What is a discount broker?
A discount broker offers real estate brokerage services at a price lower than the prevailing commission fees to internet savvy buyers.
For example, a discount broker may offer an internet savvy buyer a one and one quarter to one and one half percent (1.25% to 1.5%) commission in an area where two and one half to three percent (2.5% to 3%) is the prevailing rate. This reduction in the commission rate is often in the form of a rebate, which is paid to the buyer at time of closing.
This reduction in the commission rate is not a gift to the consumer but rather an opportunity for the buyer to substitute their efforts for those of the broker, in return for the lower fees.
Typically, internet savvy buyers assume more of the responsibility to gather and assess information. Therefore, less time and effort is required by the real estate agent in assessing market conditions and in identifying and showing houses to an internet savvy buyer client. This being the case, it is reasonable to conclude that the cost (commission rate) of the broker's service should go down to reflect this shift in burden.
Rebates are an important form of price competition under the traditional structure of real estate transactions because the seller and seller's broker, not the buyer's broker, determine the amount of the buyer's broker's commission via the seller’s listing agreement.
Without rebates, if the buyer's broker were simply to reduce his or her commission, the savings would go to the seller's broker, not to the home buyer.
The mechanics of the traditional real estate transaction make it difficult for a buyer's broker to reduce the price of his or her services because the "custom of the industry" is for the listing broker to split his or her commission with the buyer's broker.
Rebates, therefore, can be powerful tools for price competition between brokers.
And by returning money to home buyers, rebates can also benefit home sellers, because buyers will have more to spend on the home as opposed to commission payments.