Alternative Real Estate Business Models
The traditional full commission model is being challenged
A business must continually adapt to meet the needs of consumers, and real estate is no exception. The traditional percentage-of-sales-price-commission model is being challenged by multiple other viable business strategies, thanks to consumers wanting to save money when they sell or buy a home. Paying for the "full bundle" of brokerage services is gradually becoming a thing of the past, replaced by a variety of other transaction options.
The Traditional Brokerage
Traditional brokerages offer all services along the full path of a transaction, from listing and marketing properties to attending and assisting at closing. They negotiate sales between buyers and sellers. They schedule and monitor necessary inspections, and review contracts and other pertinent documents. They arrange for appraisals.
In exchange for all this, they typically receive a commission when the sale successfully closes, generally in the area of 5 to 6 percent of the price of the property. This commission is commonly split between buyers' and sellers' brokerages.
But you are by no means limited to this business model and this time-consuming process as a real estate professional.
Discount Real Estate Commissions
Discounting commissions involves taking traditional percentage of selling price model and reduce the commission percentage below prevailing local rates. Straight discounts of a percentage point or more are quite common. Some come with reduced services, but others offer full service at a discount.
You should only take it out of the listing side, however, if you're discounting down from a 6 percent listing commission to 5 percent or less commission, however—at least if you don't want agents to pass up showing your listing because their commission is less than the local rate.
Rebating a portion of the real estate commission to the seller or buyer is a viable marketing and business practice, but it isn't legal in all states, and states control the legality of real estate compensation models. There's also a gray area as to whether you must disclose to the other party in the transaction that you're doing this.
These cash rebates are typically a portion of the broker's commission, and they're commonly offered to buyers, allowing them to literally save thousands of dollars on a property purchase. They might take the form of paying closing costs, payment of inspections, or even gift certificates. Rebates delivered as part of closing sometimes require an OK from the lender.
Fee for Service Real Estate
A growing number of real estate brokerages are "unbundling" traditional full-service packages of services and offering to perform some individual services at flat rate pricing. They might also develop mini-bundles of services into packages and offer those at flat pricing.
Offering different levels of marketing is one approach. A brokerage might offer a lower commission without print or media advertising due to the expense of such advertising. You can't cut all services to buyers, but consumers tend to favor this model. It allows them to pay for only those services they want or feel they need.
This hotly-debated practice involves listing a property for a seller on the MLS at a low price, but providing few or no other services when it comes to showing the property, negotiating contracts, or helping with transactions. These services are popping up a lot.
More than 80 percent of all homes are sold through MLS listings, so this might seem like a good approach for some sellers. But some real estate agents refuse to show these homes, so this method isn't always effective.
As consumers demand alternatives to high commissions, however, you might see concepts like this take hold.
Are you a knowledgeable real estate professional with a great deal of value to bring to your clients? You might want to consider a whole new way of presenting yourself and pricing your services—real estate consulting.
You can charge for some services by the hour with this model, or charge a flat rate rather than a percentage of the selling price. Of course, your broker will have to agree.