May is Commission and Compensation Month here at Inman. We’ll sort through the noise and misinformation and provide you with the most up-to-date facts and strategies about how to prosper in the wake of the commission settlements. And look for straight-to-your inbox updates with Inman’s new weekly digest, Commission Chronicles.
With the National Association of Realtors and many brokerages facing large settlements and potentially changing commission structures, the housing industry at large is about to get a hard and fast lesson about being open to negotiating (and accepting) a lower commission structure to satisfy cash-strapped clients.
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Flat-fee brokerages aren’t new, but they’ve grown more popular in recent years. With buyers now responsible for paying their own agents, more will likely flock to flat fee and discount brokerages. However, many others may still have questions about how they work.
Knowledge is power, and there are certain aspects of working for flat or “discount” fees that cannot be ignored. Let’s look at the history of these brokerages, the pros and cons, and the important facts you need to know before you accept a flat fee.
How it began
The emergence of online discount brokerages and flat-fee referral services have put steady downward pressure on real estate commissions, but they were especially popular right before the Great Recession.
Moving forward, buyers and their agents will need to negotiate their own compensation. Most industry experts believe this will drive average commission even lower and lead to new opportunities for savvy agents.
Flat-fee brokerages scrap the prevailing commission model, charging sellers a predetermined fee that serves as the agent’s compensation regardless of the final sales price or the hours of work they put in. A related concept is the limited-service brokerage, where sellers can take advantage of a reduced selection of services in exchange for a low flat fee or lower-than-average commission percentage.
With buyers now responsible for paying their own agents, more will likely flock to flat-fee and discount brokerages. However, many others may still have questions about how they work.
How a flat-fee or limited-service brokerage works
Traditional real estate commission is based on a percentage of the price a property sells for. That means the higher the sales price, the larger the paycheck for the agents involved.
By contrast, flat-fee or limited-service brokerages charge less but usually offer less than full service. A flat-fee listing agent may put a property on the local MLS and provide some photos but likely won’t offer a full suite of marketing, staging, negotiating and home-showing services.
These brokerages generally use one of a few business models. Discount brokerages like Trelora or Houwzer employ agents directly and pay them a salary. Each sale is simply a work assignment, and agents don’t receive any compensation on a percentage basis. Trelora was acquired by Houwzer in 2022.
Discount commission structures vary, but the common theme is an upfront discounted model.
For example:
Trelora markets to sellers, charging 1 percent to list a home. They recommend a 2 percent to 3 percent buyer broker commission. They still mention on their site that sellers can save as much as 50 percent from a traditional 6 percent commission. Again, they acknowledge the previous structure or never changed it after the lawsuits.
Houwzer markets a similar structure but emphasizes that the agents are paid a salary, thus offering a more consistent and affordable experience for sellers.
Redfin uses a similar buy-hybrid model, paying its agents a salary and offering percentage-based bonuses for hitting certain performance milestones.
Some brokerages offer an “a la carte” selection of services. In this arrangement, clients can pick and choose services from a “menu” and pay a specific fee for each.
For example, sellers might skip the professional photos and the comparative market analysis but pay for a video or 3D tour, along with a fee for each open house. Buyers might pay a fee per showing and for negotiation services after identifying a property but use their own real estate attorney at closing.
Because consumers can often be overwhelmed by too many choices, many agents of this type offer pre-packaged “tiers” of service, from a basic barebones package to a deluxe full-service experience.
Figuring out if flat-fee brokerages work for you
Flat-fee or limited-service brokerages can offer a lot of upside for certain agents, depending on their goals.
A fully salaried position is essentially a compromise, where agents trade the potential upside of lucrative commissions for the security of a regular paycheck. For agents who don’t sell a lot of properties, this can be a very smart move. It’s also an excellent way for novice agents to learn how the industry works and gain some experience while still paying the bills.
The prospects of working as a flat-fee agent can be more nuanced. A great deal depends on how much the flat fee is; typically, they range from $500 up to $3,000. That might seem low compared to a traditional commission on a million-dollar home, but fewer agents than ever can pocket a full conventional commission.
Although regular transactions with traditional percentage-based compensation may appear to bring in more cash, after accounting for the broker split and other expenses, agents may find they’re making less per hour than on a flat-fee, lower-cost but more straightforward transaction.
Know the collateral
A lot also depends on the property being sold. Those handling a desirable property in great condition in a hot market are more likely to find that working for a flat fee makes sense since they probably won’t have to put as many hours into the sale.
But if agents are selling a unique or flawed property in a tepid market, it might make less sense to accept a flat fee, given the time and effort it may take to close a deal.
The calculation is a little more manageable for buyer’s agents, especially if many buyers will soon be shopping around for low-cost alternatives to a traditional commission. Flat-fee buyer’s agents can simply charge for the number of showings they take the client to, and for the specific work (like negotiation or paperwork) they do on the transaction.
Often, the determining factor will be the volume of sales. Active, full-time agents with a growing network and many clients will find flat fees quickly adding up. But for those just starting out, as well as part-timers, a flat-fee situation may not be the best decision, as it could significantly cut their income.
Figuring out if flat fee brokerages work for you
As with any major decision, agents should carefully consider their finances, experience, career goals, market and other factors before making any big changes to how they’re compensated.
But for the right Realtors, flat-fee or limited-service brokerages can be a perfect way to make more, work less, or both.
Luke Babich is the CEO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
