Startup faces uphill battle showing benefits of fee-for-service offer

Takeaways: 

• New rebate business models struggle with how to persuade homebuyers to put cash upfront for services.
• A startup’s rebate calculator puts the savings it claims to offer in concrete terms.
• SoloPro lets agents charge flat fees for individual services.

You can buy a pool with the $11,030 you’ll save by paying real estate agent fees of $970 and receiving a rebate of $12,000, according to SoloPro’s new online rebate calculator that shows the trade-off of using a “menu of service” option when buying a home.

A buyer of an $800,000 home who taps limited agent services can get a new kitchen worth the $22,370 in savings that the buyer would gain through collecting a $24,000 rebate and paying only $1,630 in real estate agent fees.

The startup has a big hurdle to clear, however: the comfort that the vast majority of homebuyers feel with not offering up cash for real estate services when purchasing a house.

SoloPro’s fee-for-service model

SoloPro is a burgeoning marketplace that lets buyers pay flat fees for individual services, including pricing a home, showing a home, providing a consultation and meeting in person (“Get on-site help at closing, inspections or walk-through”).

The startup claims to have saved buyers $20,000 so far, which is less than the size of the rebate that a SoloPro buyer would collect for purchasing a $750,000 home.

What’s the best way to convey the benefit of buyer commission rebates?

Commission rebates — and calculators

Some discount real estate brokerages serve up rebate calculators to grab the attention of prospective buyers. But they’re generally pretty cut-and-dried: Enter a home’s price and see your purported savings.

SoloPro, which has closed a $1.1 million funding round and received a strategic investment from home improvement store chain Lowe’s, has unveiled a rebate calculator that aims to put the value of rebates — which haven’t always turned out to be the business magnets their providers hope for — in more tangible terms.

The educational tool is, in part, an attempt by the startup to contend with the widely held perception that buyer’s agents customarily provide their services for free to buyers — a notion that can undercut the value proposition of the pay-as-you-go fee structure that SoloPro wants to popularize, said CEO Tommy Sowers.

“It’s certainly a hurdle,” said industry expert Russ Cofano, referring to the challenge of persuading consumers to pay for individual real estate services rather than using a traditional buyer’s agent who doesn’t charge any upfront fees.

“Regardless of how an agent presents the compensation issue, most buyers are aware that typically there is no out-of-pocket cost for them to use an agent, even in the most traditional sense,” Cofano said.

Screenshot showing a SoloPro ‘net savings’ estimate for a $1.4 million home purchase involving “A little” help from a real estate agent.

The hundreds of real estate agents who advertise their services on SoloPro set their own rates. It’s not difficult to imagine that some of those agents might try to convert customers paying for a one-time service into conventional clients willing to scale back or completely give up on a rebate in return for traditional end-to-end service.

Either way, every Solo Pro user must pay for at least one mandatory service: “Buy a home” (“Make an offer and oversee your transaction”).

That makes sense: Buyers can’t easily claim a share of the commission paid to a buyer’s broker (in the form of a rebate) by a listing broker if there’s no buyer’s broker to collect the commission.

Who pays for a buyer’s agent, anyway?

One of SoloPro’s challenges will be to battle the perception that buyers don’t pay a traditional buyer’s agent’s compensation — long a subject of debate in the real estate industry.

Since the listing broker splits the commission with a buyer’s broker, many maintain that the seller or listing broker pays the buyer’s agent’s commission, not the buyer.

That line of reasoning explains why some buyer’s agents represent their services as “free.” The National Association of Realtors Code of Ethics and Standards of Practice permits buyer’s agents to represent their services as “free or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the Realtor to obtain a benefit from a third party is clearly disclosed at the same time.”

That typically means Realtors can advertise their services as free only if they also disclose that they might receive compensation from a listing broker, said NAR spokeswoman Sara Wiskerchen.

The belief that buyers don’t pay commission may be part of the reason why buyer rebates haven’t traditionally been a big turn-on to consumers. Discount brokerage Redfin has found that increasing its commission rate does not impact demand for its services, meaning the brokerage could theoretically boost profits if it charged going rates to match its competitors.

Some real estate observers and agents — particularly agents whose brokerages offer rebates — argue that buyers actually do typically pay a buyer’s broker’s commission. The dollars covering a buyer’s agent’s commission ultimately come out of a buyer’s pocket, and are merely transferred, not truly funded or “paid,” by a listing broker to the buyer’s broker, they say.

That’s a view more buyers might have to come around to if SoloPro is to gain mass appeal. Consumers might not flock to a marketplace built to allow consumers to pay for services they think they can get for free.

“Buyers can do the math and figure out pretty quickly that the buyer agent is being paid from proceeds of the sale and the buyer is the one writing the check regardless of the route the buyer’s agent fee takes to get to the agent,” said industry expert Bob Bemis.

Cash flow and buyer education

But the issue may be more basic, whatever the true economic cost: cash flow. Many buyers struggle to come up with the necessary down payment, and the current system does not put a dent in the buyer’s wallet.

SoloPro’s Sowers is upbeat about the company’s prospects, in part, because “anyone that has bought and sold a home” knows that a buyer’s agent’s services aren’t free and because many real estate agents are attracted to pay-as-you-go compensation, he said.

Still, there “will have to be a bit of education,” with respect to the benefits of paying for real estate services directly and upfront, he said. The firm’s rebate calculator marks a step in that direction.

But the startup, which aims to rebate $1 million to homebuyers this year, may benefit from having an unusually well-connected co-founder, funding that includes support from a home improvement giant, and some approval from the industry old guard.

Email Teke Wiggin.