they’d ask to be looped in.
Partnering with a limited service, no-frills rebate broker is completely fine if you’re an experienced home buyer or otherwise happy to do most of the legwork solo. But if you’re a first time home buyer or simply expecting a traditional experience, make sure to confirm that the rebate broker you’re considering isn’t offering a watered down service.
Save 2% On Your Home Purchase
Our partner brokers are some of the most experienced and reputable in the industry.
Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided. Hauseit LLC is a Licensed Real Estate Broker, licensed to do business in New York under license number 10991232340. Principal Office: 244 Fifth Avenue, Suite 2950, New York, NY 10001.