How Discount Real Estate Brokers Make Money
Posted On June 12, 2022
Hello, my name is Grant Clayton and I’m the founder and CEO of 1 Percent Lists, which is, you guessed it, a company charging lower commission rates to list homes.
It seems that every time I speak with another agent about what we do and get past all the typical “you get what you pay for” zingers and clichés, we still have a big problem. No one really understands what we do, how we do it, but most importantly they can’t figure out how we can possibly make any money.
The irony of this is that my agents typically make A LOT more than their peers, but our “traditional” agent peers just can’t quite figure it out. So read on, if you dare, and learn how you can make more money by charging less money (yes you read that right). Approach this as unbiased and opinionated as possible. Allow yourself to be objective. Give it a chance to make sense to you.
Let’s take a moment to dispel some myths, rumors, and misconceptions:
- I don’t hate other agents.
- We are full service and handle the entire transaction from listing day to closing day including all negotiations, inspections, etc
- We ALWAYS offer competitive commissions rates to buyers agents
- I’m sure you have dealt with a bad discount company before, trust me I’ve dealt with bad agents who charge 6%
- Just because someone is doing it wrong doesn’t mean we aren’t doing it right. Just because Myspace failed doesn’t mean all social media companies are doomed to fail.
Now, let’s start this by coming to an agreement on a few simple facts……
Fact 1: All other things being equal, if you charge more for something, it is harder to sell it. If you charge less for something, it’s easier to sell it. A practical example is if you began listing houses for free as professionally as you currently do you would have tons of listings. Conversely, if you increase your listing fee to 10% you would have a very hard time getting listings. Simple economics 101.
Fact 2: Listing houses requires much less labor and more market knowledge. Acting as a buyers agent requires much more labor and arguably less market knowledge. Agents prefer to be listing agents.
Fact 3: Listings are the answer to every problem in real estate. It doesn’t matter if you want to make more money, more reliable income, more work life balance, any of those problems get solved by getting more listings. If you want more listings, get more listings. If you want more buyers, get more listings. Listings are the magic elixir of real estate.
Are listings loss leaders for us?
Now, let me stress that even at a 1% listing fee as a full service real estate brokerage paying for professional photography on virtually every listing, we are very profitable listing homes.
That said, it probably would not shock you to know that many incredibly successful businesses in the world run off a system based on loss leaders. A loss leader is defined as: A product sold at a loss to attract customers.
Let’s take Walmart for example, they practically give away their food especially staples like milk and eggs. These are the loss leaders for Walmart and every other supermarket in the world. These items are always in the very back corner of stores because these are the items that people always need.
On the way to those products that everyone needs and they are practically giving away, you will walk by tons of high margin items that you will no doubt put in your cart on your way to pick up the eggs that they don’t make one penny on. Believe it or not, these companies have strategies in place to actually LOSE money selling TONS of these items because they know you will buy tons of high margin items while you are there.
Let that sink in. Whatever company lost the most money selling a huge volume of eggs and milk is probably making the most overall profit.
Want to know how to buy a real estate franchise?
The benefits of more listings
We make great money even at 1% listing homes due to how efficiently we run our company so I wouldn’t call listings a “loss leader” for us. Let’s call it our “modest profit leader” and that is listing homes. We rake in as many listings as we can because we know that those listings are going to do several things. Those listings will:
- Buy houses through us
- Be referred out throughout the country by us to other agents
- Generate sign calls which may need to list and buy
- Dramatically increase our sphere of influence
- Enable us to network in neighborhoods and increase our pipeline
- Save us marketing dollars because our listings serve as marketing for us
My average producing agent is doing an almost equal split of listings at 1% and buyers who pay them 2.5% or more. My top producers go so busy listing homes that they don’t have time to work with as many buyers which means they make THE CHOICE to take lots more listings at lower fees than work with buyers who make a higher commission. Either way, my typical agent is making between 1.75 and 2.2% depending on the market they are in.
Circle back to fact 1 for a moment though which was: if you charge more for something it is harder to sell it. If you charge less for something it’s easier to sell it.
My top producing solo rookie did 35 listings and 28 buyers in their very first year with NO sales experience.
My top producing solo agent did 103 total transactions in 2021 and along the way increased her profit by over 500% over her previous best year in another brokerage.
The most important fact in all of this is they are not doing tons of lead generation nor are they buying leads from Zillow or one of the other lead selling services.
They are posting a lot on social media, some do post cards, we have an amazing digital marketing team that they utilize, and plenty of other goodies. But they aren’t paying referral fees to big tech and they aren’t paying for buyer leads AT ALL.
This is possible because they have a tool in their arsenal that they have never had before. They have a better value proposition to list homes. They have a REAL value proposition that the public identifies with. This brings me to….
Are all real estate agents the same?
Fact 4: This is painful to say but… The public believes that all real estate agents basically charge the same thing to do the same thing. Some do not even know how real estate commissions work.
Now you might think you are different, heck you might actually be different. You might be head and shoulders above all of your peers in many ways. But can the public identify you as truly different?
How many agents in your market have a real brand that the public identifies with like Nike, Amazon, or Tesla?
Unfortunately to the public you are just one of millions of agents charging the same fee to do the same task. Brand new agents fresh out of real estate school spent two whole weeks and 200 dollars to get licensed and they are charging the exact same fees as you.
They make logos and marketing materials very similar to yours. They are trained to say and do the same things at listing appointments as you by the same brokers you serve under. Brokers and coaches from countless companies around the country train them to all say, do, and look the same as their peers. So visualize this……
You are looking at a Where’s Waldo picture at the beach. Every person in a Where’s Waldo painting is a real estate agent. Waldo is a rock star real estate agent that the public is looking for. My discount real estate brokerage is represented by Godzilla emerging from the sea throwing sailboats and breathing nuclear fire at everything in sight.
So imagine all the facts mentioned earlier and see how they apply to us:
- We charge less to list homes, so we get a lot more listings than we normally would.
- Being listing heavy means we spend more time using our brains to make money and less of our weekends and evenings using our labor by showing tons of houses.
- Those listings often buy through us once they go under contract but those listings also generate tons of other opportunities for our agents.
- We are wildly different from our peers and our entire marketing strategies are based around shouting how different we are from the rooftops.
What all of this amounts to is we make about 2/3rds per deal what our peers do typically but we spend almost all our time doing deals and almost none of our time trying to find them.
Imagine how your life would change if you could spend all day doing the work that actually makes your money that you enjoy like listing homes and writing offers and almost none of your time asking for business.
That is the life of one of our agents.
Don’t fool yourself, it is an incredibly efficient business to run and very, very profitable.
This model is only growing in popularity as technology makes running virtually more appealing. The question is, is it for you?
Do YOU have what it takes to run a successful real estate franchise?