(Part four of a five-part series. See parts 1, 2, 3 and 5.)
Discount brokerage and FSBO sites usually flourish in strong sellers’ markets. During my 25 years in the business, it has been my observation, however, that FSBOs dramatically decline when we shift to a buyers’ market. Discounters are also negatively impacted, often going out of business or changing their model to cope with long market times. What’s interesting about our current marketplace is the number of people electing to sell “by owner” has actually declined despite the strong market.
During 2002, the number of people who sold their home “for sale by owner” decreased from 24 percent to 20 percent, according to a California Association of Realtors study. In 2003, according to NAR’s Profile of Homebuyers and Sellers, only 14 percent of home sellers actually sold their homes without the help of a real estate professional. Putting it a little differently, in 2003, the number of people who sold their house “for sale by owner” decreased by 30 percent.
While the FSBO model continues to be under pressure, the “blended FSBO model” combines limited brokerage with discounted services. These firms often offer a 4 percent commission (2.5 percent-3 percent to the selling broker and 1 percent-2 percent for the listing broker). Some of the online companies charge primarily for marketing and the seller does the remainder of the work.
My first experience with a discount broker using this “blended” model occurred back in 1978 when I showed a “Help-U-Sell” listing my buyers wanted to purchase. I was new in the business and was shocked to learn the sellers we’re actually selling “by owner.” The time I had taken to find the property by driving the neighborhood, arranging the showing, and then writing up the offer was a waste.
The Help-U-Sell model is a good example of this “blended” approach, which in some ways resembles the “menu-of-services” approach I discussed in an earlier column. The “Help-U-Sell” Web site says it is a “marketing company.” Its primary niche is the “by owner” market. Its services include marketing the property in print and on the Web, providing the seller with open house materials, contacting buyers whose profile fits Help-U-Sell listings, as well as assisting with negotiations, inspections and closings. The sellers must hold their own open houses and handle their own showings. When I searched Alexa.com to see how its Web traffic compared with the competing major brands, only two national companies had more Web traffic. Clearly, this “blended model” (marketing plus limited brokerage services) is sustainable, especially when it is combined with a strong Web presence. Help-U-Sell has been in business since 1976 and has survived two major downturns. Furthermore, the company is currently experiencing tremendous growth due to today’s strong market and low interest rates.
This “blended” model makes sense when an area is experiencing a strong sellers’ market because the “days on market” is minimal. When days on market increases, the number of FSBOs dramatically declines. In the next downturn, many of the blended models may suffer a similar fate.
The news is no better for traditional companies who try a “blended model” at 4 percent. For example, let’s assume a $200,000 purchase price where the commission is discounted to 4 percent. Assuming a 2 percent commission to the listing agent with a 70 percent split, the gross commission will be $2,800. If the listing sells in 60 days and has a 60-day close, the agent will take 120 days to close the transaction. From that $2,800 the agent will have to subtract the cost of “just listed” cards, open house expenses, MLS expenses, E & O, database management expenses, Web site expenses, virtual tour, call capture, plus any other technology the agent uses to promote the listing. The agent will also need to calculate the cost of operating his/her vehicle at 37 cents per mile. Let’s assume the agent spends $600 total and works five hours per week for the 16 weeks it takes to close the transaction. That’s a total of 80 hours. The agent nets $2,200 or $27.50 per hour. Of this, 15 percent goes to FICA and another 28 percent goes to income taxes. The agent’s net after taxes is $1,254. Divide this by 80 hours and the agent’s effective hourly rate is $15.68 per hour.
Using exactly the same scenario, let’s assume it takes 180 days to sell the property rather than 60 days. Consequently, it will take eight months to close or a total of 32 weeks multiplied by 5 hours per week. This translates into 160 hours of work. Before taxes, the agent’s hourly rate is $13.75 per hour. After taxes, the rate is $7.84 per hour. Let’s face it, few of us can afford to stay in business for less than $10 an hour net to us. This is also the reason so many people leave the industry when we experience a down market.
What will real estate commissions be in 2010? Will the traditional model survive? Look for the answers in next Friday’s RealClues, “Can Traditional Brokers Outfox Foxtons?”
Bernice Ross is an owner of Realestatecoach.com and can be reached at bernice@realestatecoach.com.
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