Editor’s note: Real estate commissions once again are at the center of debate after a recent “60 Minutes” segment on online discounters and a federal report on industry competition. In this three-part series, Inman News looks at recent research on commissions, the mystery around what agents and brokers can and cannot legally discuss, and how the new discount entrants are collaborating to add pressure to price. (Read Part 1, “Critics come down on commissions” and Part 2, “‘Mum’ sometimes the word with commissions.”)
Although some consumers who saw the recent “60 Minutes” segment on Redfin might not know it, large discount brokers like Assist-2-Sell and ZipRealty are an established force in the industry.
If big discount brokers are grabbing the headlines, that doesn’t mean they have a lock on the discount commission market.
In Wisconsin, independent discount brokers have devised a way to band together and share marketing costs, raising their visibility to consumers without giving up their autonomy.
And Virginia-based RebateReps.com helps agents who want to dabble in discounting without alienating full-commission customers, or work for a discount broker full time.
“Most Realtors don’t want to advertise themselves as rebate agents because it cannibalizes their other business,” said RebateReps founder and owner Daniel Rubén Odio-Páez.
RebateReps connects buyers to local agents who are willing to rebate part of their commission but don’t necessarily want to advertise that fact, Odio said. RebateReps allows agents “to have their full-service brokerage and to service our (discount commission) leads.”
In some ways, RebateReps is nothing more than the latest spin on Web sites that offer consumers more modest rebates in order to earn a referral fee.
These sights, including eFundRealty, HomeStar Select and Real Estate Referral Center, offer home buyers modest rebates that are paid out of the referral fee brokers collect when they send business to colleagues — generally .25 percent of the sales price, or one-twelfth of the buyer’s agent’s split of a full 6 percent commission.
Consumers who use these sites usually pay full commission, but the buyer gets a cut of the middleman’s referral fee.
RebateReps ups the ante by finding agents who are willing to give up a bigger cut of their commission in the form of a consumer rebate — at least 1 percent of a home’s sales price, or one-third of the buyer’s agent’s split of a traditional 6 percent commission. RebateReps takes what Odio described as a standard referral fee, which comes out of the buyer’s agent’s commission after the buyer’s rebate.
Buyers who use RebateReps get a minimum 1 percent rebate based on the sales price, which translates into a $3,500 credit at closing on a $350,000 home, compared with $875 from the typical Web site offering referrals to full-commission brokers.
The potentially bigger reward for the consumer — which comes at the expense of the buyer’s agent — is what gives RebateReps a theoretical advantage over other referral sites in attracting business.
Odio said more than 500 agents are participating in the network — the same number he provided Inman News in an interview two years ago, when RebateReps was getting off the ground.
RebateReps agents can give up part of their commissions and still give their clients their all in the negotiating and closing process because it’s understood buyers will do their own house hunting, Odio said.
“The idea is buyers do a lot of their own research, and when they narrow it down to one or two houses and want to make an offer, the agent steps in as a full-service provider,” Odio said.
RebateReps allows agents to decide whether they are “in the taxi business, driving buyers around for six months, or whether your time is better spent negotiating contracts, and shepherding a sale through to closing.”
The system works particularly well for sales involving new homes, Odio said, which typically sell for the same price whether the buyer is represented by an agent or not.
“You can do it with any home, but it’s a lot easier to explain the program for new construction,” he said. “If you walk in with one of our agents, you’re going to pay the same price as you would if you were not represented – $500,000, say, and get $5,000 back.”
While RebateReps offers larger rebates than other Web-based referral sites, call center based discounters like BuySide Realty provide even bigger refunds, Odio concedes. BuySide, for example, promises to refund 75 percent of the buyer’s agent’s commission, or about $11,000 on average.
But Odio claims the traditional agents in the RebateReps network are able to provide clients with more of their time and expertise, which can more than make up for the smaller rebate.
“My attitude is it’s so easy to make a mistake, (that a bigger rebate) can be an expensive savings,” he said. Those mistakes can include overestimating a home’s worth when making an offer, or not spotting a problem with a home’s condition, such as a bad roof. “I don’t think it’s wise for borrowers to try to do everything on their own.”
It’s a point Odio makes in a pitch to home buyers he’s posted on YouTube, “Behind the curtain — how commissions are really paid.”
“One little piece of knowledge could be the difference of a $5,000, $10,000 or $20,000 discount for you” in negotiating a sales price, Odio says in the video.
The 1 percent rebate is only the minimum requirement for working with RebateReps, Odio said.
“If they want to give more (as an incentive) they can, but they’ve committed to us to give 1 percent” back to the buyer, Odio said.
Alliance of like-minded brokers
In Wisconsin, Discount Real Estate Brokers of America (DRBA) offers brokers who charge commissions of 5 percent or less the opportunity to join an alliance that’s aimed at giving consumers more choices and its members more marketing muscle.
