Limits of limited-service real estate

Guest perspective: Deals harder to close with discount brokers
Inman News
Editor's note: RELO, a network of independent residential real estate firms, in this guest perspective offers its view of some of the limitations of limited-service real estate brokerage and points to differences between full-service and limited-service brokerage. The article was written by RELO members.

RELO member NP Dodge, one of the largest real estate firms in Omaha, Neb., made waves in Nebraska when it told limited-service firms that it would pay them less when they bring in buyers on properties listed by NP Dodge.

The company offers limited-service firms 1 percent instead of the usual 2.4 percent or 2.8 percent co-op commission.

According to Mike Riedmann of NP Dodge, the move was intended to compensate his agents for the extra work they do when working with agents at limited-service firms whom he contends often are inexperienced, untrained, or unwilling to handle their duties related to the transaction. "It is dramatically more difficult and time-consuming to close deals with discount brokers," Riedmann said.

NP Dodge agents say they have been involved in deals where discount brokers haven't followed up, stalled the loan process, or written a contract that was inappropriate for the client. The agents also say they've seen discount brokers try to negotiate a higher commission for themselves after they have sold their client on the fact that they accept a lesser commission.

While all real estate commissions are negotiable, there are real costs to marketing a home, said RELO CEO Pam O'Connor. If real estate professionals are not compensated accordingly, shortcuts will be taken that can affect the home's exposure to potential buyers, she added, and ultimately, its marketability and/or the price it commands. When home sellers focus on saving commission dollars by working with a limited-service broker, that discount may in fact cost them much more in the overall transaction.

Full-service firms offer extensive marketing muscle, and some limited-service firms try to take advantage of this, according to RELO. For example, one discount broker told sellers that if they listed with them they would still have their listings marketed through full-service firms that typically display MLS listings on their Web sites. Upon hearing this, one full-service firm deleted the discount broker's listings from its Web site.

NP Dodge conducted an analysis of limited-service firms and discovered that 30 percent of the contracts discount brokers have with sellers expire before they sell the property. Of those that expired, the sellers re-listed with full-service firms. NP Dodge also noted that limited-service firms only close 50 percent of their listings.

In one example, a seller asked a full-service and a limited-service firm to each recommend a selling price for the home. The limited-service agent said $250,000 and the full-service agents said $325,000. The listing went to the full-service agent who sold the home for $325,000 in less than one week. The difference was $75,000 to the seller.

First Weber in Madison and Milwaukee, Wisc., a 1,300-agent firm and also a RELO member, trains brokers and agents on how to explain the difference between full service and limited service to clients. One agent who left First Weber to work for a discount firm wanted to come back because she found it hard to cover her expenses at a limited-service firm where she was receiving lower commissions.

Another RELO member, Weidel Realtors, with 20 offices and 340 agents in the Princeton, N.J., area, stressed the importance of understanding that "you get what you pay for" in real estate. Broker Ric Weidel said, "If we can ultimately produce more net return to the seller at the closing table because a full-service commission has enabled us to deploy all of our resources to sell the home at the best price possible, isn't that a better result than if a seller receives lower net proceeds even though a lower commission was paid? It's all about value."

The other issue that Weidel discovered was that his company's success rate in selling homes increased significantly when they guaranteed a certain level of co-payment to other traditional brokers. By so doing, brokers wanted to show their listings to their potential buyers, and sales increased.

RELO is a network of independent residential real estate firms, with 660 members representing 4,700 offices and 110,000 associates across the U.S. and in 20 countries.