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Is Your Realtor Looking Out for Your Best Interests?

by Jason Dean 


FSBOIn the pantheon of distrusted professionals, real-estate agents rank somewhere between used-car salesmen and lawyers. In large part, this reputation is unjust. Many Realtors are true professionals who offer valuable expertise and take much of the headache out of buying or selling a home. But the entire system of real-estate agency — monopolized by the National Association of Realtors and legislated into existence by most state governments — is the problem, and it is leading many home-sellers go to the FSBO (For Sale By Owner) route, particularly in the current down market.

How Real-Estate Commissions Really Work

You often hear about how Realtors make a 6% commission on home sales. Well, ask your Realtor if it’s true — he won’t be able to say! This is part of the stupidity of the real-estate-agency system: Realtors are bound to a code of silence about their commissions, even though virtually everyone knows that the total commission — not your individual Realtor’s cut — is almost always 6% (at least at its base level).

But here’s the thing: If you sell your house for $200,000, your Realtor is not walking away with $12,000 (6% of $200,000) or anything close to it. Assuming your buyer also has an agent, your agent and his will split the commission 50-50. That leaves your Realtor with 3% — but half of that has to be kicked back to his broker (i.e. Coldwell Banker, RE/Max, Century 21, or whatever local outfit he may work for). This leaves your agent with 1.5% of your sale price — in this case, $3,000; not $12,000.

Why This Can Be Bad For You

Okay, let’s imagine you own a house worth $200,000 and you owe $180,000 on your mortgage. That means you have $20,000 in equity. You hire a Realtor who agrees to list your home at $200,000 and thinks that’s a fair price, but warns you it may take a while to sell in this market. “Fair enough,” you say.

But then less than a week later, someone makes a $195,000 offer on your home. You think about taking it and go to your Realtor for advice: You can trust him to give you advice that’s in your best interest, right? After all, the more money you sell your house for, the more money he makes — right?

Well, let’s take a look at the math. If you sell for $200,000, your net proceeds (minus 6% commission) will be $188,000; leaving you with eight grand after paying off your $180,000 mortgage. Assuming your buyer has his own real-estate agent, your Realtor will make $3,000 on this sale.

But what happens when the price is dropped to $195,000? Your net proceeds fall to $183,300 — leaving you with just $3,300 in profit. That’s a 60% loss compared to the eight grand you’d pocket if the house sold at full price. But your Realtor does not feel the pain equally — not even close. Instead of making $3,000 in commission, he will make $2,925 — a $75 difference. You lose $4,700; he loses $75. Selling the house quickly may be worth $75 to your Realtor, but will it be worth $4,700 to you? You and your Realtor have different interests.

What This Means in the Current Market

In the current market, Realtors are going to be especially quick to encourage you to take any offer. They want to flip houses quickly and move on to the next deal. You may want to hold out for the best price — it’s your money at stake, after all. The math of the real-estate-agency system strongly encourages people to sell FSBO during down markets like this one. Fortunately, there are more resources available for FSBO sellers today than ever before. Below are just a few of the many sites dedicated to aiding FSBO sellers on the Web:

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Comments

7 Responses to “Is Your Realtor Looking Out for Your Best Interests?”

  1. Liz Provo, Editor/Publisher on August 29th, 2007 12:09 pm

    Well said! In addition to the sites you have mentioned, sellers should look for the kind of exposure and support found through regional for sale by owner advertising services. Being local is very important as most real estate is purchased locally and the owners of these services know their local markets best. A great resource to find for sale by owner magazines in your area is: http://www.fsbopublishers.org.

  2. Eric on August 29th, 2007 1:44 pm

    It’s not that Realtors are bound by a code of silence about commissions. It is the anti-trust laws that they’re trying to avoid breaking. They don’t even want to give the impression that there is some collusion to set a “base” commission. There are severe penalties under the federal laws. You’re analysis of the commission breakdown, however, is farily accurate. Usually the “top performers” receive a higher percentage of the frim/agent split.

  3. Jason Dean on August 29th, 2007 2:46 pm

    Eric – I used the term “code of silence” for dramatic effect. Obviously, there is collusion to establish a standard commission — and I wouldn’t have any problem with that if not for the collusion between the government and the National Association of Realtors. I believe in free markets, not government-sanctioned cartels. The ridiculousness of anti-trust is exposed by this arrangement the Realtors have with the government.

    Yes, the top performers typically get a better deal, based on volume. i.e. after surpassing $x in commissions or sales, the split between the Realtor and her broker shifts to being more favorable to the Realtor. Also, the base commission of 6% may decrease based on the selling price of the home. i.e. it may be 6% for the first $200,000; 3% on the next $300,000; and 1% above that, etc.

  4. Jason Dean on August 29th, 2007 2:46 pm

    Thanks for the link and the comment, Eric. That looks like a great resource!

  5. cindy@staged4more on August 29th, 2007 5:12 pm

    Hello

    Theses are great resources for for sale by owners. I also like that you broke down the commission structure. In a competitive market, the agents actually may reduce their commission to 5% just to win the listing. Not to mention, after all the marketing expenses and ad costs, overheads, gas, open house signs and food, etc., I doubt the agent actually can receive a full 1.5%.

    I don’t know if holding out for a better offer is a sound advice, because like you said, the current marketing the offers are going to be low. Who knows when you are going to see another qualified offer? From my experiences (I am a real estate stager), the longer a listing sits on the market, the more likely it is going to take a price reduction. In my market, San Francisco bay area, a starter home starts at $800,000, you are talking about at least $10,000 in price reduction. I don’t know if holding out and wait for the better offer may be the best idea.

    I feel that an experienced realtor should be able to advised his/her client based on the client’s best interest. If they are in a hurry to sell, carrying two mortgages, they are probably not in the best position holding out. But if they are not in a hurry to sell, they have the luxury to wait for better offers.

    Cheers,
    Cindy

  6. Jason Dean on August 31st, 2007 11:49 am

    Cindy – It’s not a matter of whether holding out for a better offer is sound advice. Obviously, it is sometimes and it isn’t others. The issue is whether Realtors share the same goals as you do, as a homeseller, and the answer is NO. For every $1,000 your sale price drops, your Realtor is sacrificing $15. You’re sacrificing $940. And that $940 ALL comes out of your equity, which can quickly disappear at the rate of $15/$1,000 to the Realtor. The Realtor doesn’t feel the pain proportionataley. His interest is to sell fast and invest as little time possible in the sale of your home. I say this as the husand of a Realtor. This is the reality of realty.

  7. Advanced Personal Finance » Blog Archive » Carnival of Personal Finance #116 - NSA Edition on September 3rd, 2007 7:43 pm

    [...] As if that wasn’t enough, Jason of Smart Money Daily wants to know, is your realtor looking out for your best interests. [...]

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