“There’s been a huge increase in discount sales in Wisconsin,” said Robin Fazio, a discount broker since 1999 and one of DRBA’s five founders. “This is an alliance of like-minded brokers coming together, with the intent of educating consumers so they understand what they can expect to pay, and what kind of service they’re going to get.”
So far DRBA — which is pronounced “derba” — boasts eight discount brokers as members, with applications of four more pending.
Not any broker can join DRBA, Fazio said. In addition to committing to reduced listing-fee services for sellers and commission rebates for buyers, DRBA members agree to uphold the group’s customer service standards. To ensure those standards are being followed, DRBA conducts customer satisfaction of consumers who use the alliance to find a discount broker.
The surveys are conducted twice — at 20 days and 40 days after services are initiated. The results of the surveys will be posted publicly beginning June 1, as a tool for consumers shopping for a broker.
“The response has been phenomenal,” Fazio said, with a 95 percent rate of return on the surveys. The willingness of consumers to provide feedback to a third party will give its members more credibility, she said.
“Consumers like to know you are upholding that level of service,” she said.
DRBA doesn’t take a cut of its members’ commissions, relying instead on its affiliated businesses — both mortgage and title insurance — for revenue.
DRBA also charges for enhanced listing features like video tours, satellite imagery or mapping on its Web site, and membership dues for brokers are “part of the long-term plan” Fazio said. For the April 1 rollout, “it was important initially that we get people we knew had a good reputation, and met our level of service expectations.”
Fazio said DRBA’s affiliated businesses not only generate revenue that the alliance can use to cover its overhead and market its members, but also offer buyers and sellers additional convenience and services.
Sellers, for example, can offer interest-rate buydowns through DRBA’s affiliated mortgage company, Fazio said.
Buyers and sellers are under no obligation to use these services, but they are “the fuel that supports Discount Real Estate Brokers of America,” Fazio said.
When brokers agree to join DRBA, “they are giving us access to their clients,” Fazio said. “The first week they list, they’re given a welcome packet, with seller incentives, buyer incentives,” and AfBA disclosures.
“The intent is when you have the one-stop shop, which is really common in this industry, it makes it very simple” for clients, she said.
Agents who work for DRBA-affiliated brokers can use the group’s back-end system to order title insurance or the see status of a buyer’s mortgage application.
“It makes the process easier, but there is no requirement” for brokers to steer clients to DRBA’s mortgage and title insurance offerings, Fazio said.
In addition to generating leads for members through its Web site, DRBA is conducting regional TV, radio, newspaper and billboard marketing campaigns to raise their visibility.
As the public becomes increasingly aware of discount brokers, “People are coming to us,” Fazio said. DRBA is “helping get that message out there, and smaller discount brokers didn’t have the marketing opportunities that DRBA is giving them.”
DRBA launched on April 1, and today its members offer about 500 listings.
“We rolled out with seasoned discounters,” Fazio said. “You don’t want to build the second floor until the foundation is solid.”
DRBA hasn’t conducted a membership campaign, and the four applications from prospective members “came in without any efforts,” Fazio said.
As implied by the company’s name, its founders have plans to expand outside of Wisconsin. For now, DRBA sees the Midwest as its best opportunity to do so, with Illinois and Michigan likely starting points.
Rebates prohibited in some states
According to a recent report by the Federal Trade Commission, “Competition in the Real Estate Brokerage Industry,” rebates can be “powerful tools for price competition among brokers.”
Another DRBA founder, certified appraiser Donald J. Moore, told Inman News that the impact of the government’s antitrust investigations was one issue the group’s founders considered when they first got together last summer.
Miller said at the time, it appeared the federal government was supportive of discount brokerages — an impression reinforced by the FTC report.
“The critical component here is that this is a market-based solution, not a regulatory solution,” Moore said. “We believe that the real estate industry itself can provide answers to these problems if allowed to operate on an even playing field.”
Rebates are prohibited by law in 10 states — Alabama, Alaska, Kansas, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oklahoma and Oregon. Iowa prohibits rebates when the customer uses two or more brokers during a real estate transaction.
Although states can generally pass legislation banning rebates without fear of federal antitrust enforcement, similar policies, when enacted by state real estate commissions, have been challenged by the U.S. Department of Justice.
The DOJ’s investigations of rebate bans by real estate commissions in West Virginia and South Dakota led to the bans being rescinded. But a similar investigation of the Tennessee Real Estate Commission’s ban on rebates led the state legislature to pass a law banning cash rebates (see Inman News story), which awaited the governor’s signature at press time.
Although DRBA doesn’t face any immediate legal obstacles to its Midwestern expansion plans, RebateReps is already nationwide, and feeling the effects of legislative rebate bans.
“We get a lot of buyers from the New Jersey area and also Oregon that want to take advantage of the program, and we can’t help them,” Odio said of RebateReps. “I wish the DOJ could move faster. I hope they keep fighting the fight.”
Send tips or a Letter to the Editor to firstname.lastname@example.org, or call (510) 658-9252, ext. 150.