OK, first a disclaimer…
This post is not a one-sided argument written by an agent to try to convince everyone that if you try to sell your home by yourself you are either wrong, dumb, likely-to-screw-up and/or foolish. As a Realtor, I personally find those posts insulting as it ignores the fact that, in some specific cases, a By Owner sale, could be the right way to go.
Similarly, if you are a seller and feel that by not using an Realtor, you are convinced that you are going to save 6%, then you can stop reading now.* The belief that the entire commission is an expense is far from accurate (it is much closer to a 1.0 to 1.5% savings depending on the value of the home), but more on that later.
The goal of this article is to identify the true cost of using a Realtor and how to decide if using an agent is correct for your situation.
What is a FSBO?
The FSBO (aka, For Sale By Owner), is a home that is For Sale directly from the owner without the use of a listing agent. Some FSBO’s will offer a 3% commission to any agent who brings a buyer while others demand that the buyer pays the commission to their agent (this is a far more common practice in the commercial realm and drives the residential agents nuts every time it happens.)
In 99.99999% of the cases, the argument to use or not to use an agent hinges on commission. If a By Owner can find the buyer, they can save roughly 6% of the gross sales price. On a $300,000 home, quick math tells us this is $18,000. If the By Owner pays a cooperating Buyer’s Agent a 3% commission, then they save $9,000. Neither of these figures are small numbers and when equity in homes has been reduced as much as it has from the heights of 2007/8, it becomes a significant part of the cash generated by the sale (if not all, in many cases.) The want (or need) to save is powerful and therefore the decision to employ an agent is not to be taken lightly.
A Nod to Historical Trends
First, an important statistic…
Did you know that traditionally, somewhere between 90 and 95% of the homes that are sold involve at least one Realtor? This percentage may fluctuate somewhat (depending on the market) but has more or less remained within a few percentage points of 90% for a considerable amount of time. After you remove family sales, inside sales and other non-arms length transactions, that number actually increases. In 2011, only 4% homes sold in the US were sold directly from seller to buyer without the use of an agent. That figure is one of the most important facts for the selling public to understand. Statistically speaking, there is 90% or greater chance that the home you sell will involve the payment of at least 3% of the gross sales price to an agent as compensation.
If there is a 90% (or greater) chance that an owner will be paying at least 3% to a buyer’s agent to sell their home, what about the remaining 3% that would normally be paid to the listing agent?
Agents Inflate Expenses to Justify Commissions
Most times, the articles written by the agent community try to justify their existence to FSBO’s by over-inflating the costs to promote a home…which is not fair. The web has created a far different landscape for the promotion of anything for sale (homes, cars, boats, furniture, clothes, food, used pinball machine parts, etc…) and Realtors have figure out how to find the places where property can be promoted free (or very inexpensively). While there are fees in brochure creation, photography, MLS, web portals and other promotional sources, in total, they are relatively cheap and should not be used by the agent community as the reason to list. Any agent who brags about spending money on their listings is one who won’t be in business very long.
To adequately promote a listing for sale and to reach the necessary people who would likely be interested in purchasing your property, you will need to spend (at least in Richmond VA dollars) anywhere from $300 to maybe $3,000.
- $300 buys you the cheapest of everything and no real promotion
- $1,000 buys you decent signage, decent photos, professional brochures, an ad in the paper or two and maybe a little ‘Featured Listing’ status on one of the portals.
- $3,000 buys you all of the above and a broker open house with food, drone flyover, virtual tour, direct mail and about everything else you can do to promote a home.
In reality, the majority of the expense for any agents is the fixed costs of being in business and the time it takes to do things well…not so much in the expense of carrying listings.
As agents, we have amazing tools (and even more on the way) which will allow us to promote your listing more broadly, more quickly and far less expensively than ever before. If an agent has spent more than $3000 on promotional materials and advertising, they have spent too much. Likewise, if an agent justifies their existence based on spending, call someone else.
The Advice is the Key to Value
Instead of looking at expenses, look at knowledge and the issues at the forefront of our industry.
If you are an owner who is considering ‘FSBO’ as the method of sale, you should be able to answer the following questions:
- Do you understand how to combat the effects of Zillow and Trulia on buyer behavior?
- Do you understand how listings are pushed and syndicated?
- Do you understand how to interpret feedback?
- Do you understand the effect of Dodd-Frank, the new disclosure laws as well as RESPA?
- Can you combat a flawed appraisal?
- Do you understand the numerous laws which preclude the many actions considered to be discriminatory?
An perhaps most importantly, do you REALLY and TRULY understand what your home is worth? The irony is, many agents can’t/don’t either…but that is a different article on another day.
The real cost of a Realtor is closer to 1.5-2.5% of the gross sales price. Knowing this, the accurate question to whether or not to use a Realtor is: Do you feel that guidance required to navigate the questions listed above, related to both process and market values, should be considered an expense off your bottom line or an investment in both your top and bottom lines?
To me, it is a no-brainer…provided the correct agent is employed to do the job…and that is the key point. Identifying the population of agents and brokers in your marketplace that impact the net proceeds positively should be your goal (and there are more than 1 in almost every market, so interview several.)
If you do your homework and hire the right agent for the job, the effect on your bottom line will be far positive than if you tried to do it yourself.
* The 6% commission rate is an estimate of commission expenses and is in no way meant to imply that 6% is a mandated policy.