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Risky Business: Selling Alone

For Sale By Owner?

Maybe you’ve thought about selling your home without an agent in order to avoid paying an agent’s commission. That commission, depending on where you live and what agency you choose, most likely will be somewhere from 5 – 7%.

I’m going to say something that will be unpopular with my collegues in the real estate industry: SOMETIMES, this will work. Once in awhile, you really don’t need a great agent to help you make the most of the market. I will tell you that these times will be rare, but they do exist. My Mom was a Realtor for 40 years overall, but there were a few years when she “stayed at home” with us kids. And she did sell our Santa Clara home “for sale by owner”. But she had a lot of real estate knowledge and my Dad was a lawyer, so they kind of had the bases covered.

There may be times when a relative or someone knowledgeable about the home wants to buy it and is willing to pay at least close to market value. That’s another exception.

But I can tell you dozens of stories from the other end of the spectrum – stories where family friends “knew someone” who wanted their home. They “saved” the commission but actually lost even more than they saved. So before you even THINK about selling “by owner”, at least talk to some reputable, experienced Realtors about the TRUE market value of your home.

But let’s say this is what you want to do anyway…. Handling your own sale means you will have to place ads, answer calls, and show your home to strangers at all hours—no matter how unexpected or inconvenient. (At least if you want good traffic, you will need to be flexible.) Remember that each year, Realtors all over the US are injured in the line of duty – so please take the safety issues seriously! Also, buyers who know you are saving on an agent’s commission may offer less for your home, destroying any financial benefit you were hoping to gain. This is especially true if you do not “cooperate” with a buyer’s agent. If the buyer has to forgo the help of his/her agent, you can be sure that the buyer will want some money back!

Serious buyers depend on real estate agents. 98.3% of the homes for sale are listed by Realtors. And 70% of homes sold are sold through agent-to-agent communication (we call it networking). Using the right professional will make your home sale a better experience, and a more profitable one. (If you would like to see MY seller services, please return to the first page of this section on hiring an agent. My list of seller services can be found there.)

Discount Brokers A small leg up from “For Sale By Owner” is the almost-fsbo-but-on-the-MLS “solution” or the “discount broker” option. Allow me to say just a few words on these. Again, they *may* be appropriate in some rare cases, but generally they are not a good idea for most people!

In California, several types of listing agent agreements are legal. (Please get a copy of my book if you’d like an in-depth explanation of these.) One type allows the broker to collect your paperwork, charge you a fee, and then put your home on the MLS. And that may well be ALL the brokerage does for you (gives you a type of exposure), and the fee to do so is often small. So the plus may be the larger amount of traffic, but the negatives are all still in place regarding showings, negotiating, knowing how to complete the disclosure requirements, etc. And, if the home is on the MLS, that pretty much means that you will at least pay the buyer’s agent. So you will pay for the buyer being represented, but you will not be represented yourself. Talk about a disadvantage!

Another “partial” solution with a big discount comes from the flat-fee brokers. What they do not tell you in the ads is that while they “only” charge a few thousand dollars to list your home, they usually do not place it on the MLS and even if they do, they will not pay a buyer’s agent. So most buyers will not want to play ball – they want their agent’s help!

Commissions Explained

Commissions are NOT fixed by law, though individual brokerages may decide what commission they themselves will accept. Commissions vary from region to region, and on average run between 5 – 7 % of sales price (for some reason, 7% is not uncommon on the east coast – and they ALSO pay lawyers to help with the contracts as well). Where does it go?

Contrary to how it may seem, Realtors do not usually get 6% (or whatever the total commission is) when they sell a house. Using 6% as a hypothetical number, what is more typical is this: 3% buyer’s side (Realtor representing the buyer AND the Realtor’s office) and 3% seller’s or listing agent’s side (again, the individual Realtor or team of Realtors and the office).

So if you are the listing agent, you may get 3%, which in turn you split with your company. The “split” depends on a few things, like how much you usually sell (production), how long you’ve been with the company, etc. It ranges, normally, from about 45-50% on the low end to 85% on the high end (unless the agent is with a 100% split office, in which case their monthly fees to be with the company are far, far higher). So let’s say the agent makes a 60 – 80% split, because he or she is not new. From that split (which is now about 2% of the sales price), the agent pays for ongoing agent expenses (desk fee, memberships in various boards, MLS fees, technology fees, web fees, marketing fees – flyers, postcards, virtual tours etc., errors and ommissions expenses, auto fees, etc.) You can see the 2% is shrinking fast, and we haven’t even talked about Uncle Sam yet! Or employees, if any! (I have an escrow coordinator to whom I pay a flat fee per sale, but in the past have had hourly rate employees.) If an agent is good and works well, and doesn’t waste a lot of money, what started out as 3% before splitting with the company may well end up being 1% when the bills (and taxes) are paid.

I have always been very open with my clients about how much I make on each sale, and it seems to help them to understand that if I spend a ton of money on the business (marketing expenses are significant, but so is ongoing education – which helps me to do a great job for them), there isn’t a lot of fat to cut if they come looking for a big discount.

Everyone wants “a deal”. I have turned down a lot of business when clients wanted me to charge like a discounter but perform like an experienced agent giving full-service. Like everyone else, I work for a living! But I am not totally inflexible….

When clients do two transactions with me in a short amount of time (18 months or less), I will give them a break on commission. So too with very high end properties. And also with truly hard-luck stories (folks about to lose their home to foreclosure, etc.). In those cases, I do what I can to help, whether it’s in gratitude for extra business or a sense of wanting to help in the midst of a catastrophe. But ordinarily, I charge 3% for my own services and we can see what the market bears for the buyer’s side – but 3% is usually advisable!

And a last word about the commission and what is offered to the buyer’s side. I have been to real estate conventions in other states in which I personally heard top producers “brag” that when they got a listing agreement signed, they kept the lion’s share for themselves and offered less to the buyer’s side. For instance, if the agent got a 7% listing, he or she would offer not 3.5% to the buyer’s side, but rather 3% and keep 4% for himself/herself. Not every listing agreement stipulates what amount is being offered to the buyer’s agent – but as a seller, you WILL want to know this number, and know if it is competitive.

If the area your house, townhome or condo is in has listings which predominently offer 3% to the buyer’s agent, and your home offers less, what do you think will happen? This is not a case of agents getting together and boycotting (that would be an antitrust violation). Instead, you have a man or woman who needs to provide for a family and sees a smaller paycheck. If the agent is exceptionally ethical, he or she may show it to the buyer anyway. But most will show *that* home last.

Instead, you want your Silicon Valley real estate or home seen by as MANY agents and buyers as possible. To this end, some listing agents offer a larger share to the buyer’s agent. Or a bonus. Because that will likely increase traffic, and the higher traffic will likely increase the number of offers, thus boosting the ultimate sales price.