Why traditional real estate brokerage is alive and well

Guest perspective: Full-service brokers offer expertise, assume risk
By: Kelly Sweeney: Inman News
Editor's note: Kelly Sweeney is president of Weir Manuel Realtors in Birmingham, Mich. He wrote the following guest perspective on the state of traditional real estate brokerage services.

We all witnessed the dot-com impact on the stock market a few years ago. There was a serious rise and subsequent decline in Americans' net worth as stock market valuations eroded when new Internet business models failed to deliver on their promises. Some have asked, "How could so many smart people have been so gullible?"

There can be no question that technology and the Internet have changed our lives. The way we communicate and the way in which goods and services are marketed and sold have been permanently altered.

As a result of this new technology, new business models have emerged in almost every sector. The real estate brokerage and mortgage banking industries are no exception. New "low-cost" alternatives promising thousands in savings to the consumer are popping up everywhere, just as the dot-coms did before. Their new value proposition is "get your home sold for much less."

But does this new approach really maximize the seller's value and minimize the seller's liability? To answer that question let's examine the components of the traditional real estate broker's value proposition. The traditional full service real estate broker contributes many services and considerable expertise to the real estate transaction.

One of the more obvious services provided by the traditional broker is a marketing and promotion plan of which one small component is marketing the property through the multiple listing service. Properly staging the property, advertising and promoting the property, answering inquiries, handling showing appointments, hosting open houses, preparing legal documents and presenting offers are all part of the service provided by the traditional broker.

In addition, consumers rely on the broker's experience and knowledge in the areas of pricing, negotiating, market knowledge and contract law.

This type of advocacy and the many of the services listed above are typically not provided by the emerging low-cost brokerage models. Their marketing effort is typically limited to entering the property into one of the multiple listing services and in some instances providing a yard sign. The remainder of the effort necessary to actually sell and close the property is left unattended to or falls squarely on the shoulders of the seller himself.

In cases where the seller has the time and the expertise to perform these functions on his or her own, an opportunity truly exists for the seller to save significantly on real estate commissions. In the vast majority of cases, however, the seller does not have the time or is not capable of performing one or more essential elements of the selling process and the property lingers on the market and remains unsold. In still other cases, the limited nature of the services offered by the "low cost" broker is not made clear to the seller and sellers' expectations are not met. In either case, the fees paid to the "low cost" broker, although modest, are typically lost with no value having been rendered to the seller in return.

But the real difference that is frequently missed in the ongoing philosophical debate about limited-service versus full-service real estate brokers is this: "Which party assumes the risk of getting the property sold?"

The full-service brokerage model, which has evolved over the last 100 years or so, under which full commissions are charged, is based on the broker assuming all of the risk of sale. That is to say, the broker agrees to take a listing, expend significant time, effort and money on getting the property sold and is only compensated if and when the property transaction actually closes and the seller receives his proceeds from sale. Included in the commissions charged under this model is a significant component for risk assumed by the broker. There will always be a certain number of listings taken that do not sell or do not close, but for which the broker still had to expend significant resources.

The limited-service or low-cost model, on the other hand, is based upon the seller assuming all the risk of sale. The seller pays the broker a flat fee up front or even a series of fees based on the level of service actually provided by the broker. While these fees are typically less than those charged by the full service traditional broker, they are paid regardless of results. If the property does not sell, the seller experiences the loss, not the broker. Under this model, the broker has no financial incentive to make sure that the property actually sells.

In all but the hottest sellers markets in the country, using a low-cost alternative will many times prove to be "penny wise and pound foolish." Truly motivated sellers who understand the true nature of both business models will almost always be better served and save in the long run by using a proven traditional full service real estate broker.