Before I start, I should say this…
This piece is not some kind of diatribe penned by some self-important Realtor meant to convince you that you’re about to make an astounding mistake by trying to sell your own home. As a Realtor, I have seen my share of these posts, and I don’t like them. Why? Because sometimes it can make sense to sell your own home.
But this cuts both ways. If you are a seller and think that all that’s at stake here is saving a 6% commission, you may not want to read any further.* I’m going to share a calculation soon that will demonstrate that at best you might save 1-1.5%. If you want to know why, stay with me.
Really all I want to do is help you make a smart decision on whether selling your property on your own makes sense for you.
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. Now, oftentimes buyers have engaged an agent to help them with their process. This creates issues when it comes to FSBO’s. Some FSBO’s are willing to pay the buy side portion of the commission—3%—while others will have none of that and suggest that the buyers compensate their agent. (The latter situation is much more common in the commercial world, but it can drive residential agents batty.)
In 999,999 out of a million cases, sellers make this decisions strictly on the basis of commission. If a FSBO is successful, he or she can save roughly 6% of the gross sales price. On a $200,000 home, quick math tells us this is $12,000. If the FSBO pays the agent who brought the buyer to the table a 3% commission, then the FSBO has saved $6,000. These amounts are not insubstantial to the total value of the home. And if you’re still dealing with the scar tissue of the Great Recession that triggered precipitous drops in value, the need to get as much out of your property could be powerful. The desire (or mandate) to save is powerful. That can make this a tough decision.
A Nod to Historical Trends
Before we trot out history, here’s something to know:
At least one Realtor is involved in 90-95% of all residential transactions. This stat may fluctuate somewhat (depending on the market) but it has been pretty close to that 90% figure for a long time. Take away the family sales, inside sales and other non-arms length transactions, that number actually grows. In 2011, only 4% homes sold in the U.S. managed to change hands without the use of an agent. This is important for people to know.
If there is a 90% (or greater) chance that a FSBO will pay 3% to a buyer’s agent, what about the remaining 3% that would normally be paid to the listing agent?
Agents Inflate Expenses to Justify Commissions
As an agent myself, I have no problem acknowledging that some of my peers try to game the system a bit. They validate their importance by pumping up the costs to market a home. No good.
The web has changed the entire ballgame. There’s a platform to sell everything, and and Realtors long ago figured out how to promote their listings (and services) for free or on the cheap. The costs for brochures, photography, MLS, web portals and other promotional sources are scalable and pretty affordable. Those things aren’t enough to justify the 6%.
Here’s a rundown of the costs an agent can incur to sell a property:
$300 gets you almost nothing but crappy promotion.
$1,000 buys you decent signage, some good photos, professional brochures, an ad in the paper or two and maybe a little ‘Featured Listing’ status on one of the portals.
$3,000 gets you the whole kitchen sink, including the latest drone technology, virtual tours, direct mail, and a big beautiful open house.
A lot of what an agent is going to do is a fixed expense just for being in the business. It doesn’t necessarily correlate to the number of listings you have. As agents today, we have so many tools at our hands to market your property effectively and to the people most likely to buy. Any agent who spends $3000 on basic promotional materials and advertising is throwing money away. And if they cite these expenses as the reason for a 6% commission, they don’t understand their business.
The Advice is the Key to Value
Instead of obsessing over how much 6% is for your likely sales price, think about what you know and what a solid professional knows.
If you are thinking of taking the FSBO challenge, you’re going to need to answer these questions:
- Do you understand how to mitigate the Zillow and Trulia phenomena of creating all-seeing buyers?
- Do you understand how listings are pushed and syndicated?
- Will you be able to recognize constructive feedback?
- Do you understand the effect of Dodd-Frank, the new disclosure laws as well as RESPA?
- Will you know what to do with a flawed appraisal?
- Do you understand the numerous laws which preclude the many actions considered to be discriminatory?
And the most basic and important question I can aks: do you really know how much your home is worth? The irony is, many agents can’t/don’t either. But, we’ll talk about that at a later date.
Given all this, the real cost of using a Realtor is probably between 1.5-2.5% of the gross sales price. Given that, you might want to ask yourself: Do you feel that finding some top-shelf guidance that helps you sort through the tricky areas of the sales process and market values would be something other than an expense, that you might actually consider it an investment?
I think this is the easiest question to answer in the world. The critical thing, in my opinion, is to identify of the agents and brokers in your market who can make a difference in getting you the best return on your investment.
If you’re still thinking about FSBO, and you should, figure out the entire effect it can have on you.
* The 6% commission rate is an estimate of commission expenses and is in no way meant to imply that 6% is a mandated policy.