Discount Brokers: Avoiding Adverse Selection Problems
Yesterday we discussed one of the original discount real estate brokerage businesses from the Dot Com 1.0 Bubble. To be fair, the founders probably came out well – a success story from a Y Combinator definition, because the founders “got rich” (relative to their cohort).
But none of the discount brokerage firms have been majorly disruptive on the old commission model when buying and selling houses. The argument in favor of discounting usually parallels airline ticket travel agents and retail stock brokers – with the Internet, we weren’t supposed to need them any more. Unfortunately, we know real estate brokers are different. Homes and large investments are complex transactions. Each parcel is unique and nuanced, the valuations opaque and subjective, and the consequences of a mistake can be catastrophic.
The most common explanation for discount brokers failing is the adverse selection problem. Only agents who are low performers would willingly give up a big portion of their commission on every transaction. On the buyer side, some agents grumble that only difficult clients who will be unpleasant to serve would actively seek to save this 1% and risk a problematic transaction.
Is any of this true? Can we avoid the adverse selection problems on either side? Dozens of companies small and large have attempted some twist on the rebate model – even new ones in 2019. Maybe this time the market is ready. Firms such as RentHop, RealtyHop, and BAR below will be rolling out some version of rebating in the coming months.
One argument in favor of rebates for rental transactions. Most clients will not close a deal after a showing, AND most clients will not even reach out to the agent for future showings. Smart agents know if the client hasn’t shown significant interest during or shortly after the showing, you probably won’t close them at all.
To stand out from the competition, we have seen experienced agents specialize in a small handful of buildings and neighborhoods . They always research the best possible rental deals – fee, exclusive, or 1 AND 1 OP and Free Rent deals. They are always in the area ready to show, and they successfully close enough deals that they can offer rebates to the renter.
Starting 2020, we will experiment by allowing agents to advertise rebates for specific listings. Renters will still always see the net effective price between the landlord and tenant, but the rebate to renter can be an extra incentive to schedule the apartment showing online.