Active Rain February 25, 2009

Discount Broker Loses $2.7 Million

According to Inman News, Minnesota-based Webdigs, Inc, a discount real estate broker, announced a loss of $2.7 million since it’s inception in the spring of 2007. Many businesses lose money in their first year or two, and I know nothing of Webdigs’ merits or demerits. What is significant to my mind, and what should matter to the consumer, is that this follows a pattern of non-traditional brokerage models failing. Iggy’s House and Foxtons, both discount brokers, are two recent examples.

Why should this matter to the consumer? Because your transaction is not a zero-sum event. If a broker promises you a 3% commission discount, for instance, there is a cost associated with that discount that doesn’t show up in their hypothetical net sheet because it doesn’t account for one immutable law of real estate brokerage:

The best agents who will do the best job for you will work where they can make the most money.

Foxtons’ agents in New York were all on a salary and an extremely modest commission schedule. When I checked them out in 2001 I recall a $35,000 per annum salary and a $400 bonus for closed sales. A Mini Cooper was in the package also. I know top-producing agents who gross $35,00 a month. They don’t drive Minis. They wouldn’t work at Foxtons. Since the top 10% of agents are responsible for 90% of the transactions, the agents who were attracted to Foxtons weren’t enough to keep the company in the black. And they folded.

Here’s how it affects the seller: If, as the seller you choose the firm with the lowest commission thinking it will net you the most money, you are employing backwards logic. Not all real estate agents will do the same job for you. Overall and with rare exception, good agents cost more than discount agents because good agents get great results and discount agents get discount results. Good agents sell homes faster. Good agents get more money. Good agents resolve home inspection issues faster. Good agents handle compliance & title issues more effectively. Good agents have better mortgage sources. Good agents can negotiate the pants off a crummy agent. A good agent may quote you a lower price when they first meet you, but they’ll net you more money because they won’t let your listing go stale because it is overpriced.  

It is ironic that people will shop around for the best cell phone, the best laptop, the best plasma TV and the best surgeon for their gall bladder but the biggest financial transaction gets given to the lowest bidder or Aunt Ethel. If people treated choosing a broker like it was their financial life or death, they’d get dramatically better results. If you think a 3% discount is worth forfeiting that, go ahead. Just remember that the 3% may be off a far lower price or after a far longer, more stressful transaction. And don’t be surprised when the company goes out of business.