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Impact of National Franchises on Local Property Values

First let's review how national franchise companies make money from local real estate transactions. The most common model of compensation is a percentage of every transaction is paid to the national company by the local brokerage firm. Typically a local brokerage firm will pay the national company 8-10% of their fee from every transaction. Thus, if a broker sells a home for $300,000 and charges a 6% commission, the broker pays the national company $1,800 of that commission.

The question is not whether these companies make money (we know they do), but how does a national affiliation help a buyer or seller. The short answer is that they do not help buyers or seller locally.

The level of service provided by brokers without national franchise affiliations is the same as those with national franchise affiliations. There is nothing locally (MLS, Realtor.com, Free Press, etc...) that requires a national affiliation or that is benefited by a relationship with a national franchise company.

While the service level provided is the same, brokers with a national affiliation must charge buyers and sellers more. As described above, brokers who have national affiliations must pay the national franchise company. Because of this, they must pass along this cost to their clients. Therefore, if you choose a firm with a national affiliation, you will likely pay a higher rate or the broker will have less room to negotiate their fee because of the extra fees paid to the national company.

Because brokers with national affiliations must charge more, the cost of these relationships eventually trickle down to each transaction and make property more expensive locally. As I pointed out in the last issue, broker fees are a transactional cost that is added to the price of property in every transaction. Ultimately, if the seller needs to pay their broker more because their broker has a national affiliation, then it only stands to reason that the seller must factor that into the price of their home when selling. The seller then passes that cost along to the buyer by making the buyer pay a higher price for the home to cover their broker's fees.

Therefore, at the end of the day, property is more expensive locally when national franchise companies are present.

Even though national brands may lend immediate credibility to a broker, they do little to directly help the clients of the broker. In fact, many of the most recognizable brands are owned by the same company (Realogy), including Coldwell Banker, Century 21, ERA and Sotheby's. It is difficult to see how clients benefit when such an inherent conflict exists in the national company supporting the various brands.

The only way that national franchise companies can make more money is to sell more franchise units. They are constantly looking to increase the number of franchise units in the same market area. Most national companies are willing to have the same brand located within 1/2 mile or less of another office owned by a different broker. Thus, you might have the same brand in the same town with two or even three different owners.

Flat Fee Real Estate has not and will not affiliate itself with a national franchise. We want to continue providing our services for a flat fee of $3,500 per transaction and do not believe that we could if we were to partner with one of these companies who keep pressure on brokers to maintain the traditional 6% commission based model. We also want to ensure that local property remains more affordable for our clients by not having to pass along the costs of a national franchise to our clients.

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