You've heard of discount brokerages on Wall Street. But there's another kind of low-cost broker a little closer to home: discount real estate agents.
Longtime Fools understand the difference between traditional full-service brokerages (which we used to refer to as "full-price" brokerages) and discount brokerages. The former generally charges a lot while hand-holding its clients with personal investing advice. The latter leaves decision-making to the customer but offers very inexpensive rates. The distinctions between them have blurred a little in recent years; full-service fees have fallen, and many discounters now offer rich stock-research information. Full-service brokerages include Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MWD), while discount brokerages include Fidelity, Charles Schwab (NYSE: SCH), Ameritrade (Nasdaq: AMTD), E*Trade (NYSE: ET), and Toronto-Dominion's (NYSE: TD) TD Waterhouse (which is being gobbled up by Ameritrade).
Discount real estate agents, like their stock market counterparts, offer lower fees for simpler services. You probably know that real estate agents typically earn 5% to 6% when a home is sold. Discounters, who sometimes take commissions at 3% or less, are now undercutting that rate.
How can this be happening? Well, think of it in classic economic terms. There are only so many homes that get sold in a given year. But in the past few years, the number of real estate agents has surged. (I'll bet you have at least one friend who became an agent recently, perhaps switching careers. How many of your friends have switched to nursing, teaching, or software programming?) According to an article in the Minneapolis-St. Paul Star Tribune, in the past five years the Minneapolis Area Association of Realtors has grown from 5,400 members to 10,000.
This kind of explosion fuels competition, and one way agents can fight it out is by undercutting each other's profits. This can result in big savings for us homebuyers and home sellers. (Just remember that you should never select an agent on commission alone -- their skills are far more important. Agent A might charge more than B but might sell your home for more than B would, enough to cover the difference in the commission.)
Discount real estate agents can sometimes afford to offer lower rates because they let the client do some of the work, such as researching homes online. Many clients consider this trade-off well worth it, but discounters are getting a lot of flak from their traditional counterparts. Some states are restricting how low agents can set their fees, which rarely benefits their clients.
If you're looking to buy or sell a home, educate yourself before you get too far into the process. Spend some time in our Home Center, which features lots of money-saving tips and even some special mortgage rates.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. She recently discovered that there's a sink that bears her name.
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