Discount Brokerages

There's a lot of buzz going on about discount brokerages on US-based real estate blogs. At 6% commission on a sale, I'm sure there's a market for discount brokerages.

In Singapore, where the standard agency commission is between 1-2% on a sale, talk about discount brokerages has hardly registered- although recently there has been a lot of debate on the practice of buyer's agents paying the 1% commission for a purchase transaction on a HDB flat.(Read about the debate here )

I do remember though, an agency advertising cash back schemes (not to be confused with HDB's cash back ) where the buyer does his/her own property search through calling up various seller's agents through the classifieds, arranging for their own viewings with these individual seller's agents and then inform the seller's agents that they are being represented by their own agents when they are ready to make an offer. The incentive in doing all the legwork yourself and then calling in the 'discount brokerage' to represent them is that the discount brokerage would be willing to share their commission with you and would return you a certain percentage of their commission.

Am not sureif it's the best way, or most ethical way of conducting a home search, however. The theoretical basis is that the buyers would do all the legwork themselves, organising for viewing schedules and making their own way between viewings. What it could degenerate into is an abuse of the seller's agent's time- where the buyer has various seller's agent picking out a few properties for them , arranging for viewing schedules, and then bring up the matter of representation when they are ready to make the offer.

Sellers' agents are also wont to consider buyers who call in directly as 'their clients' , - which would obligate the buyers to inform every seller's agent they contact that they are being represented by their own agent from the start.

As for the maths- and I'm sure this has been touched upon in a different context elsewhere- co-broking effectively halves the commission for sellers' agents. Which makes them unwilling to negotiate on the asking price. And should we look at the overall picture- where the commission is 1% of the total sale price, the savings could potentially work in the buyer's favour in the case where there isn't any co-broking. Am going to throw hypothetical figures(which in all likelihood would be very much tempered in real life):

On a purchase price of $1m, the agent gets a commission of $10k.

Upon co-broking, it's effectively $5k for each agent- with the discount brokerage giving you a refund of, say, 50%, which equates to a saving of $2500 for the buyer.

In the circumstance where there is no co-broking, however, the threshold for negotiation vis a vis how it affects the agent's commission is a lot higher. Should the purchase price be negotiated down to $800k(might or might not happen in real life depending on the seller's reserve price- but for this example connotes savings of $200k off the purchase price), the commission is still $8k as opposed to the co-broking fee of $5k at $1m-which would indicate that there is a greater incentive for the agent to negotiate on a lower sale price(although in real life there's the issue of agent loyalties- the relationship with an established as opposed to a new client, etc). In real life, co-broking scenarios are common, with very little resentment on the part of the agents involved but sometimes, as the above(rather extreme but illustrative of the message) example shows, the savings in a cash-back, discount brokerage might not justify the overall price paid.

The issue of reconciling agent's motivations/loyalties and the commission structure has been much debated- from Freakonomics to an excellent article I read in the Business Times a few years ago. Agents understand the motivation that comes with commissions and I have met agents who volunteer to pay for the agent's commission(they're on the buyer end in a private market- not typically necessitating a commission) should the transaction value be perceived as being too low to motivate an agent to source for apartments for them. Or the agents who buy their own apartments without trying to get a cut off the commission through co-broking because they understand it disincentivises the negotiation process.

Will continue touching upon the commission/motivation structure, and if there is ever an ideal model in later posts.

Update:-

Philip Greenspun suggests the 6% commission fees might be too low:

People who sell $1 million condos often complain that paying a 6 percent standard (read “fixed by collusion” among realtors) commission is too much ($60,000 for what might only be a few days of work). Economists who have studied the real estate market, however, find that in some ways the commission is too low because realtors don’t work very hard to sell clients’ houses compared to their personal houses. In other words they sell a customer’s house relatively cheap so that it will sell quickly rather than work for many weeks to get the best price and 6% of the extra.


Why haven’t we seen anyone propose a commission structure that says the realtor gets a 25% commission… but only on the amount above the assessed value of the property? Your typical $1 million NY or Boston apartment is assessed at maybe $850,000 and could be sold for that price with almost no effort in a few days so the commission paid on such a sale shouldn’t be more than $1000. If a realtor could sell the place for $1.2 million via clever marketing, however, she should be entitled to a fat commission.

And there's a precious quote on Singapore's commission rates and the kind of agents it spawns:

1. 
   

   Michael Slater

   
   

   June 8, 2005 @ 10:28 am

   
   

   6When I sold my house in the east bay of San Francisco, this is exactly what I did. The commission was tiered and he was better paid the higher the sale price of the house was (starting at 6%) And to be clear, I got significantly more for my house (even considering that I had bought it only 11 months earlier… thanks California Real Estate Market!)

   
   By the way, if you think 6% is low or a lot, consider what the real estate agents in Singapore get…. One Percent.
   
   And yes, the average real estate agent here is about as good as you’d expect for paying only 1%. It’s practically a hobby job for most of them — a bunch of Glen Gary Glenross losers, they don’t even get the steak knives.