One of my readers raised this topic for discussion, and I am very happy to bring the issue to the forefront.

I’ll try to raise the pros and cons of this hot topic without sounding too biased, but that will probably be tougher than it sounds.

In the end, if I really felt that “flat fee” realty services had something to offer, I’d probably be working for them…

First of all, let me state that I am very open to receiving ideas and suggestions on topics to discuss on my blog.  I welcome both positive and negative criticism, and last week, after one of my readers commented that my blog has made a turn towards becoming a typical “ranting and raving” blog, another reader suggested that I can avoid this by taking requests, one of which could be discussing the merits of “flat fee real estate.”

I am more than happy to oblige.

Flat Fee real estate companies have existed for a very long time, but don’t get as much publicity as they would like.  In my estimation, flat fee real estate companies have already peaked and come back to earth, although both the companies themselves and their customers might claim otherwise.

As I mentioned at the onset, I’m going to attempt to discuss this topic with very little bias, but keep in mind that I work at a “traditional” real estate firm, and thus I see value in what I do for a living; that is, I myself have a value.

Let me make two quick points before I get started:
1) Your house or condo is the largest asset you will ever own
2) You are not a real estate agent.

Okay, let’s get started.

In a typical real estate transaction, there are four parties: buyer, seller, and two agents representing the buyer and the seller.

A typical real estate commission is 5% of the sale price, and it is paid in whole by the seller.  This fee is discussed and agreed to at the time the listing agreement is signed.

Of that 5% commission, a 2.5% portion will be paid to the “buyer’s agent,” or the agent who provides the buyer to the transaction.  The other 2.5% of the commission is paid to the selling or “listing agent.”

I would estimate that 99% of all real estate transactions that originate on the MLS system are transactions in which a “typical” commission is paid, ie. 4-6%.

Then, there are “flat fee” companies.

A flat fee real estate company will list your property for only $399.00.  When compared to the 5% most people pay, this is dirt cheap!

However, the very first point that these companies will make is the following: “Pay an agent who brings you a buyer 2-3%, and if you bring the buyer, you don’t pay anything at all!”

Right off the bat, we notice two things:
1) You ARE responsible for the 2.5% commission for the buyer’s agent (if one is present to the transaction), meaning the $399 price quoted is far, far from the actual cost
2) they suggest that you “bring your own buyer” to avoid the 2.5%, meaning you have effectively become a real estate agent.

What do you do for a living?

Astronaut, secretary, carpenter, doctor, teacher?  Do you have time to go look for your own buyer?  Probably not, which is why most people hire a “typical” real estate agent.

Let’s say that you do find a buyer for your property, and you can avoid paying the 2.5% commission, where does that buyer come from?

Because you have to understand that most buyers actively work with real estate agents.  Buyers sign a “buyer agency agreement” just as sellers sign a “listing agreement,” so most buyers already have representation, and thus thus it’s difficult to find these buyers walking around with no agents, and thus avoid paying the commission under the “flat fee” arrangement.

Assume that you sell your house through a buyer who does have an agent, and you pay the 2.5% and the $399 to list your property on MLS.  Basically, you are saving about 2% of the total cost you would otherwise pay with a “traditional” agent.

But what are the risks?

Well, for one thing, you have zero representation or experience.  In my experience, agents at “flat fee” companies are there because they couldn’t make it at traditional brokerages, and they probably aren’t the most intelligent, creative, ethical, and capable people.

How hard is that agent going to work for $399?  Expect him or her to simply press a button on a computer, and the job ends there.  Anything extra costs you money.  Read the fine print!  I’ve seen flat fee companies charge $1000 for every open house they work, and go as far as to limit the sellers from hosting their own open houses!

Simply put, a “flat fee” agent isn’t going to spend a single penny marketing your property.  And if you read my blog on a regular basis, you know how I feel about all the agents or sellers who don’t believe that “marketing” a property is a significant part of the selling process (see tomorrow’s post).

A flat fee agent won’t send out “Just Listed” cards to neighbors who have friends and family looking in the area.  You won’t get ads in the Toronto newspapers and real estate magazines.  There are no open houses, and the agent has no clients of his/her own to try and sell the house to, since “flat fee” agents only work with sellers.

A flat fee agent won’t pay to bring in a “stager/fluffer” and get your home looking its best and prepare it for sale.  A flat fee agent won’t pay for a home inspector to provide a detailed report for potential buyers and identify problem areas ahead of time.

All you get is an MLS listing, and even at that, there are probably no pictures on the listing and a half-assed attempt at things like room measurements, descriptions, survey’s, legal information, etc.

Your property is your largest asset. 

Why the hell would you risk losing huge sums of money by trying to save little sums of money?

In recent years, the real estate market has been red hot, and multiple offers happened with increasing frequency.  It was not abnormal to receive huge premiums on what your property “should” or “could” sell for.

Take a house listed at $549,000 that gets seven offers and sells for $655,000.  This was a factor of the real estate agent’s knowledge, experience, and above all: marketing!  This agent spent money out of his/her own pocket, and knew who to bring in to the transaction, ie. home inspector, stager, etc.

Let’s see……5% of $655,000 is $32,750.  That’s the commission payable by the seller.

Had this seller listed with a “flat fee” company who would have stuck a sign on the lawn, a listing on MLS, and just waited for it to sell, you probably would have got the $549,000, and lost out on the $106,000 premium for the house.  And if you didn’t “go find your own buyer,” you’d still be on the hook for 2.5% of the selling price plus the $399.00.

It hardly seems worth it.

Not every case is like this, but more often than not, a “flat fee” agent will get you far, far less for your property than a traditional agent would.

I always ask people, “If your boss came in one day and cut your pay in half, how hard would you work?  What if he cut your pay by 90%?  Would you have any incentive to work at all?”

How hard would a “flat fee” agent work for you?

Why risk losing money on your largest asset?

The only way I can see this working out is if the seller is a seasoned real estate buying and selling veteran who is completely immersed in the industry and has been down this road before.  It’s not unusual to see condo listings “For Sale By Owner,” but again, most buyers work with agents and these seldom-found for-sale’s aren’t common enough to find their way to most buyers.

If a seller is competent and experienced enough to handle both the buyer and the seller to the transaction, do all the work that is normally handled by the Realtors, and make an informed decision on price, then perhaps a “flat fee” company makes sense.

But if I wanted a large cedar deck to be built in the backyard of my house, and I lacked the twenty years of carpentry experience needed to erect a quality structure that my family would use for years to come, I’d probably hire somebody who builds decks for a living.

Not all “flat fee” companies are the same, and my descriptions and accounts above might not do them all justice, but I feel that sums up most of them fairly well.

I welcome your comments and questions…